Once Bullish Jim Grant Now Likes Cash
NEW YORK (AP) -- Jim Grant quotes obscure dead economists at length. He pines for an earlier time of gas lights and top hats when the dollar was convertible to gold. He wears bowties.
Prolific author, gold bug, droll chronicler of Wall Street folly, Grant would be easy to dismiss as an entertaining but irrelevant throwback if he hadn't been proven so right so often. Now, as small investors are putting more money into markets, the publisher of the biweekly Grant's Interest Rate Observer is warning of new dangers. He says prices are too high for nearly every asset you can think of -- stocks, junk bonds, Treasury bonds, British gilts, even Iowa corn fields.
With its wry observations about investor self-delusion, Grant's newsletter ($910 for an annual subscription) has become a sort of bible among the bold and bearish alike. Though detractors say he's far too negative, he's been praised for some timely calls. In the 1980s, he warned of an overheated junk bond market before it collapsed. He foretold of the bursting of the tech bubble in the late 1990s, and revealed the false alchemy of Wall Street's mortgage packaging business before housing crashed four years ago.
Occasionally, he's gotten bullish at the right time, too. Amid the panicked selling of late 2008, Grant told readers to load up on investment grade bonds, junk bonds, even a few of those much-derided mortgage securities. Some picks have more than doubled since.
A graduate of Indiana University, Grant, 64, was a Navy gunner's mate before starting his journalism career at the Baltimore Sun in 1972. He then joined the financial weekly Barron's before starting Grant's Interest Rate Observer in 1983. He's also written seven books, mostly financial histories and profiles. His first book was on Bernard Baruch, the pre-WWI financier and advisor to presidents. His latest is a profile of Thomas Reed, an acerbic and witty Speaker of House over 100 years ago.
As stocks were falling last week, Grant visited The Associated Press in New York to talk about why it's not just stock investors who should be worried. Below are excerpts, edited for clarity, from a wide-ranging conversation in which he lit into the Federal Reserve for our current troubles, warned of 10 percent inflation and waxed nostalgic for a time when Washington had the courage to let prices fall in crises rather than goose them up and prolong our agony.
Q: What's your view of the stock market?
A: The Federal Reserve has unilaterally taken it upon itself to levitate asset prices. It is suppressing interest rates. When you're not getting anything on your savings, you are inclined to go out and buy something, anything, to generate either income or the expectation of capital gains. So the things that we take as prices freely determined are in fact manipulated.
A few months ago, (Fed Chairman) Ben S. Bernanke, Ph.D., the former chairman of the Princeton economics department, stood before the cameras of CNBC and said that the Russell 2000 is making new highs. The Russell! He sounded like another stock jockey. He was taking credit for new highs in the small cap equities index. The Fed, as never before, or rarely before, is now the steward of this bull market. One wonders what it will do if stocks pull back significantly.
Q: Are stocks overvalued?
A: Some big multinationals left behind in the past ten years (like) Wal-Mart, Cisco Systems, Johnson & Johnson appear to be attractively priced. But generally speaking, things are rich.
Q: What would you have done in the financial crisis if you had been in Bernanke's position?
A: Resign. I don't know. I have great faith in the price mechanism, in the mechanics of markets. I think there should have been much less intervention and we should have let some chips fall, many chips fall.
Before the Great Depression, there was a great depression (lower case `g') in 1920-21. Within 18 months, the GDP was down double digits and commodity prices collapsed. Harry Truman lost his haberdashery in Kansas City. It was very painful, but it ended. And the Fed, during that depression, actually raised its discount rate and the Treasury ran a surplus. The reason it ended was the so-called real balance effect -- that is, prices came down and people with savings saw things that were cheap and they invested. That's the fast and ugly approach.
The slow and ugly approach is to mitigate, temporize and forestall to give us time to work ourselves out of difficulties. That's the current approach. I think it's intended to be a more humane approach, but I wonder about its humanity. I mean these college kids get out of school and they've got nothing. It's awful -- 9 percent unemployment and going nowhere except sideways.
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