TAKING BULL MARKET BY HORNS James Grant gives Wall Street pause as the don of doom


NEW YORK -- His newsletter is profitable and celebrating its 10th anniversary, his new book has just been published, his conferences are overbooked and his influence on Wall Street has never been stronger. He even correctly forecast the current upsurge in the U.S. economy.

For James Grant, the signals are unmistakable: Bad times are ahead.

"I would like to be contrarily bullish, but even when we are bullish, it's in the context of 'yes but,' rather than 'gee whiz,' " Mr. Grant said. "I am a contrary-minded, a bloody-minded person. I find happiness and complacency in the market deeply upsetting."

Not even Mr. Grant's sharpest critics could have put it better. Ten years after launching Grant's Interest Rate Observer, Mr. Grant still attracts 0eaders who would like to convert him to bullishness. But now as then, he has no intention of changing his bearish ways.

While Wall Street has many professional bears, Mr. Grant has become their don. He may have underestimated the strength of the 1980s bull market, but he was on the money in predicting a shakeout of junk bonds, the banking system and the credit-burdened economy itself.

"I think we serve a need out there to bring to light what polite people on Wall Street don't talk about," Mr. Grant said.

What is usually avoided nowadays by the Street's smart set is talk of a downturn, excessive speculation and the return of historical valuations to a market that is bucking most known measures of a bull market. And these are precisely the topics of Mr. Grant's newsletter, conferences, television appearances and books, including one released this month, "Minding Mi$ter Market," a selection of articles from his newsletter.

"He clearly is a doom and gloomer, but that's healthy in an environment where everyone is optimistic," said Michael Gray, a portfolio manager at Fidelity Investments and regular Grant's reader.

Mr. Grant's contrarian thoughts are more than a clever selling point; they are the man. Tall, angular and genial, the 47-year-old native New Yorker shuns the pundit's sound bites.

Working out of the Wall Street offices of the U.S. Assay Office -- the government agency that weighed gold when the country was on the gold standard -- he speaks in long, complete sentences, paragraphs and essays.

Even his newsletter cultivates an archaic look: The headlines are dry and cryptic, in a thin typeface that harks back to the old look of The New Yorker magazine. It is usually 12 pages long and punctuated with small cartoons.

With 3,500 subscribers paying $450 a year, the newsletter has become a financial success, although it nearly went bankrupt its first year and, in a neat twist for a puritan market analyst, Mr. Grant had to finance a few editions with a Visa credit card.

Before starting his newsletter in 1983, Mr. Grant worked at Barron's for eight years and, before that, for The Sun for three. He studied at Indiana and Columbia universities and served in the Navy.

His newsletter now reaches most top Wall Street money managers, strategists and economists. A readership survey concluded that most readers keep it as a reference tool.

But Grant's is hardly chock full of the statistics and charts that a money manager typically consults.

At least eight of its 12 pages are made up of half a dozen articles totaling 6,500 words on finance and economics. They range from warnings about resurgent inflation to musings about companies that symbolize one worrisome trend or another. The most recent edition talks about the price of cement, credit cards and yearling horses.

In a way, these quirky topics and the publication's elegant writing are Trojan horses used to sneak in Mr. Grant's warnings about resurgent inflation, pending bottlenecks in industries and mindless speculation on the stock market.

The piece on cement, for example, used the construction material as an indicator of inflation. The price has risen sharply, Mr. Grant wrote, so that "shortages are the coming thing. The timing is a mystery [certainly to us], but the dynamics of the cement market suggest how the unthinkable might occur."

The argument is classically Grant's. A somewhat obscure phenomenon is hauled out for dissection and shown to be indicative of a larger problem. Cement's price is rising, giving Grant's a chance to warn about inflation and give a happy poke to the conventional wisdom that inflation is dead.

Mr. Grant said he realizes the dangers of generalizing from anecdotes, but points, in this case, to a wealth of other anecdotes buttressing his case for future inflation. While government statistics continue to show low price increases, his essays are an early warning signal telling his readers that it might be better to err on the side of caution.

It is a message he has repeated now for a year, leading some on Wall Street to dismiss his warnings.

While praising Mr. Grant for being a serious thinker and entertaining writer, economist and investment manager A. Gary Shilling said Mr. Grant might benefit if he put his money where his ideas are.

"There's a tremendous discipline in running a portfolio. It's one thing to make forecasts that may come true a few years down the road, but by investing you are forced to really think through your ideas carefully," Mr. Shilling said.

Mr. Grant cheerfully admits that he is no "market-timer" -- a forecaster who can tell investors when to jump off one trend and on to a hotter one. Of more interest to him is what lies on the distant horizon, which he often divines by reviewing historical trends that are currently ignored.

Underpinning many of Mr. Grant's arguments is a belief that Wall Street, like the old communist countries in Europe, suppresses history. From his two previous history books -- "Bernard Baruch: Adventures of a Wall Street Legend" and "Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken" -- to his biweekly newsletters, Mr. Grant has constantly dredged up examples and personalities from the past to explode Wall Street's eternal battle cry of "this time it is different."

"The Henry Ford dictum that history is bunk is not said out loud on Wall Street, but I think many people secretly believe it," Mr. Grant said.

Wall Street's current line is that stocks are not overpriced because interest rates are low. But as he unfailingly points out, every age has had its reasons why its bull market could not collapse. In the end, overpriced stocks and bonds were sold off in favor of commodities and bear markets reigned for a period.

It's a message that not all on Wall Street enjoy, but which many force themselves to read, said Patrick J. Alwell, managing director of ISI Group Inc.

"He acts as an important cynic in a business where optimism and pessimism move in extremes," Mr. Alwell said. "He's not always right, but he's always important and always entertaining."

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