Wall Street skeptic writes with elegance


The dictionary says a skeptic is a person who "questions the validity or authenticity of something . . ." They might as well

paste a picture of James Grant next to that definition.

His exquisitely articulate brand of skepticism is reserved for the world's financial markets, especially the gravity-defying stock and bond deals that sometimes take place there.

The past 10 years of market excesses (junk bonds, leveraged buyouts, skyrocketing and collapsing real estate) have provided fertile ground for a skeptic. But they've been equally dangerous times for a skeptical market bear predicting ruin for stock and bond prices.

With notable exceptions (the 1987 stock market crash) such prices have enjoyed quite a ride in the past 10 years. Being right a few years early can be a very unproductive investment strategy, as Mr. Grant wryly notes.

He differs in several ways from most people who write about financial markets.

First, he simply is an excellent writer, elegantly stringing words together to make even familiar ideas fresh and clear. He is probably best known as an early and consistent critic of junk, or high-yield bonds, the 1980s phenomenon that allowed companies with previously unacceptable balance sheets access to the public debt markets in exchange for promised high returns. Often the money raised went for hostile corporate takeovers or leveraged buyouts.

Here's an example of Mr. Grant's dry, understated prose employed against junk bonds: "Even the strongest junk issuers routinely serve notice that, barring future asset sales or refinancings, they won't be able to service their debts. . . . So

the smart money long ago stopped reading prospectuses, or at least stopped believing the risk language that the lawyers put in them."

Second, Mr. Grant has a distinct point of view (he's bearish on just about everything), which informs his essays with a vividness above and beyond that of "objective" analyses. He also has a great historical range that allows him to discover parallels in bygone financial eras others are only dimly aware existed.

For the past 10 years, Mr. Grant's main occupation has been the publication of his newsletter, Grant's Interest Rate Observer, and this book is a collection of essays that first appeared there. It is a snapshot of the ills of 1980s finance as told by a skeptic waiting patiently for the world to return to its senses.

His range includes junk bonds, booms and bust in commercial building, the unsustainable bubble that was Japan's stock and real estate markets, bank balance sheets, Italy's economy and more. The short essays, herded into thematic categories, are enlivened by the clever cartoons of Herb Blaustein.

The book's main drawback is its very nature. Though perhaps a cut above the "first draft of history" that is daily journalism, these essays are still very much tied to a particular

time. Many have outlived at least part of their intrinsic interest.

This book also is not for the uninitiated, for the author's detailed discussions of monetary velocity, bank assets and liabilities and the Tokyo Stock Exchange require prior knowledge. Mr. Grant clearly reads prospectuses closely, and to appreciate the book fully, readers need at least a passing acquaintance with them. It wouldn't hurt to know broadly what's gone on in financial markets for the past 10 years, either.

Despite the temporal nature of many of the pieces, there are timeless themes. Mr. Grant believes, for instance, that credit and attitudes toward it are cyclical, much like markets and the economy itself. He writes: "Collectively, lenders and borrowers progress from being brash to being timid, not pausing long at the midfield marker of reasonableness."

Mr. Grant lives at that marker of reasonableness. His thoroughgoing skepticism (he's even bearish on the federal government's creditworthiness) is a useful tonic at any time. With equity markets at record levels and some apparently convinced that the markets can only go up as long as money flows from certificates of deposit to stock mutual funds, now might be a particularly useful time for his distinctive brand of sobriety.

Mr. Grant's attitude toward bull markets is reminiscent of the oft-quoted phrase about the Federal Reserve's counter-cyclical duty when the economy shows rapid growth: They take away the punch bowl just when the party really gets going. As Mr. Grant himself reminds us: ". . . the truth is that people with money, acting in crowds, periodically go off the deep end."

(Mr. Lipschutz writes frequently about financial matters. He lives in New York.)


Title: "Minding Mister Market: Ten Years on Wall Street with Grant's Interest Rate Observer"

Author: James Grant

Publisher: Farrar, Straus & Giroux

Length, price: 404 pages, $27.50

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