James Grant, who publishes the excellent newsletter Grant's Interest Rate Observer, is one reason to believe Wall Street has a brain. Though he has been one of the great critics of the boom, he now sees more promising investment opportunities than he has in a very long time.
What's going to put this economy back together?
One of the helpful things to remember is a little ditty that futures traders in Chicago came up with back in antiquity: "The best cure for low prices is low prices. The best cure for high prices is high prices." Meaning that in the case of our slumping residential-real-estate market, for example, low and falling prices themselves are the answer to the bear market, in that lower-priced houses become more affordable.
So where have prices fallen sufficiently low?
We sent a reporter to Detroit—and he came back, too!—a couple of weeks ago to case out the opportunities there. The status quo in Detroit is, as they say, you can't tell the annual lease rate from the house price. And even in Detroit, as woebegone and seemingly abandoned as it is, these truly rock-bottom prices for houses are having their classical effect, which is to entice speculative buyers to buy for the sake of a new rise.
So if you have the guts to be a landlord in Detroit, you can make a nice return. Tell me something else you've discovered recently.
We went back and looked at every single business-cycle downturn since 1929 and measured the federal response to each. We did this in fiscal policy by judging how much of a stimulus there was. In monetary policy, we looked at how muscular the Fed's response was. And what you see is that for our great recession beginning in December 2007, what the government has done in the way of fiscal and monetary policy response is unprecedented: three times the response of the Depression for one-fifteenth of the severity.
Then it ought to work, right?
Unless the intervention itself is part of the problem. And I wonder about that.
Is your outlook influenced by anecdotal experience?
The trouble with what one sees, tastes, and smells in one's immediate neighborhood is that it can be too emotive and unrepresentative of what's happening with the rest of the country. It can reinforce existing prejudices. If you are inclined to be bearish on the economy and the markets right now—and there are plenty of people who are and they have their very good reasons—you walk up Madison Avenue and you see, for example, that a new chain in town is called For Let. And you can ride the subway and get a seat. Based upon these anecdotal sightings, you can build yourself a pretty powerful reinforcing case about why things are going to seed. In New York, things are always bigger and louder, and maybe it's not so bad elsewhere. It's important to be almost clinically detached from what the economists call the coincident indicators, because they're unhelpful. Just blow out more birthday candles, it'll be fine.
How long have you lived in New York?
Since the mid-seventies.
And how did the city seem to you then?
Scary. My wife and I moved to Brooklyn Heights, and we were there a couple of months and there was a murder down the block. And many times you'd ride home on a graffiti-laden subway car and see strange people doing menacing things, and you'd think, tell me again why we moved here?
Do you think the city might be heading back to the seventies?
The big difference between now and then is, there isn't anything like that menace that was in the air and in the streets way back when. This might be early days yet, but I don't see it coming back.