So Wrong He’s Right

Nobody wants to commiserate about the perilous market and climbing interest rates. Even in the dot-com world, everyone I know is weirdly sanguine (dot-commers say how wonderful it is that the weak companies will be washed out). On the financial shows, it continues to be business as usual. While the Fed squeezes – after years of tight-lipped disapproval, it struck me, Alan Greenspan had finally decided to have it out – the media holds firm. You could argue, even, that the financial-news channels, with their bouncy, positive equanimity, and the vested interests of their guests in the power of positive thinking, have supplanted the Fed as the ballast of the economy (“Crash? What crash?”).

But I know the sky is falling (plus I have a mortgage I’d meant to refinance two Fed rate points ago).

So I called Jim Grant, the one person in the financial media who could be depended on not to sugarcoat anything. There was no one else who had so consistently bucked the national optimism – and who, therefore, by any conventional measurements, had been wronger than anybody else for the past decade.

Indeed, I was not sure if I was calling him because his was a cautionary tale – if you mistrust too much the boom, you become an odd duck like him. Or because I was hoping to get some lessons in how to survive as a contrarian in the consensus-oriented, popularity-courting, conventional-wisdom-extolling American media (certainly, on every dip, I’ve assumed that free fall was beginning, when, in actuality, the greatest part of great fortunes was just on the verge of being made). Or because I sensed that he was quite possibly about to be vindicated.

I had not seen Grant since the turn of the last decade, which was also the last time he had been right. The collapse of the junk-bond market in the late eighties, the crisis in the New York clearinghouse banks, the fall of the Reichmanns and the real-estate market, had been his stories. (The last time we had seen each other was at a funeral of a very eighties bond guy of our mutual acquaintance.) I confess to not having gotten in touch with him in ten years in part because I did not quite know what to say to someone who was just so wrong (“How are you doing?” “I’ve been wronger”).

Grant does not seem, in the least, proud of having bucked the trends. He is not a puffed-up, bullying, Bill Bennett kind of contrarian; rather, he exudes, mostly, helplessness, as though he has been condemned to his point of view.

In the world according to Jim Grant – no more glum-looking now than he was ten years ago – periods of excess, of financial illogic, of irrational exuberance, promoter-driven phases of the economy such as occurred in the eighties, will reliably and predictably end (as they briefly appeared to have ended in 1989 and 1990). This is not an unusual point of view; it might have been, up until recently, even the prevailing point of view. But in the face of continuing boom, relentless expansion, and myriad media opportunities for men of good economic cheer in the nineties, most analysts, as well as ordinary stock buyers, have allowed for a revised view – the new economy is not only ever-growing but self-healing. (Most recently, the new analysis has held that the new economy has already thrown off so much wealth that, just by the process of reinvesting, things will keep going nicely.)

Jim Grant sits behind a desk in an old-fashioned office (dark paneling and fireplace) in an old-fashioned building (with an elevator man) next to a newly gentrified, Donald Trump-refurbished tower on Wall Street. He does seem, painfully, not at all with it – big, dorky glasses rather than precise little things. “Marginalized,” he describes himself. The fact that 3,000 people pay $725 a year for his every-other-week newsletter, Grant’s Interest Rate Observer, is in itself a market anomaly. People buy it not for his prescience but for his prose style (which could possibly mean that the value of a compelling prose style has been vastly underestimated in other quarters). Although he has been systematically wrong about the outcome of the American economy, there is arguably no one else who has described it so vividly and dramatically (drama comes naturally when you assume the economy is set to collapse any day).

“I have become the leading authority,” he says – and it is not necessarily with humor – “on where stocks are not going.”

Was his decade-long goof just the result of overthinking? Had he taken the numbers too literally? (Not just him – Templeton, Soros, Druckenmiller, Buffett had all read the numbers much too closely.)

“Against all the evidence, I never believed there was something new going on,” he confesses. “Not even once in the middle of the night did I think stocks should go up.”

It is not hard to imagine him rising every morning, stoically ready to face the dire effects of the world’s faulty reasoning and overweening faith.

Certainly, I sympathized – too much, probably – with such pessimism. (Is it unreasonable to imagine the possibility that most, if not all, of the dot-com businesses might fail? On the other hand, is it wise to pursue such foreboding?)

Unlike most contrarians, however, Grant does not in the least seem proud of having bucked the trends. He is not a puffed-up, bullying, Bill Bennett kind of contrarian (it is reassuring to know that it is possible to hold contrarian views without being annoying about it); rather, he exudes, mostly, helplessness, as though he had been condemned to his point of view. This is a both disconcerting and compelling attribute – he is a new-economy martyr.

“I chose every single day not to change my mind,” he says. “There wasn’t a day over the last ten years when I didn’t think that logic would prevail. I couldn’t buy the notion that technology was the great redeemer. I don’t believe in the new age. Nevertheless,” he says, pausing, “I didn’t have to predict the end of the boom so frequently – for that, only I can be blamed.”

I put a question to him that was troubling me: “If you don’t mind my asking, out of personal interest, how have your kids taken the fact that you’ve been wrong so often?”

He sighs. “They understand it would be better to have been bullish. Other kids in the schools they go to – well, you know. When the markets go up, other kids know something really good is happening. Of course,” he reflects, “some are so rich they’ve stopped caring, which is another stage of the economy.”

With a little critical interpretation, you can see Jim Grant as a kind of I. F. Stone of the financial media. What has played against him is not the logic of his various arguments (that the value of technology, for instance, should accrue to the users rather than to the makers) or the facts he has unearthed (most recently, that productivity has not really increased) or the fundamental truth of his position (it’s a speculative bubble – duh!) but the social mood. Like I. F. Stone, whose newsletter through the fifties and sixties continued to hold the interest of an ever-more-upwardly-mobile, consumer-oriented, in-name-only left-wing audience, Jim Grant holds the interest of professional investors who enjoy his rigorously old-fashioned follow-the-numbers, value-conscious approach while happily betting against him. Like Stone, Grant has had to face the burden of an unreasonably satisfied and optimistic America.

Such self-satisfaction and optimism have nowhere been more on display than in the financial media.

It’s the Motley Fooling, he says, and CNBC-ing of America.

Even when big jolts and certifiable corrections hit the markets, a few days later the talking heads are back saying keep the faith, buy on the dips, trust the Federal Reserve.

Indeed, a media analysis may explain more about the long boom than a financial analysis. The financial-news outlets have became so competitive that they have all courted the ever-growing stock-buying audience with programming that’s a lot closer to entertainment than to one’s father’s sober financial advice.

“The return on reading financial documents has been low for many years,” he says, shrugging. “No one wants to read the deconstruction of a 10K report when it’s all about the momentum of the S&P 500, when you can watch CNBC and end the day $10,000 richer.”

He is really pained. “People have been able to make just horrific mistakes in analysis and be right anyway.

“It is,” he says, “the emotional underpinning that I have not understood, the collective optimism, the public heart.”

The madness of the crowd was his undoing.

“And yet,” I say, “Now we are obviously at a different moment. It’s no longer the nineties. Talk to me,” I say, “about interest rates.”

He smiles. “During the course of the bull market, the rate has been no lower than 3, no higher than 6 – now it is 6 and 1/2. Greenspan is no longer an incrementalist. He’s mopping perspiration off his brow. And we can expect another rate hike in June.”

“And? Is it remotely possible we can keep absorbing this? That things just go on?”

He doesn’t have to answer. This is what the contrarian knows (it’s what I know): Change – massive, unexpected, mostly unwanted change – is out there, coming our way.

Those of us who are less logical, less rigorous in our thinking, than Jim Grant look for other sorts of signs of such imminent change. (Town & Country’s current issue is devoted to the Internet – what does that mean?)

We contrarians know that eventually, inevitably, we will be right. All we have to do is wait. (“Even a broken clock is right twice a day,” my friend Kara Swisher, who covers Silicon Valley for the Wall Street Journal, snapped at me recently when I suggested we had arrived at the end of something.)

We can hardly stand the anticipation.

Then, sheepishly, Jim Grant admits that he himself has recently raised some venture money (it is one of his favorite rants: the market distortions of “essentially free equity capital”) to take Grant’s online. His theory is that when the crash comes, when the bubble truly bursts (or when people understand the bubble has in fact burst), then the casual, amateur, day-trading sites will be washed out and the value of the professional analyst, the detail guy, the value hunter, will become clear. The manager of the new Grant’s online business comes in for a moment to discuss the business model of the site, which is as vague as any Internet enterprise’s.

Surely, this could be the most telling indication of a bleaker future, of the game’s being over – that Jim Grant thinks it won’t be. When the last bear goes bull, that’s when the market truly turns.

But it could also mean that Jim Grant has finally come over to the other side – “If I had a vested interest in calamity, I no longer do” – and is at last willing to be happy.

And it could be that the economy will sustain the Fed rate raises, that the dot-coms will shake out and then grow even stronger, that cockeyed optimism and ever-more-easy-listening financial-news shows will save the day (that George Bush won’t be so bad, even), and that I’ll be the only one shouting into the wind (what will my children say?).

But I don’t believe it. Do you?

E-mail: michael@burnrate.com

So Wrong He’s Right