The Voice of Reasonby Nick Riddle
From his office on Wall Street, James Grant, BA'70, has an unimpeded view of a line of excited people carrying cameras. "They come to visit the Stock Exchange, to go in the visitors' gallery and watch their wealth fructify," he explains. "They're out there taking pictures in front of the building. It's like they're visiting some French cathedral."
Photo: James Grant, with his wife, Patricia Kavanaugh, M.D., at the Annual Recognition Banquet.
These fiscal tourists are as much a part of today's markets as the traders on the floor. The "share-owning democracy" has been with us for several years now, and James Grant is an acute observer of it, as well as a voice of reason. His biweekly publication, Grant's Interest Rate Observer, has been delivering cleareyed analysis and timely commentary on the markets since 1983. He can be seen dousing the irrational flames of the market on shows like "60 Minutes," "The News Hour with Jim Lehrer," and "CBS Evening News," and he spent 10 years honing his considerable skills as a commentator on "Wall Street Week." His byline is a regular sight in the Financial Times, the Harvard Business Review, the New Republic, the American Spectator, and the Times Literary Supplement. He is the author of four books on finance and financial history, the most recent of which was The Trouble with Prosperity, published in 1996.
And to think he might have become a musician. But in retrospect, fate was sending him some strong hints and asking him to - well, to be reasonable.
During his upbringing on Long Island, Grant developed an interest in playing the horn. He was drawn to Indiana by the world-class reputation of the brass faculty at the IU School of Music. After a tour with the U.S. Navy in the late '60s, Grant was accepted by the IU School of Music to study the horn, but began to have second thoughts. "Music at that level is something you pursue with all your mind, heart, and soul, or not at all," he says. He paid a visit to the School of Music and met with a member of the faculty. "I told him, 'I've been accepted as a horn player,' and he said, 'Oh really? I never have.' That knocked me back and reinforced the doubts I'd been having."
And then there was the sports car. Any musician will tell you that sleek roadsters are the vehicle of choice for brass players. On leaving the Navy, Grant bought a Mercedes Benz convertible - "1958 model 190 SL, silver blue," he recalls - from his division officer, who pointed out the pulling power of such a machine at college. A few months before his arrival in Bloomington, he totaled it. Thus, he explains, "The path of study was opened to me."
Grant enrolled in the College of Arts and Sciences, majoring in economics - a more apt choice, since he had already spent six to eight months working for a Wall Street firm after leaving the Navy. He soon developed an ear for the voice of reason, courtesy of College faculty. He cites a lecture in Rawles Hall during his first semester, when the memory of his deceased Mercedes must still have been painfully fresh. Professor Robert Ferrell was speaking about American diplomatic history.
Photo: Patricia Kavanaugh, M.D., and Professor Robert Ferrell enjoy James Grant's award acceptance speech.
"The windows were open," remembers Grant, "and a passing late-model Mustang caused rows of heads to turn to Third Street." Professor Ferrell looked melancholy for a moment. Then, says Grant, "He said something I have always remembered. He said that he could never look at a new car without mentally calculating the number of books that the down payment might have purchased." Grant took note, bought books, and still sees the influence of Ferrell's words every time he looks at "the wretched 1995 Ford minivan that I refuse to replace." It's no coincidence that he is a staunch opponent of credit culture and deeply suspicious of bull markets.
But skepticism by itself can get you only so far. Grant uses his knowledge of financial history and his skills as a writer to express his opinions in grounded, elegant prose. He began his journalistic career at the Baltimore Sun in 1972 and in 1975 joined the staff of Barron's, where he founded the "Current Yield" column. An economist who favors economy of expression, he nevertheless finds room for the colorful metaphor and the quick character sketch, a combination that sets his work apart from the daunting screeds of most financial commentary. Grant is quick to point to his time at IU as a formative period.
"A liberal arts education is the trellis on which ideas can grow," he says. "I learned at IU what it meant to be well read, to think in a critical way. And the craft of expository writing, which I was introduced to in high school, was something I really got to grips with in college." He recalls a composition class taught by a graduate student in English, who praised Grant's first piece of work. Then he turned in his second piece. "I'd spent less time over it. He came back to me and said, 'Please don't give me uncooked oatmeal. Work on it.' That stayed with me."
While he kept the advice of all his professors in mind, one professor in particular - Robert Ferrell, instigator of the car/textbook equation - has watched Grant's progress from undergraduate to influential commentator. Ferrell remembers his former pupil's decision to launch Grant's Interest Rate Observer in 1983: "He took a room in the Woolworth Building that he liked to call a suite. Once the Observer caught on, he moved to Woolworth's one-time office, an elaborate Art Deco place that he very much enjoyed." Over the years, Grant and Ferrell have kept in touch, and Grant often asks his former professor for advice. "I'm working on a biography of John Adams," he says, "and I send him chapters. He sends them back with comments and fixes. So the tuition is really getting an extended run."
Besides the Adams biography, which he describes as a labor of love, Grant has been bringing his sense of history and his journalistic skills to bear on the feverish state of the economy over the past decade. He has described the 1996 bull market as "the most overwrought, over-excited thyroid case we've ever seen in this country. It's a case study in 'overvaluation', meaning that stocks are overpriced." He points out the irony of the Wall Street universe, namely that stocks become more attractive to investors as their prices go up. "People who wouldn't have dreamed of buying those stocks when they were down go out and buy them now, because, after all, they will continue to go up." Or so the flawed reasoning goes. Gravity is a dirty word on Wall Street.
"There's almost no lesson on Wall Street that you should learn and then remember always."What fascinated Grant in 1996, and for years before that, was the power of the crowd mentality. Where many analysts see digits and percentages, he sees the pull of the irrational - panics, fits of elation, and other arcane forces. "Crowds act in illogical ways," he says. Perhaps for that reason, he rarely gives tips on stocks and shies away from predictions. The markets, in Grant's view, are built on shifting sands. As he says, "There's almost no lesson on Wall Street that you should learn and then remember always."
So what is James Grant doing with his money? Investing it in Japan, he replies. "They've been in a 10-year stagnation," he admits, "but you want to invest because prices are low. Bargains are thick on the ground." And he pauses for another illustration of the topsy-turvy world of the markets: "As a nation, we'll drive 10 miles to get a good deal on a case of Diet Coke, but when it comes to the markets, bargains scare most people." It's as though investors overlook the cyclical nature of the market, in which extremes follow extremes. The peaks are an alluring proposition, but Grant sees the greatest risk at these points. "When stocks are depreciating is the time to find bargains," he says, "though it can be hazardous to your health."
Why should the rest of us take the time to acquaint ourselves with the markets? Because stocks and shares are now increasingly a part of our lives. "The markets matter now as never before, because Americans have now committed their savings to them in such huge numbers," Grant explains. He sees this, incidentally, as not entirely a good thing and believes that many people have been lulled into a false sense of security. "We tend to forget that savings are the residual of work. They represent time that can't be reclaimed. People have come to see the stock market as more or less a permanent annuity." The fact that it's nothing of the kind is the core of Grant's message.
If he sounds bearish, that's entirely true to form. Last year the New York Times business section included Grant in its full-page profile of four noted bears. Grant happily admits this: "I'm bearish because I was dropped on my head," he jokes, then adds, "I think certain types of bloody-minded, contrary people can't abide a settled consensus of opinion. And I have often confessed that I am one of them." But as long as stocks are overvalued and the credit markets hold sway, he has more than enough fuel for his bearish brand of commentary. To the admiring crowds lining up outside the Stock Exchange, Grant's voice of reason is bound to come over as doom-laden. The rest of us should pay heed to his caveats. After all, he was taught by the best.