Gloom With a Smile : James Grant Keeps Dishing Out His Witty Predictions of Disaster
Merger activity is up. Leveraged buyouts are back. The “junk bond” business, though now slower than before October, still hums along.
The financial world’s partial recuperation from the October stock market crash has shaken the faith of many who had foreseen disaster in the heavy-borrowing, free-spending ways of American business. But the convictions of James Grant remain firm.
“When the history of this period is written, it will go down as an enormous speculative bubble, no different than bubbles before it,” says Grant, editor of a newsletter called Grant’s Interest Rate Observer. “What we consider normal now will look horrific.”
Such sentiments have given Grant a curious status. He has become one of the financial world’s most visible doom-sayers, called on routinely by financial publications and such TV programs as “Wall Street Week” to voice the direst view of the markets or trends in modern finance. Yet the newsletter’s quirky mix of analysis and humor has also won him an ardent if small following in Wall Street’s upper reaches.
“It’s not a big readership, but it’s a good one,” says Barton M. Biggs, strategist at the Morgan Stanley & Co. investment firm. “They’re sort of the cognoscenti of this world.”
Among his admiring readers are James S. Chanos, a well-known investment fund manager; Laurence A. Tisch, CBS’ chief executive, and Donald P. Marron, chief executive of the Paine Webber investment firm. Although the junk bonds of the Drexel Burnham Lambert investment house have been a favorite target, Drexel executive and junk bond pioneer Michael Milken is also said to be a regular reader and has reportedly called Grant from his Beverly Hills office to convey his views.
Since putting out his first issue in November, 1983, Grant has inveighed against high-risk buyouts and borrowings, over-aggressive lending and such financial innovations as the international bank money-exchange system called CHIPS. Grant also does sympathetic profiles of Wall Street personalities and explanatory articles about the workings of the credit markets.
His eloquent fretting naturally puts him in a minority on Wall Street--a minority that gets smaller all the time. Last month, Grant lost something of an ally when the investment firm Lazard Freres & Co.--whose influential partner Felix G. Rohatyn has long criticized high-yield, high-risk junk bonds--announced plans to begin junk underwritings of its own.
Grant tries not to see this as a setback. “I actually find it encouraging, since the nature of fads is that everyone of importance believes in them before they are over,” he says. One of his favorite phrases was first quoted by a grumpy banker of the 1930s, who said of the 1920s speculation: “The more intense the craze, the higher the order of intelligence that succumbs to it.”
A former columnist for Barron’s magazine, 41-year-old Grant works in what was once an office of retailer Frank W. Woolworth on the 40th floor of the Woolworth Building in lower Manhattan. With its dark wooden paneling, ornate molded ceiling and roll-top desk, it is a roost that the old-time financiers Grant admires would probably find congenial.
Grant, a soft-spoken man who wears round glasses and an earnest expression, seems himself to fit neatly into these surroundings. He’s been a bear, Grant jokes, “since 1906.”
Indeed, his office furnishings include a stuffed brown bear as well as framed copies of advertisements for some of the more aggressive junk bond issues.
Grant sharply disagrees with those who contend that companies can take on much more debt these days because of modern technology and global markets. According to this “new era” thinking, computers and telephone lines have so increased the liquidity of world markets that such debt loads are now safe.
Grant views the latter-day borrowing practices as a fad that is not actually new but part of a cycle of credit expansion and contraction. After each recession, he contends, innovative financiers have worked out new means for companies to carry more debt. These innovations are eventually embraced by a majority, but imitators push them to greater and greater extremes until there are major business failures, and credit tightens.
Sees Trouble Ahead
After playing Cassandra for four years, Grant concedes that he at least misjudged the timing of the apocalypse. He says he underestimated the strength of the 5-year-old economic recovery and, in predicting the failure of some takeovers and leveraged buyouts, didn’t recognize the savings that their new managements could achieve.
But he sees trouble ahead. The credit agencies downgraded more bonds than they upgraded last quarter; thrifts continue to go under, and bank failures have resumed, he says.
Yet corporations and investors who might have been sobered by the October market crash seem as eager as ever to invest in what he considers dubious deals. The investor pools that fund buyout deals have swelled recently, he says.
“I can’t predict the immediate cause of the market collapse, just like nobody knew that the assassination of Archduke Ferdinand would set off the First World War,” he says. “But I know it’s coming.”
The newsletter often focuses on specific deals in its effort to provide readers critical investment research that the big investment houses don’t offer, he says. One of Grant’s early interests was John Kluge’s leveraged buyout of the Metromedia television chain; he took an early interest in Drexel’s junk bond distribution network.
Recently he looked at a bond prospectus put out by Farley Inc., the Iowa firm that manufactures Fruit of the Loom underwear and is run by one-time presidential aspirant William Farley. Grant wrote: “If there were a nonfiction companion volume to Tom Wolfe’s wonderful bull-market novel, ‘Bonfire of the Vanities,’ it should be the Farley document, which is a record of debt, wealth and gall.”
Grant was intrigued by the prospectus’ disclosure that Farley Inc. had “advanced” its chairman $25 million to extricate him from a bad investment in another company.
Last month, Grant’s attention focused on huge fees paid to bankers in the battle between R. H. Macy & Co. and Campeau Corp. for Federated Department Stores. Macy agreed in March that, deal or no deal, it would pay its lenders up to $31 million--a sizable figure when compared to Macy’s recent net worth of $20 million, Grant noted.
Whimsical Drawings
Grant rounds out the letter with drawings that an artist, Hank Blaustein, usually draws to his specifications. A recent illustration showed a self-satisfied father and son, posing before their home, with the caption, “E. Harold Benton, rainmaker/E. Harold Benton Jr., baseball card collector.”
Another, dating from the beginning of the insider-trading scandal, shows a pleased trader amid computer consoles, above a caption: “News that Dennis B. Levine, confessed abuser of inside information, had won the government’s permission to keep his BMW was greeted with an audible sigh of relief on many Wall Street trading desks.”
Grant did a post-crash analysis of the real estate market in Greenwich, Conn., which is the wealthiest suburb in the Northeast and home of many Wall Street grandees. He raised the discomforting possibility that Greenwich home prices might decline this year, as they have in only four years since 1945.
About 1,500 subscribers now pay $375 a year for the newsletter, which nearly failed in its first year of publication. Going to work in those days was like “pounding on the chest of a corpse to bring it to life,” Grant says.
Grant says last year he finally made as much as he was earning at Barron’s when he left in 1983.
Some of Grant’s fans gripe about the unrelieved gloom of his outlook on debt. “He’s way too jaundiced about a lot of things,” says Morgan Stanley’s Biggs.
‘Journal of Foreboding’
Others on Wall Street say Grant doesn’t have a wide audience because the newsletter seems to offer no practical information that they can use.
And a subscriber once told Grant’s circulation manager that he had canceled the newsletter because he simply couldn’t afford to listen to such gloomy talk during a bull market.
The editor is good-humored about such criticism. At a conference that he recently sponsored on credit, Grant described his organization as “the Journal of Foreboding, doing business as Grant’s Interest Rate Observer.”
Grant insists that he’s uncomfortable in the naysayer’s role and hopes that the current trends will end so he can strike a more positive note. Still, he plainly will continue his broadsides as long as Wall Street promotes wares that are over-risky or overpriced.
“If making money were really as easy as they say, Fred Flintstone would have been driving a Lincoln Town Car,” Grant says.
A JAMES GRANT SAMPLER
On Jesse Jackson:
“The Rev. Jesse L. Jackson is the bears’ favorite son. He is the candidate of short sellers and put buyers as much as he is of blacks and ultraliberals. He is the standard-bearer of low stock prices, high interest rates and volatility, and any bear who has not contributed handsomely to his campaign is an ingrate.
“Although not specifically endorsing low securities prices, the candidate has all but guaranteed them.”
On Donald J. Trump:
“Like the Bible, ‘Trump: The Art of the Deal’ is a book that repays deep and repeated study. It is, perhaps, even greater than the Bible, for it speaks to today’s reader on subjects both mundane (‘Sometimes it pays to be a little wild’) and spiritual (‘The point is that you can’t be too greedy.’)”
On easy credit:
“In 1978, money to finance the deficits of Latin American governments was available in what must have seemed like unlimited amounts. The sky was the limit on lending to real estate investment trusts in the early 1970s and to Dallas developers in the early 1980s. When commercial lenders fall in love with a particular class of asset, as Stanley D. Salvigsen, the financial strategist, has said, that is the time for the rest of us to fall out of love.”
On a recent leveraged buyout:
“The purchase price was high (as is clear enough in retrospect), and the capitalization precarious, but that is the way with LBOs. Born ugly, they are expected to bloom fast.
“Revco stayed ugly, and now a Drexel Burnham-led restructuring is under way.”
