Did you get burned on housing, Fannie (FNM) or Freddie (FRE)? Did you not buy Altria (MO) in 2000, yielding over 9% and miss out on 24% a year since? If you did it is because you have not read James Grant’s Interest Rate Observer or, if you did, you ignored it to your own peril.
First the boilerplate stuff:
Collected from speeches and editorials by Grant, the editor of Grant’s Interest Rate Observer, these essays are remarkable for their prescience: two years before subprime mortgages collapsed, the author described them as “not one borrower left behind” and when other analysts were worried about the effect of a Fed interest rate increase, he foresaw that the “risk to house prices lies not with interest rates but with lending standards.” Other chapters attack bubbles in stocks and the dollar with erudition and wit (“Economics, mistaking itself for physics, is wont to turn up its nose at history, but the past has much to teach”; “as dress on Wall Street has become more casual, so have the monetary arrangements… the gold standard and swallowtail coats have given way to Greenspan and open-neck shirts”). It’s hard to imagine reading any other investment newsletter even a week after publication. Grant’s is the exception; it paints on a larger canvas and is infused with the author’s generous spirit and rich sense of humor. (Nov.) — Publishers Weekly, September 22, 2008
Collected from speeches and editorials by Grant, the editor of Grant’s Interest Rate Observer, these essays are remarkable for their prescience: two years before subprime mortgages collapsed, the author described them as “not one borrower left behind” and when other analysts were worried about the effect of a Fed interest rate increase, he foresaw that the “risk to house prices lies not with interest rates but with lending standards.” Other chapters attack bubbles in stocks and the dollar with erudition and wit (“Economics, mistaking itself for physics, is wont to turn up its nose at history, but the past has much to teach”; “as dress on Wall Street has become more casual, so have the monetary arrangements… the gold standard and swallowtail coats have given way to Greenspan and open-neck shirts”). It’s hard to imagine reading any other investment newsletter even a week after publication. Grant’s is the exception; it paints on a larger canvas and is infused with the author’s generous spirit and rich sense of humor. (Nov.) –Publishers Weekly
The book:
Grant is a scathing critic of the Fed and its now decade use of low interest rates to prop up economic growth. In the mid 1990’s Grant predicted, almost to the tee, the current situation we find ourselves in today. Article after article warned of the tenuous (at best) situation at Fannie and Freddie and described in detail how gluttonous subprime lending, caused by irresponsibly low interest rates (and government mandate) was going to cause a collapse of the housing market, and then due to securitization, a banking crisis. Anyone read the papers lately?
Grant avoids to common thread today of laying blame on a political party or a particular person. He instead lays the majority of it at the feet of the Fed. Grant argues, successfully I think, that massive Fed liquidity injections and 1% interest rates, causing an actual negative real rate of interest (the interest you receive minus the rate of inflation) lead to yield hunting. The easiest way to accomplish it was to lend the money to hungry home buyers and owners. When the AAA rated buyers were exhausted, yield hunters moved down the credit chain.
When they reached the bottom of the yield chain, they moved on to alternate mortgages (interest only, no money down, no verification etc.). All the while, the loans were being combined, sliced and diced in to CDO’s, MBS’s and a whole litany of cryptic letter denominated securities. These were sold to other yield hunters and provided more cash for additional lending.
Grant argues that much of what we are experiencing today may have been avoided had we accepted 3% plus GDP growth was not a mandate, kept interest rates at more of a sane level, fought inflation rather than accepting it and kept the dollar from depreciating.
For over a decade, Grant laid out a thesis that doing the above would avoid the mess we find ourselves in today. Now ,agree or not with what he says, it would be hard to believe and make a convincing argument he was this right for all the wrong reasons.
When you put this book down you will say what I did 1/4 of the way through, “Had I only read James Grant 10 years ago”. You could have made a bundle, or, more importantly saved one..
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Disclosure (“none” means no position):Long MO, None
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