Mr. Market Miscalculates: The Bubble Years and Beyond

Mr. Market Miscalculates is not an after the fact analysis of the depression, recession, call it what you will of 2007 to ____ (terminal date not yet determined), it is a collection of essays about economic troubles in the making that were published in Grant's Interest Rate Observer between 1999 and 2008. If nothing else, the book should put paid to the claim that no one could foresee that a financial disaster was brewing until it was too late. Truth be told, the signs were there but most people did not care to heed them.The author describes himself as "a Grover Cleveland Democrat who favors free markets and traditional business attire [and] votes the straight capitalist ticket, when available." Errors and excesses in the public and private sector are well described, and neither political party is singled out for praise or blame. That's good!There is a refreshing absence of proposals to overhaul the financial system so that "nothing like this can ever happen again." Grant does laud gold as a store of value and note the fallibility of paper currency, but he refrains from suggesting a return to the gold standard. Even students of economic history cannot escape the fact that said history is cyclical, he says, but they can avoid being surprised when major changes occur. The book ends with an essay dated May 2, 2008, months before the financial crisis hit in full force, pronouncing "the close of the era of peace and quiet" and predicting that "higher interest rates and higher inflation are the coming things."Economic turmoil ensued, as is well known, but it was purportedly addressed by aggressive government moves to restore confidence, rein in Wall Street, and promote economic growth. Two years on, US interest rates are at record lows and the rate of inflation remains low. A high unemployment rate and anemic economic growth are the leading problems on the government's radar screen, although some people are fretting about soaring deficits and debt.So did Grant get things wrong? Time will tell, but I for one doubt it. Note that the Federal Reserve's oft-expressed concern about deflation provides a rationale for tolerating a moderate level of inflation, say 2% per year, versus price stability. The 2% target was validated at a July 1996 meeting of the FOMC, although then Chairman Alan Greenspan supposedly "cautioned committee members not to reveal that such a discussion ever took place." (page 296). It undergirds the Quantitative Easing policy of the Federal Reserve today, which will be manifested by a purchase of $600 billion in government bonds (equivalent to printing money).Two percent inflation may not sound like much, but it works out to 18% currency debasement over a decade. Moreover, the actual rate of inflation could go much higher if the rest of the world lost its appetite for U.S. dollar debt. If this happens, watch out!

This is not a single book, but rather a collection of essays from Jim Grant's Interest Rate Observer. Many financial professionals at hedge funds and other institutions subscribe to Jim Grant for his witty, intellectual approach and macro views on the market. He often finds a bond, stock, or other investment that is over- or under-priced and explains why. He is a value investor, capitalist, and gold bug at heart. A subscription to his newsletter costs nearly $2000 per year, so this book is a bargain if you want to get a taste of his own favorite essays for only $9.99.Many of these essays are fascinating, especially the ones foretelling certain doom in mortgages, CDOs, CDSs and other derivatives. I found the "book" to be intellectually stimulating and refreshing for the first two-thirds, until at that point I wanted to relax my mind. I found myself saying "I got it, Jim, you like Gold instead of Paper Money!"If you are looking for an explanation of value investing or a breezy read on the markets, this is not the book for you. If you're the type of reader that relishes the long essays in the New York Times Weekend magazine focused on a specific topic, this book will give you great joy.For financial professionals, this book is worth the price for the articles on CDS derivatives alone.One of my favorite quotes:"How convenient it would be now if mansions and subdivisions could be exported, to improve our foreign trade balance. Since they cannot be exported, perhaps the foreigners who own our massive debts can be repaid by coming to live in our McMansions, with homeowners serving as houseboys and house maids to the visiting Japanese and Chinese owners of our debt"A typical passage from an essay on CDOs:"Synthetic CDOs are different. They don't buy actual mortgages, or mortgage slices, as their cash-flow cousins do. Rather, they sell credit protection against such loans and slices. That is, they gain exposure to the subprime market by writing credit-default swaps on it."

This is my first contact with Grant, the editor of "Grant's Interest Rate Observer". I just wish I had been a subscriber since 2000 and one who would have acted on what he said. Not since I read Winston Churchill's, "The Gathering Storm" have I read a book that shows such prescience and gives over and over the warnings of a boding calamity that, if the warnings had been heeded, could have been lessened in intensity if not prevented.But one great mind is never able to sway leaders and politicians bent upon a self serving course of affairs, be it conquest on one side vs appeasement on the other or in the financial world greed/financial power on one hand vs political power and its misuse on the other.His article of 8/11/2006 predicts, "the long -provoked national bear market[in housing]already underway."The article of 9/22/2006,"Age of Aquarius", describing CDO's and subprime mortgages in general as well as,"ACA Aquarius 006-1 is a $2 billion,mezzanine-structured, hybrid collateralized debt obligation, or CDO." in particular makes one wonder how these impossibly complex and unsound instruments ever floated. But greed and the fear of not getting in on easy money makes people do amazing things. This is the one chapter we all should memorize.He nails the big banks like GS, C, and defunct Merrill as well as their sometimes nefarious CEOs like Ruben and Paulson who obtained great political as well as financial power or ones like O'Neal, and Thain who broke their companies and gives a new(to me) inside view of Alan Greenspan that shows him to be merely mortal and sometimes pretty fallible too.A great read and fun to see his humor poke the 'questionable' guys. The cartoons of Hank Blaustein are a lesson in themselves as well as humorous.I just wish I could afford a subscription to the newsletter.

This is a well written and insightful book that contains numerous articles in Grant's Interest Rate Observer where they have correctly predicted economic errors that the market (or Mr Market) seemingly ignored.Now I am not going to say that the book is for everyone. It is not. The author (James Grant) is idiosyncratic: he is a fan of returning to the gold standard and that permeates through his writings. But he is one of the most insightful analysts/journalists out there and his writing contains pearls of wisdom, mixed with economic/business history and his analysis is usually spot-on.What this book does is provide a reader with a succinct analysis over many years of bunglings by numerous luminaries. It provides to readers that having clarity of thought and not being wrapped up in panics/manias, should lead to persistently above-market returns.

Some great teachings are contained within this large book.

Excellent

Book appears to be unread. Only paper cover looks a bit yellow. Above expectations, thank you!

Good Book