The following is a transcript of a WealthTrack interview with James Grant, esteemed editor and publisher of Grant's Interest Rate Observer. In this must read/view, Grant argues that today's pessimism is overdone and believes the economy will recover surprisingly strongly, and will jar people. He also discusses his thoughts on gold and investing in general, and shares a few ideas, making for a thought provoking read.
CONSUELO MACK: This week on WealthTrack, why ballooning government debt, the diminishing value of the dollar, and the rising treasure of gold are all on the mind of contrarian James Grant, the editor of Grantās Interest Rate Observer. This financial thought leader is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. Iām Consuelo Mack. āThose who cannot learn from history are doomed to repeat it.ā Eight decades ago, the Dow Jones Industrial Average plummeted over four trading days, dubbed ever since as black: Black Thursday, October 24th, 1929; Black Friday, October 25th; Black Monday, October 28th; and Black Tuesday, October 29th. Their cumulative 25% Dow decline would deepen to 90% by the time the market hit bottom in July of 1932. It then took until 1954, another 25 years, for the Dow to reach its pre-1929 levels. What relevance do these events of eight decades ago have today, considering the Dow is trading far above its March 2009 low?
This weekās WealthTrack guest is an excellent student of the past, who pays particular attention to the forces that periodically buffet the world economy and markets: bubbles and busts, loose and tight credit, expanding and contracting debt, rampant speculation, and extreme mood swings from euphoria to pessimism and back.
He is James Grant, editor of the biweekly newsletter Grantās Interest Rate Observer, a self-described independent, value-oriented and contrary-minded journal of the financial markets. A financial thought leader, Jim is one of Wall Streetās most astute, erudite and articulate observers. He is also the author of six books including a wonderful biography of the nationās second president titled John Adams: Party of One
and his most recent Mr. Market Miscalculates: The Bubble Years and Beyond . In an interview conducted last October, before GDP statistics confirmed the U.S economy expanding well above the pace predicted by most economists, I asked Jim why he, a notorious glass half-full kind of guy, had recently gone from economic bear to bull
How zippy is the recovery?
JAMES GRANT: Pretty darn zippy. The finest expression was that of a long deceased economist named Pigou, a Brit actually, sounds French, who said that the error of optimism dies in the crisis; it is followed by the era of pessimism, which is born not an the infant but a giant. Which is a wonderful expression of the human tendency to overdo it. So all of the new era cats find out that they didnāt get the memo. They were all wrong. There was in fact a debt problem. It burst in their faces. What they do now? They are disconsolate, they inconsolable.
Nothing like this has been seen in the history of the world, the patient will not live sadly. So itās like that. And especially they overdo it on the downside and I think that goes for our esteemed government, especially the Fed, which not only didnāt see it coming but also didnāt comprehend it once it splattered all over its face like a cream pie.
CONSUELO MACK: How robust do you think the recovery will be?
JAMES GRANT: I think itās going to surprise to the upside and so old am I, Consuelo, Iām not going to give a number, nor am I going to give a date, but I think that itās going to be surprisingly strong. The consensus is for next year to generate growth in our gross domestic product of about 2.5% after adjustment for price fluctuations. I expect it will be much better than that. Certainly for a couple of quarters which I think will jar people- theyāll say, wait, that was an unauthorized, who said they could do that? And you can see some of this in the making. The earnings call recently from Caterpillar featured the information that the dealers had run down their stocks to half of the usual and if they were only to restock to the little bit of the normal, there would be a big sales boom and CAT was kind of venturing that not implausible outcome next year would be growth of more than 10%. And I could see that throughout the economy, and people are expecting much, much less.
I think that the wisest course for investors is to heed the advice from the scripture of value investing, the Graham and Dodd idea that we can not know the future, therefore seek a margin of safety in investments in the present. That is to say, we canāt know really whatās going to happen in 2010, let alone 2017, but we can observe two things. We can observe the opportunities that are in front of us, in the securities as they are now priced, and two, importantly, they didnāt say this but I will, you can observe how the world is positioning itself for an expected outcome.
