By James Grant
Reviewed by Jon Ford, CFP®
Jon Ford, CFP®, heads CF Financial Planning Solutions, Inc. in Mesa, Arizona. He writes a regular "Financial Fundamentals" column for the Cedar Falls Timesin Iowa.
James Grant is the founder and editor of Grant's Interest Rate Observer, a newsletter with an annual cost of $850. Mr. Market Miscalculates is a compilation of 25 years of some of the best articles appearing in Grant's. The book is an imaginary and quite irrational creation that represents the depth of imbalance-buying and selling almost as if he depends on tide or climate cycles.
My suspicion is that Grant's is aimed at large institutional readers, but my strong recommendation is that financial planners buy this affordable book immediately and plan to spend many hours learning and laughing. For instance, the book assumes immediate relevance as the subprime debacle and associated horrific behavior from both Wall Street and politicians unravels right before us. We will likely be shaking our heads in disbelief for years to come; but the book helps us realize that this calamity was anything but a surprise.
The articles describe the developing and predictable expectation of popping bubbles in the financial world. Grant wraps mounting trends in a blanket of historical precedent and pins them together with bold (and accurate) forecasts of things to come. Since individual articles in the book are dated, it appears that outcomes were clear-long-term capital management would fail, costing $4.6 billion of equity market, and that Enron's derivative trading problems would eventually wipe out $70 plus billion. Will the most recent bailout surpass the trillion dollar mark, making the others look like a Kool-Aid stand?
The dated articles in Mr. Market Miscalculates suggest a greater (almost precognitive) understanding of events leading up to the disastrous wind-up in the subprime market. They point to offending financial institutions, badly timed and confused interest rate modifications from the Federal Open Market Committee and knee-jerk reactions from badly informed legislators. Just as we seem doomed to make the same bubble-bursting mistakes as in the past, so also do we repeat the same dysfunctional remedies going forward.
Reading this book you'll discover rich sources of data and interpretation, many of which we financial planners are unaware-a great example is Grant's itself. Readers will also begin to understand what exactly represents a "bubble" (two standard deviations from a historical average) and gain a better understanding of CDOs (collateralized debt obligations). You'll learn such things as the effect of macro- and micro-economic interest rate changes on "cash-flow" and "synthetic" CDOs. Don't be discouraged-few seem to know any more than we do.
This book is not to be read lightly. The concepts and implications are real, but because of their novelty, they are more difficult for most of us to grasp. However, the author is likely Mensa material, and this book suggests he is undeniably a shining journalism talent with a wonderful wit. He grasps ideas as do others, but has an uncanny ability to lead readers far beyond. Take the plunge and hold on to your hat.
Axios Press (2008)