Let the Good Times Roll
Might the recovery be more robust than widely expected? Wall Street’s most respected pessimist thinks so.
* By Hugo Lindgren
* Published Dec 27, 2009
Illustration by André Carrilho
Blessedly, 2009 did not turn out to be the utter catastrophe many once feared it would be—no bank runs, no bread lines, no sport-hunting of the rich. But it’s far from certain whether the worst has been truly averted, or, to use a phrase that became fashionable, the can was merely kicked down the road. The signals are, at best, mixed. Jobs are still being lost, if not at the same wildfire rate. Many small businesses lack credit, not to mention customers. So what lies ahead?
Between the yahoos who tout every market uptick as the stirrings of the next boom and the doom peddlers who cling to their prophecies of societal breakdown, a consensus has cohered around what investment strategist John Mauldin, a hero of the blogosphere, calls “the muddle-through economy,” a protracted period of elevated unemployment rates and sluggish growth. Federal Reserve chairman Ben Bernanke, who once spoke of “green shoots,” now describes the “considerable headwinds” that the economy faces. Goldman Sachs economist Jan Hatzius sees double-digit unemployment persisting through the end of 2011.
Within this school of forecasters, a popular approach is to characterize the United States in terms of other countries’ trademark miseries. So we are Japan— a major Paul Krugman meme—staring down the barrel of our own “lost decade” of deflation, zombie banks, and cultural inertia. Or we are Europe, afflicted by the “sclerosis” of high structural unemployment and gigantic government. Or, as former IMF official Simon Johnson asserts, we are “a banana republic,” debasing our once-mighty currency by recklessly printing it to cover our debts.
But describing current conditions is only part of the game. Correctly calling the next crisis is the great status bake-off of economics. Which is why it was bracing to receive a recent investment newsletter from one of the most distinguished pessimists on Wall Street with this headline: “On the Coming Shortage of Labor.”
It was not a joke.
The bi-weekly newsletter, Grant’s Interest Rate Observer, is published from a picturesque office on Wall Street overlooking Trinity Church. The proprietor is a former journalist turned finance philosopher named James Grant, who—in addition to turning out the newsletter, which costs subscribers $850 a year, and hosting conferences at the Plaza Hotel that feature some of the sharpest minds in the investing business—has written six books, including a history of debt (surprisingly engaging) and a biography of John Adams (better than David McCullough’s, some say). But his ample intelligence has often left him out of sync with the animal spirits that rule Wall Street. Over a quarter-century in which the economy mostly boomed, Grant stayed mostly gloomy. His view has been that the economy is a Frankenstein creation of cheap credit that drove up prices and instilled a false sense of prosperous stability.
At critical moments, such as the great collapse of the eighties boom, this analysis proved brave and useful, swelling Grant’s subscriber rolls and turning him into a star of sorts. But it also led to him advising caution and restraint as some of the most vigorous bull markets in history commenced. Indeed, the nineties was not kind to pessimists. “In this business,” he says, “everything is cyclical, including one’s evident IQ. One goes from genius to moron all too quickly. And so I went from being regarded as one of the brighter people on Wall Street to being, let’s see, a perma-bear, and there was truth in that. I wasn’t supple enough, wasn’t flexible enough. I was in love with our story, which had been so successful, and didn’t see the world change.”
Having made this mistake more than once, Grant is determined never to make it again. The financial crisis ratified many of his core convictions about the pitfalls of debt and loose monetary policy, and the panic of people who didn’t see the crisis coming produced great opportunities for those who did. The transition from bear to bull was difficult for Grant, but before 2008 was over, he was recommending to his subscribers that they shop for bargains, including, yes, houses in Detroit. “One year ago, we turned bullish on tradable bank debt, certain ‘toxic’ mortgages, junk bonds and other such unwanted debris,” he says. “In March, we turned bullish on bank stocks. And now we are bullish on the economy.”
Grant’s optimism is built on two pillars. The first is his analysis of cyclical trends. Like a rubber ball thrown against pavement, the U.S. economy has historically bounced back with a force roughly approximate to that with which it fell. So the tepid recoveries of the early nineties and early aughts, the ones that preoccupy many analysts today because job growth was so torturously slow in both cases, were just the predictable aftermath of what Grant describes as “toy recessions.” A better model for our present circumstances, he says, is the early eighties, when the economy was in shambles (double-digit unemployment then, too) and then suddenly, to the shock of learned people everywhere, staged a stupendous recovery. Yes, there are seemingly unique impediments to such a recovery this time around—the indebtedness of U.S. consumers, to name one—but there are always such seemingly unique impediments, and the U.S. economy has repeatedly demonstrated the power to adapt.
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