Mr. Market Miscalculates

The Bubble Years and Beyond
By James Grant
Hardcover: $22.00 • ISBN: 978-1-60419-008-3

“When it comes to writing about complicated matters of business, Jim Grant has no equal.”

—Steve Kroft (60 Minutes)

“Remarkable prescience—infused with the author’s generous spirit and rich sense of humor.”

Publishers Weekly

“Jim Grant thinks outside the box—Please read him, listen to him.”

—Nassim Nicholas Taleb (bestselling author of The Black Swan: The Impact of the Highly Improbable)

“In the past quarter century, Grant’s Interest Rate Observer earned and maintained a place on the ‘must read’ list of every serious student of markets. Jim Grant’s trenchant observations and elegant prose never fail to illuminate and educate. For those without the perseverance to review the superb writing in each issue from the past twenty-five years, Jim Grant offers a greatest-hits collection in Mr. Market Miscalculates.

Read, learn, and enjoy. Happy Silver Anniversary, Grant’s!”

—David F. Swensen (Chief Investment Officer, Yale University)

“Like many other market participants, we eagerly await each and every release of Grant’s Interest Rate Observer. It provides a uniquely insightful, astute, witty, and penetrating analysis of key economic and financial factors. Indeed, there is only one thing better than receiving our regular edition—and that is having access to this amazing compilation of some of Jim Grant’s very best writing. I am certain that you will come away from reading this anthology with an incredible grasp of the natural forces, policy decisions, and human abuses that have shaped markets in the U.S. and abroad. You will also gain an exceptional perspective for analyzing what lies ahead. Simply put, it’s a must for anyone that seriously seeks to understand the past, dissect the present, and postulate future scenarios.”

—Mohamed El-Erian (author of When Markets Collide: Investment Strategies for the Age of Global Economic Change, co-CEO and co-CIO of PIMCO, and past president of Harvard Management Co.)


Wall Street newsletters come and go, but Grant’s Interest Rate Observer has gone on and on. It has enlightened, enriched and provoked Wall Street’s most successful investors every two weeks for the past 25 years. Its thousands of readers treasure it not only for its insights and analysis, but also for its clarity and wit.

This special anniversary collection of Grant’s articles traces the tumultuous events of America’s bubble era: from the dot-com boom of the late 1990s to the house-price levitation of the early 2000s to the subsequent worldwide mortgage collapse. The essays contained herein make up no armchair history, but a living record comprised in the heat of events. They chronicle what happened and why—and what, in editor Grant’s best judgment, was likely to happen down the road.

The “Mr. Market” who figures in the title of this volume is the imaginary gentleman who, on account of some untreated mental imbalance, is prepared to buy or sell shares of stock at radically different valuations almost from one phase of the moon to the next. But there is more to the aberrant behavior of the past 10 years than fallible humanity, as these essays so entertainingly show. At fault, too, are the currencies and central banks in which savers and investors so uncritically repose their trust.

In finance, as this Grant’s treasury amply demonstrates, most everything is cyclical. Ideas, securities, markets, and nations have their seasons. But good writing and sound judgment—qualities present here in abundance—never go out of fashion.

About the Author

James Grant, the founder and editor of Grant’s Interest Rate Observer, was born in 1946, a year of baby-size interest rates. He pursued his undergraduate and graduate studies—at Indiana University and Columbia University, respectively—as the gold-backed dollar gave way to today’s paper model, and he served his journalistic apprenticeship at the Baltimore Sun and Barron’s during the 1970s great inflation. Author of five books (four on finance and financial history, a fifth a biography of John Adams), he is the father of four grown children and lives with his wife in Brooklyn.

Publishers Weekly:

“Collected from speeches and editorials by Grant, the editor of Grant’s Interest Rate Observer, these essays are remarkable for their prescience.”

James Pressley (

“Such proofs of Grant’s foresight—the power of mind over mania—fill his new anthology, Mr. Market Miscalculates, a bracing tonic as US equities suffer what may prove their worst year since 1931.”

[Complete review: ]

Kirk W. Tofte (

“Unlike investment banks, credit rating agencies . . . this hedge fund manager obviously did his homework. We can do a little of the same for ourselves in order to come to grips with the financial mess that has resulted by reading James Grant’s new book Mr. Market Miscalculates.”

[Complete review:]

Neil Lyndon (

“Throughout the last decade, James Grant has been . . . foretelling disaster. . . . The proof is in his recently published book, Mr. Market Miscalculates: The Bubble Years and Beyond.”

[Complete review:]

Brooklyn Heights Press:

“Grant’s new book is destined to give experts and neophytes alike an ‘astute, witty and penetrating’ understanding of the tumultuous events of America’s bubble era . . .”

[Complete review: Brooklyn Heights Press]


One: Gallery of the Immortals

First There Was J. Pierpont Morgan

Emulate Henry Singleton

Inside Isaac’s Head

At the Bank of Graham and Dodd

Thomson Hankey was Right

Two: On Planet Stock Market

Crisis of the Big Guys

The Economic Consequences of Air Conditioning

Just in Case


Three: New Eras on Parade

Thank Mother Russia

Real Estate 36,000

Nasdaq’s Peak was Greenspan’s

Meet the New Mary Meeker

Whom Blodget Displaced

Snoopy Deploys Capital

Four: Perils of Tranquility

Parable of Perception

There Ought to be Deflation

Deflation a la Eisenhower

Not Too Big to Hit the Wall

Fill in the Suez Canal

Five: Mr. Market Buys a House


Rope for the Neck of the Homeowner

Meet “Mr. I.O.–P.O.”

For a Considerable Period

Your Home is Your Debt

The 29th Bubble

In Kansas We Busted

House Prices: Prepare for the Impossible

Six : Mortgage Science Projects

Find That Risk

Inside ACE Securities’ HEL Trust, Series 2005–HE5

Age of Aquarius

Inside the Mortgage Machine

Up the Capital Structure

Wheezing CDO Machine

Seven: Mr. Market in the Dock

Carter Glass, R.I.P.

The Miscreants We Deserve

Mr. Market’s Shiner

Houses of Ill Repute

The Peoples’ Wrath—Delayed

Eight: Federalized Interest Rates

Monetary Regime Change

So It’s the Government’s Yield Curve

Mission Creeps

Bonds: The Next Generation

Nine: Bonfire of the Currencies

Paper Tigers

Money Less Bad

Broadside of the Barn

End of the Honor System

Ten: Lenders Don Lampshades

Missing Bankruptcies

Value at Risk

Our Friends, the Creditors

Subprime Companies

Fire the Brainiacs

Eleven: The Fine Art of Security Analysis

Pariahs’ Club

Bearish on Corning

Risk in a Cheap Stock

Glowworm Will—Eventually—Turn

Three Years Later and Still Not Cheap

Bullish on Tata

Swing and a Miss

Postscript: The Close of the Era of Peace and Quiet


From Chapter One: Gallery of the Immortals

First There Was J. Pierpont Morgan

April 9, 1999

The March 30 edition of The Wall Street Journal, with its unique page one makeup and exultant “Dow 10,000” headline, fairly jumped off the newsstands, and the quotes of the bullish equity strategists almost leapt off the page. “Top American corporations will command even higher valuations in the future,” said one, “because they constantly reinvent themselves.” “What price do you want to pay for a Matisse?” he asked.

Henry Clay Frick, turn-of-the-century steel titan, earlier compared another financial asset to the works of a different Old Master. “Rembrandts of investment,” pronounced Frick, referring to railroad bonds. Although mistaken about the senior securities of a fast-maturing industry, Frick did die rich.

“But while stocks never before have been so richly valued,” wrote a reporter in the same Wall Street Journal Collector’s Edition, “neither has the U.S. ever enjoyed so long a period of economic growth with declining inflation.”

Possibly, the writer did not remember the last three decades of the 19th century, when the annual rate of growth in real GNP averaged some 3.83%, and the consumer price index registered an average annual decline of 0.87%.

The perfect antidote to the suggestible millennial press is the wonderful new biography of J.P. Morgan, Morgan: American Financier by Jean Strouse (Random House, 796 pages, $34.95 at retail).Morgan’s life is testament to the importance and inevitability of financial and economic cycles, as well as to the possibility of becoming very rich while spending half the year in Europe collecting art. A Morgan partnership in the late 19th century was almost regarded as a death sentence, Strouse relates, so overworked were the principals at 23 Wall Street. Yet Morgan somehow managed to find the time to run the firm, rescue the credit of the United States, reorganize the railroads that had issued too many “Rembrandts,” create trusts, intervene to stop recurrent financial panics and, yet, to organize his personal life in such a way that his second wife and he were not often together on the same continent, let alone under the same roof.

“What’s really driving the market is peace,” another brokerage-house employee was quoted in the March 30 Journal. “Nobody’s talking about the peace dividend.”

The United States was at peace from the close of the Civil War, in 1865, to the start of the Spanish-American War, 1898 (which lasted only about as long as a modern bear market).Yet, over that span of years, creative destruction raged, panics swirled and interests clashed. Feckless and overleveraged optimists periodically came to grief, low interest rates, and the absence of a federal income tax notwithstanding.

There was no central bank in those years, either, but Morgan, de facto, almost seemed to fill the office himself. Even before he played Atlas in the Panic of 1907, he was widely viewed as the indispensable man. In 1902, when Morgan was 65, the historian Henry Adams wondered “What would happen if some morning he woke up dead?”

The year of Morgan’s death, 1913, was also the year of the passage of the Federal Reserve Act. “The king is dead…,” a perceptive New York banker wrote of Morgan’s passing. “There are no cries of ‘Long live the king,’ for the general verdict seems to be that there will be no other king; that Mr. Morgan, typical of the time in which he lived, can have no successor, for we are facing other days.”

Now they say, “Thank God for Alan Greenspan,” and many wonder what would become of the charmed stock market if the chairman left office (his term expires in 2000).What followed Morgan’s death was unimagined change. A peaceful Edwardian world went to war, governments formerly limited in their taxing power became rapacious, a gold standard turned to paper and the Rembrandts of investment (which, in truth, had been in a bear market since the turn of the century) went on depreciating. History is bigger than individuals, and there is no permanent high plateau of prosperity. On a more hopeful note (now we are thinking of Asia), there is also no permanent low plateau of depression.


From Chapter Two: On Planet Stock Market

Crisis of the Big Guys

March 26, 1999

Remarks by James Grant before the American Council of Life Insurance, in Tucson, Ariz.:

I have a big subject to address, and big shoes to fill. As you know, I am here today only because Peter Bernstein couldn’t be. Peter, who is ailing, literally wrote the book on risk—his splendid Against the Gods appeared in 1996. You’ll agree that anyone who could make an international best-seller out of the history of risk in the speculatively charged 1990s must be a very formidable intellect indeed.

Peter’s timing was admirable. This is a risk-fraught juncture in finance; in my opinion, among the most perilous ever. I know that I have said this before, too many times, and I understand full well that my association with a bearish message does not necessarily enhance its news value. I have resolved to do better during the next once-in-a-lifetime boom.

The tricky thing about risk is that it is more threatening as it seems less obvious; and less threatening as it seems more obvious. If you concede the truth of this paradox, you are bound to agree that America is dangling by a thread, financially speaking. Rarely has risk seemed less obvious to the majority of investors than it does today. Although not actually eradicated by modern science, it is, like polio, thought to be in full retreat. Time magazine crystallized the spirit of the age last month when its cover featured a picture of Alan Greenspan, Robert Rubin and Lawrence Summers, collectively identified as “The Committee to Save the World.” The story inside implied that no financial risk is so great that it cannot be neutralized by a committee of enlightened public servants.

Like many other financial ideas, the concept of risk is forever being redefined. Its definition varies with financial and economic circumstances, and it has recently undergone a bull-market transformation. For a professional money manager in 1999, the riskiest asset isn’t necessarily interest-rate derivatives, commodity futures, Russian sovereign debt, or even domestic small-cap equities. It is probably Treasury bills. Cash is the one asset class that is positively guaranteed not to double in value in the next fiscal quarter. It is the investment that is certain not to keep up with the S&P 500.

For me, the all-cycle definition of risk is the chance of loss. It is not the risk of falling behind the S&P or of not retiring, like everyone else in one’s neighborhood, at the age of 49 to Boca Raton.(Nor, it seems to me, is the volatility of a particular security in relation to an index. If a good business can be purchased at a compelling valuation, of what significance is the flight path of its stock price?) The value investor Seth Klarman has thought long and hard on the subject. “Unquantifiable in prospect,” he writes, “risk is (surprisingly) no more measurable in retrospect. You can, of course, measure the outcome of an investment. But you cannot easily evaluate what failed to transpire, all of those seeming risks that were somehow avoided as well as those that were never even imagined.”

I think Seth would be the first one to concede that thinking about risk has lately not been the way to get rich, or to become richer. The trouble is that the risk-averse investor is competing with people who might be described as risk-oblivious. They can imagine no conceivable way in which there could be a loss—the subject has never dawned on them. I used to pity these innocents—they didn’t even have the good sense to subscribe to Grant’s. Now, I suppose, they pity me. In such a paradise as this one, the argument goes, the only relevant risk is that of underperformance—of not keeping up with one’s brother-in-law, the Internet trader. I fearlessly predict that this will change. In fact, to judge by the weakening net inflows into equity mutual funds as well as by the great and growing disparity between the chosen few stocks and the unwashed mass, it seems to be changing already.