Mr. Market Miscalculates: The Bubble Years and Beyond
Collected Grant's essays; title listed on grantspub.com books page
Summary
Grant collected pieces from Grant's Interest Rate Observer covering roughly 1997 to 2008, spanning the technology bubble, its collapse, the credit expansion that followed, the housing boom and the beginning of the crisis.
The collection's value is that Grant identified the mortgage credit problem early and in specific terms. He wrote about the deterioration of underwriting standards, the structure of the securitisations, the role of the rating agencies, the leverage in the financial system and the mispricing of credit risk while these were consensus non-issues, and the pieces are reproduced with their dates. He also documented the technology bubble's excesses in real time.
Grant's method is visible throughout: read the actual documents, particularly prospectuses and loan-level disclosure, examine the price of credit rather than the enthusiasm of equity investors, and treat historical precedent as evidence about what is possible. The pieces frequently quote the underlying documents at length, showing that the information was public and unread.
The collection also includes the calls that were wrong, particularly on the timing of the eventual correction, on inflation and on interest rates, which Grant includes rather than editing out.
The format is a compilation and there is no connecting argument beyond the introductions. The specific situations are historical. Its use is as a demonstration that the information required to identify the crisis was publicly available for years and that being right early is expensive.
Key takeaways 7
- The deterioration of mortgage underwriting standards was documented in public disclosure documents years before the crisis and was not read.
- Examining the price of credit rather than the enthusiasm of equity investors identified the excesses in both the technology and housing episodes.
- Rating agency methodology for structured mortgage products was published and its assumptions were checkable, and almost nobody checked them.
- Being correct about a bubble years before it ends is expensive, and the holding cost defeated many investors who had the analysis right.
- Reading the underlying legal documents rather than summaries is where the information advantage in credit analysis comes from.
- Consensus non-issues are where the risk is, since anything widely discussed is already reflected in prices.
- The collection includes the author's wrong calls on timing, inflation and rates, which is what makes the correct ones assessable.
Who should read it
Investors who want documentation that the 2008 crisis was identifiable years in advance from public documents, and what that cost the people who identified it.
About James Grant
Founder and editor, Grant's Interest Rate Observer (since 1983); financial historian and biographer
Grant's Interest Rate Observer is a primary source other investors read and quote, and Money of the Mind is a standard credit history.
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