James Grant, the editor of Grant's Interest Rate Observer, warns that the current economic picture will not brighten soon.
"The recession will not end next week," Grant told a meeting of the Baltimore Security Analysts Society yesterday. "It will be over, but not soon."
While a rising stock market has traditionally foreshadowed an upturn in the economy, Grant said he was skeptical of this indicator because of the "commoditization of the stocks," where investors treat stocks as if one were as good as another. This is particularly the case with the new trend of "indexing," in which an investor will own each stock in a market index, such as the Standard & Poor's 500. If the index goes up, the investment goes up.
This is much different than in the past, when most investors put their money into individual companies and followed their performance, Grant said.
Grant, 44, is a well-known commentator on the foibles of the American economic system. Through his biweekly newsletter published in New York and appearances on ABC, CBS and the public TV show "Wall Street Week," Grant has mixed economic statistics with dry humor to warn against the spendthrift ways of modern America.
He is also noted for his witty phrasing. Commenting on the stock market rally in the May 10 issue, Grant said: "It has rallied as if it has seen a vision of cold fusion combined with free money."
Grant began his journalistic career in 1972 in Baltimore at The Sun, where he worked in the business news department. From there he moved in 1975 to Barron's, the widely read financial weekly. There he started the column called the "Current Yield," which tracked the movements of the credit markets.
Then, in 1983, he struck out on his own and started his newsletter, which has grown to a circulation of 3,000.
Easy credit has resulted in a recession that is unlike any other during the last century, Grant told the analysts.
Grant cited two trends, which he calls the "democratization of credit" and the "socialization of credit risk."
"The apex of the '80s was the five-year Yugo loan, for a car that was guaranteed to last three weeks," Grant told the audience. Such arrangements have resulted in "the upside-down loan," where the value of the car drops below the balance due on the loan.
In this situation, a person buying a new car might find he needs more cash and will put off the purchase. "This may prolong a certain amount of stagnation," Grant said.
Another trend is the shifting of the risk of reckless loans from the banks and thrifts onto the government. Grant said this shift has been in the making for the last 100 years with the establishment of such institutions as the Federal Reserve and deposit insurance.
The result is that the economy carries the burden of "the weight of many generations of lending practices," Grant said.