Porter Sits Down With Newsletter Legend Jim Grant, Part I

Editor's note: Porter calls Grant's Interest Rate Observer "the single most valuable resource I've ever discovered."

In today's Masters Series – adapted from episode 19 of the Stansberry Investor Hour podcast – Porter sits down with Jim Grant, and they discuss how he became an industry expert... how he became involved with The Big Short... and why his newsletter is unique...

Porter Sits Down With Newsletter Legend Jim Grant, Part I
A conversation with Jim Grant, editor, Grant's Interest Rate Observer

Porter Stansberry: Joining us this week is a legend of the newsletter industry and a new friend of mine. His name is Jim Grant, and he is the founder and writer of Grant's Interest Rate Observer, one of the most expensive and elite investment-research products available on the market anywhere. Jim, thank you very much for joining us today.

Jim Grant: Well Porter, it is my pleasure indeed. Thanks for having me.

Porter: So Jim, the first question I've got to ask you is how did a middle-class kid from Long Island become the most renowned and celebrated financial journalist of his day? How did you go from zero to being at the very top of your field?

Jim: Well first and foremost, Porter, thank you for the premise and the question. You know when you stand at the pinnacle of financial journalism, you're kind of standing at sea level. I am deeply grateful for the compliment and I'll pass it on to my wife.

I set out in life to first of all play first base with the Brooklyn Dodgers. Failing at that, I took up the French horn, played it seriously, attended college with the intention of either teaching music or playing professionally, quit after about four months, went into the Navy for a couple of years, came out again, and got a job, Porter.

My serious life begins at the age of about 20. I get a job at a firm called McDonnell & Company, which was a member firm of the New York Stock Exchange. I was there before returning to college, and I got a taste of the financial markets, which I savored and have continued to savor.

I went back to school, studied economics, graduated, went to Columbia University for a couple of years, and then got a job at the Baltimore Sun. Because with six or seven months' experience in McDonnell & Company, I was considered the economic guru of the newsroom. That's what it took.

When there was an opening on the financial desk, I took it, and a couple years later, I achieved an ambition of mine which was to go to New York and work for Robert Bleiberg, the editor of Barron's. It was a wonderful experience. I was there for about seven or eight years, and then the year was 1983. There is one of those ever-so-petty but – because of the lack of money involved – ever-so-intense spats among the staff of Barron's.

Some people were on one side. Others lined up against them, and I was on the wrong side. It dawned on me that I had better leave Barron's before I was invited to leave, but where to go? I looked around at the possibilities for employment and saw nothing very appealing. So I thought to myself, wait a second. Surveys showed as many as 50,000 or 80,000 people read my column in Barron's. It was a current-yield column I wrote about the credit markets.

I figured if only half of those subscribed at the rate of I think $200 a year... My wife and I had one of these very early automated spreadsheets, and we did the calculation about the first year's revenue. We decided that we needed tax counsel owing to the imminent influx of subscriber funds. That was the plan. The reality was – and I don't think you can identify with this, Porter, because I think Stansberry Research has never been in this exact predicament.

I think I had 18 subscribers week one and I got into a cab and took the 18 envelopes to the post office to mail them. It was volume one, number one. I paid the cab driver, closed the cab door, and looked at the magnificent steps of the main post office on 8th Avenue and 34th Street in Manhattan. It is a towering and monumental building... I realized that the cab that had sped up 8th Avenue had the envelopes that contained the first issue of Grant's. So anyway, I'm still proud of that first issue, as few of them that exist.

Porter: Jim, I want to jump ahead. At Grant's, the scope and the magnitude of what you offer the reader, in my opinion, is bigger, broader, and more professional than any other product that's on the market. You have a very unique position in the heart of the financial district. And I'd like to ask you to tell the story of how Grant's became involved in The Big Short.

By that I mean your newsletter was featured in a Hollywood movie that dramatized the collapse of the mortgage bubble and those financial actors who were able to make billions from that market event. And I was reading your newsletter very carefully at the time and I recall your introduction of the ABX index that was the tool that a lot of these traders used to short junk bonds. Can you tell us how you grew to understand what an enormous trade and opportunity this was for so many investors?

Jim: I'd be happy to. Let me begin in about 2000-2001. The dot-com bubble had collapsed and the Federal Reserve was looking around for ways to rejuvenate and rejigger the American economy. If you recall, Paul Krugman, among others of that political persuasion, was urging the Fed to slash interest rates, hence mortgage rates, so as to set off a rally which presently became a bubble itself in house prices. Lo and behold that's more or less what came to pass.

The Fed slashed and slashed rates, and up and up went house prices. Something was out of kilter as early as 2000 and 2001, and we began writing about house prices in 2000.

We noted that you could get a mortgage with very little collateral. We noted that you could get a mortgage in which you were not required to service the principal for many years. We noticed that your word was your bond on some mortgages and your word in some cases was not very good.

So all these anomalies and these oddities and these excesses began to pile up, and year by year we wrote about the levitation in house prices and we kind of threw rocks at that particular rising bubble.

Rocks never brought the bubble down, but I think our readers began to understand that house prices were simply out of their customary orbit through well-intended but ultimately disastrous federal stimulus. House prices flew way out of range of incomes with which to service the debts and to maintain the structures.

So now the year is I guess 2006 and we get a call from one of our readers who said, "Have you seen the prospectus for" – oh, I've forgotten the name, a very convoluted-sounding mortgage structure. I said, "No," and he said, "Well take a look because it bears investigation."

Porter: Yeah, by the way, Jim, you'll recall that no one ever read the prospectuses of any of those asset-backed securities.

Jim: Well, you're looking at the organization that did. This is about 800 pages or so. At the time, we had an associate that did Grant's analysis, Dan Gertner. Anyway, I dumped this stack of papers on his desk and I said, "Dan, figure this out." About a day and a half later, he said, "I can't," and I said, "Dan, we've got ourselves a story."

We dug deeper and produced the first piece on this complex – but ultimately analyzable – structure. We began to look at others and began to see the contradictions and the main investment appeal – and here was the investment appeal, Porter. These mortgage-backed securities, collateralized-debt obligations, what have you, were priced, most of them, at about 100 cents on the dollar, 101 cents on the dollar, 102 cents on the dollar. If you sold them short, it fell to you to service the interest and also stand ready to buy them back in case they rallied in price, but they were not liable to rally much because they're already priced slightly above par.

However, if we were correct that the collateral would not support the debt, that the homeowners would walk away rather than continue to pay their interest and principal, then these structures would collapse in price perhaps to nothing at all, and you would make a lot of money. So the upside was vast and the downside risk of the mortgage depreciating in price was minimal.

So it was that very rare opportunity in which reward towered over prospective risk and importantly the world had not caught on, nor did the world catch on for a long time.

Porter: A couple of things about your product I'd like to ask. Your newsletter is so idiosyncratic, it's unlike anything I've ever seen before. It's certainly unlike anything else that's published in the space, and you seem, as I told you once, to have a Zen-like disregard for whether or not your subscribers like it. So what I wanted to ask you is what is the vision you have for the product and where did that vision come from? Because it is so unique.

Jim: Well, in the long-lost volume of Grant's, we set out to do the following: Illuminate the very best ideas and expose the worst ideas, to do this in the best prose, and produce the funniest cartoons. This is an aspiration of craftsmanship. We must be the last publication in the English language that actually employs a copy editor.

I keep on reading about all the firings in the New York Times and you see the prevalence of typos even in the once-immaculate Wall Street Journal. We take the greatest pains on facts. We take the greatest pains on accuracy of speech, the humble art of spelling, and the rest of it. Needless to say, we take enormous pains in the selection of topics. But I pour everything I have into every issue of Grant's, and I think the staff does as well. I'm not at all indifferent to what our readers like, but I don't go to them asking them what they'd like to read. I keep on hearing that one ought to do that.

We didn't invent anything at Grant's, but we aspire to be the best at producing well-expressed, well-thought-out ideas that could help people. And we try to not only look ahead (which is an art that I'm still working on at age 71), but we also try to incorporate as many of these lessons as we can salvage from the past and give people a 360-degree look in time... not only gawking ahead and staring as we all try to do, but also to inform that guesswork with a more than superficial knowledge of what happened in cycles past. We do it 24 times a year, and we would invite anyone who wants to give it a try to give it a try. It would be a privilege and a pleasure to have more readers.

Editor's note: Twice a year, Jim hosts the world's most exclusive financial meeting. And Porter has arranged a red-carpet, VIP-level invitation for Stansberry Research readers... for about half the regular price. This is unlike anything Jim has ever offered before... And he may never offer it again. Click here for the details.