Customer Reviews

The Trouble With Prosperity: A Contrarian's Tale of Boom, Bust, and Speculation

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When I first started investing in stocks, I read two financial books with two very different slants on the markets. The first was Peter Lynch's "One Up on Wall Street" - a breezy, everyone-can-do-it, "buy what you know" feel-good primer. The second was this book, James Grant's "The Trouble With Prosperity", a real wake-up call to anyone who thinks that investing is easy, stocks ought to go up forever, and that the good times will always last. My investing life was probably spared several times over by Grant's book.

Let me spill the beans right here: the trouble with prosperity, in Grant's view, is that people begin believing it will never end. As a result, financial decisions begin to be made - both by individuals and by institutions - during prosperous times that are based on too rosy a view of the future. When reality sets in and conditions turn out not as expected, those poor decisions end up creating imbalances in the markets that need to be corrected before economic health can begin anew. So lenders made more and more unwise loans in the late 80's... leading to a banking crisis. Real estate values rise on speculation and then crash. We are seeing at this writing some wrenching corrections and volatility in tech stocks based on too-optimistic views of their future earnings. And the list goes on.

Grant's view of the corrections are that they are painful but necessary, sort of like the occasional brush fire that clears out the old undergrowth and allows for new growth to begin again. His is an urgently needed message in an age of electronic brokers and cheerleading financial media. Read and heed what Grant has to say to help guard against your own 'irrational exuberance' in whatever market you are in and to help see your financial future in light of both prosperous times and their inevitable corrections.

A great book. If you really want to understand how an economy functions, read this book. Explains, amongst other things, the currently flaccid state of the Japanese economy, and the issues with having the government (through the Federal Reserve) set interest rates. Also writes about historical precedents..remember the old saw about learning from history? An engaging, informative read.

According to James Grant, this is what goes wrong during good times: "Of all the consequences of sustained prosperity, none is so powerful as the delusion that markets always go up." Not many people wanted to hear that when it was first published in 1996. Which is probably why he added this redundancy: "They do not always go up."

Grant chronicles periods of boom and bust. He is effective at this. For example, he quotes The Journal of Commerce during a bear market in 1952: "Many bankers visualize a return to the conditions of 150 years ago, when many sections of Wall Street and environs were residential and retailing districts." It's difficult to imagine that Wall Streeters would be that bleak. It's also difficult to imagine that investors would be as unrealistic as they were in the 1990s: "In response to warnings that dividend yields were too low, or that price-earnings yields were too high, the public only invested more, thereby sending yields even lower and price-earnings multiples higher." Four years after Grant wrote that the S&P 500 began to decline.

The Trouble with Prosperity is not a "how to get rich book" for "dummies" or "idiots." This is a serious discussion of financial history which gets heady at times. For instance, the author applies theory from the Austrian school of economics. "In the Austrians' judgment," he explains, "there is one principal source of collective error: interest rates. Set them too low and people will overreach." The central bank is the culprit. "The quarrel I have with the Federal Reserve", proclaims Grant, "is not so much that it creates credit as that it pretends to know the interest rate at which that credit (in the form of bank reserves) should be lent and borrowed." Alan Greenspan, in other words, is not omniscient.

James Grant is not a cheerleader for the stock market. He is a genuine contrarian, a skillful writer, and he was right.

History has a way of repeating things. Our economy is NO exception. James Grant writes a great book on the history of money,interest rates and the stock market in this country. Starting with a building at 40 Wall completed in 1930 the year after the market crash and taking you through the history of many of its tenets. Grant is able to show the many Boom and Bust cycles in our economy and why they happen. A MUST READ to understand the cyclicality of our markets....And the foolishness of our politicians and Central Bank heads into believing that they can manage the economy into a virtual up economy all of the time. The lesson learned in this book is that artificially inflating assests will cause major reccesions to happen.

James Grant is a stock market analyst and historian of Wall Street. In the Trouble with Prosperity, he recounts investment movements in the United States during the twentieth century and brings them to life without dull painstaking illustration or by selling an investment tool. This book along with "Money of the Mind" shows that he is no slouch in his understanding of U.S. financial history.

As an amateur economist, the section of the book most interesting to me was called the "Consequence of 3%" where Grant shows why he is critical of modern central banking with its dependence on loose credit. He follows the analysis of William Roepke and other "Austrian" economists in discovering the faults of a government managed credit system. One should not dismiss this assessment out of hand because of its Austrian roots. Even neo-classical economists have lately become interested in some of the ideas of Knut Wicksell, who by following Walrus and Bohm-Bawerk sought to discover the consequences of price floors and ceilings on credit markets.

Grant mashes the history in with theory and comes up with this highly insightful book.

... of the cyclical nature of the financial markets and the folly that afflicts its participants.

After you've read all of the "buy-and-hold" pulp nonsense, pick up Mr. Grant's works and prepare to be truly informed.

I'm sitting here in August of 2002, looking at Jim Grant's 1996 prognosis for the stock market. At the time he presumably was writing his book, the NASDAQ (the major over-the-counter, technology-laden index)was in the 1,200 to 1,400 range.

At that time, Grant apparently was suggesting that stocks were "too expensive", and that a bubble existed, which would soon burst.

Well, after his book was written, the market continued to rally strongly for another 4 years, and now that the bubble has burst, we find it's a different bubble entirely than Mr. Grant assumed it was.

Because after the bursting, the NASDAQ index is down from the 5,000 level reached 4 years AFTER Jim Grant said prices were too expensive, and is now rallying up from a double bottom at the 1,200 level.

In other words, Mr. Grant back in 1996 was claiming we were near a top in the market, but he was totally in error! After all that has happened since his book was written, we are still at or above the stock price level that he claimed was "too expensive". Apparently the author's ceiling has become the FLOOR of the stock market, which means he was about as wrong as he could have been.....