Grant’s Interest Rate Observer

"One of the most thoughtful was James Grant, editor of Grant’s Interest Rate Observer, who had carved out his anti-junk position back in September 1984. Grant explained that he had reached this point of view, first, because the world even at that time was long on debt and short on equity, and he followed the old investment adage that one should own the thing in short supply and shun the thing in surplus. What an illiquid world needs is cash, he reasoned, and so the debt security to own (if one chooses to own debt at all) is the one with the highest ratio of cash flow to interest expense—not, in other words, the junk securities of companies which typically have little financial leeway. Second, Grant reasoned that the holdings of junk bonds were so concentrated in a handful of institutions (Milken’s inner circle)—which issued bonds and bought each other’s paper—as to invalidate the argument of safety through diversification in one’s portfolio. And, third, he declared that the junk idea had been carried too far, and that a faddishness had grown around its progenitor and prose-lytizer, Milken. Thus, Grant declared in September 1984, “. . . our hunch is . . . that, in some basic way, junk has had its day.”"

"One of the most thoughtful was James Grant, editor of Grant’s Interest Rate Observer, who had carved out his anti-junk position back in September 1984. Grant explained that he had reached this point of view, first, because the world even at that time was long on debt and short on equity, and he followed the old investment adage that one should own the thing in short supply and shun the thing in surplus. What an illiquid world needs is cash, he reasoned, and so the debt security to own (if one chooses to own debt at all) is the one with the highest ratio of cash flow to interest expense—not, in other words, the junk securities of companies which typically have little financial leeway. Second, Grant reasoned that the holdings of junk bonds were so concentrated in a handful of institutions (Milken’s inner circle)—which issued bonds and bought each other’s paper—as to invalidate the argument of safety through diversification in one’s portfolio. And, third, he declared that the junk idea had been carried too far, and that a faddishness had grown around its progenitor and prose-lytizer, Milken. Thus, Grant declared in September 1984, “. . . our hunch is . . . that, in some basic way, junk has had its day.”"