Before the great bull market began in the early 80's, when companies really were undervalued, it wasn't just that value went unrecognized, it was also that there was not an adequate financial mechanism to unleash that value from the big conglomerates in which it was sealed. Then came the high-yield "junk" bond. At that point, financiers finally could compare the free cash flow from a corporation, sell a bond that paid lenders somewhat less cash flow and use the money raised to buy the corporation and realize an actual cash-flow profit - no matter how big the corporation was. This method grew out of the Warren-Buffet-type approach, which was to look at a company exactly like a bond and buy it as though the cash flow would actually belong to you, even if you were just a shareholder. Of course, he bought in large enough parcels to actually influence the management of the corporation and insure that the cash flow situation got better and not worse, and sometimes bought companies outright so the cash flow really would belong to him.
The ability to raise all that junk bond money added liquidity to the market in the 80's. What clearly happened subsequently is that the liquidity in the market for these new bonds was quickly outsized by the speculative liquidity in the stock markets themselves. In 2002, buyers of corporate assets seem to approach the cash-flow value of a company as a floor, rather than a ceiling, for the stock price. Then there are those bubbly companies whose stock prices outstrip all reasonable hopes for cash flow in the future.
The question for people like Jim Grant is: "So what?" Literally, so what? As long as the markets are liquid, who cares about stock valuations? If the markets don't need people buying companies for debt-raised cash to keep money flowing into stocks, who cares what the cash-flow value of these companies really is? What is going to stop the buying, why should it, and when?
The only people who care right now are bespectacled tongue-cluckers like Jim Grant. What he can't stand is the idea that there is no difference between a stock "investor" and a stock speculator. If that were true, then all his brain power would be for naught. If that were true, then capitalism would not be a world of reward for merit, but one of reward for simply appealing to the people with the cash (including by duping them). If that were true then he would have to admit that capitalism is a system of the self-congratulation of the wealthy, instead of a system of solid, moral and objective standards.
The James Grants of this world and the socialists are not so far apart. Socialists are, if you will, the ultimate value investors. The question is how we use the extensive and expert systems of valuation that serious-minded finance-heads like James Grant have developed and marry them with socialism, which has heretofore been utterly financially naive. That because, eventually, the bubble will burst that capitalism cannot re-inflate. At that point people will look for leadership and either socialists will have it or barbarians will pour through the gates of civilization.
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