Bear's bear. Train-wreck forecaster. Calamity howler. Jim Grant has been called all of them.

Since the early 1980s, his Grant's Interest Rate Observer has given subscribers 6,500 words every fortnight on credit and its excesses. Its central theme: The credit markets are going to hell in a handbasket -- and taking the U.S. economy with them.

In 1984, when Grant's flew the headline, "Junk Bonds Debunked," it was a voice in the wilderness.

But Jim Grant's early call on the crack in high-yield bonds was just one feather in his cap. Grant's also divined the bursting real estate bubble, troubles in the commercial paper market -- in short, the global credit crunch. And bad times were good for Mr. Grant and for Grant's.

Now optimism is running high again. On Wall Street, stock prices say the U.S. economy is pulling out of a mild recession. The New York Times last week reported, on page one, the revival of junk bonds.

But Jim Grant is not easily converted. From municipal bonds to common stocks, speculation is overbought and caution oversold, he warns.

Lately, Mr. Grant has been dividing his time between Grant's and a book on -- what else? -- the evolution of credit in America. He talked with staff reporter David Gillen last week about how one bear is weathering the bull market.

Question: Junk bonds are up; gold is down. Optimism seems to be high. How does the bear feel now?

Answer: Well, a lot of time has been freed up by the lack of primetime television appearances.

There has been a terrific change in sentiment on Wall Street. At Grant's, new orders trailed off in February and stayed low. So my business has been affected, which I think is interesting -- and quite extreme as swings in sentiment go.

People want to believe. They don't want to ask many questions, and they think they understand it's onward and upward. There is a credulousness, or a faith, or a gullibility toward the financial markets and financial questions.

Q: So the bear is still a bear?

A: Oh yeah. On what, one might ask.

Q: Well, junk bonds are telling us -- and the stock market, at least until two weeks ago -- that the recession is on the way out.

A: That indeed seemed to be the message of those markets.

As to the junk market, I would note that it was very slow off the dime this winter. Months went by before the junk market participated in the rise in equities.

So I would not read much predictive value in the strength in the junk market -- I think it's a lagger.

Q: And stocks?

A: Well, there has never, in the postwar experience, been a time when the stock market convincingly and dramatically took off when business activity did not pretty quickly follow.

But also, there has never been a time in which the rate of growth in real disposable personal income was as low as it is now and there's been a recovery. And there's never been a recession in the postwar experience in which monetary growth was as sluggish as it is now.

ONe thin one has always known about the stock market is that it knows something -- it is a leading indicator of some reliability and importance. But what I'm beginning to wonder is whether the market has not become so institutionalized and so far removed from business activity that perhaps it's no longer the leading indicator that it was.

What has gone on in Columbia Gas [Systems Inc.] -- with the Street being utterly surprised -- what has gone on with IBM, and recently with Wells [Fargo & Co.] -- I wonder how many people are doing the numbers.

I would beg to ask -- very humbly, because one always begs to disagree with the stock market humbly -- whether it is being driven so much by numbers or glandular activity.

Q: Corporate bond spreads reflect what equities do, though equities are a lot quicker. And corporates are expensive now. Do you think the bond market is ahead of itself, too?

A: It might well be. I am struck by the extent to which almost every market has decided that the worst is out, the recession is over, and what lies ahead is not only a recovery but something that is very strong and very satisfying all around.

You can see it in the way the cyclical stocks are priced, something like Stone Container's equity.

Q: And Stone Containers' junk bonds.

A: That's true. Their securities in all phases of capitalization are priced for a big rally in liner board prices.

But it's a highly leveraged company with a very precarious balance sheet, and it's having difficulty paying its interest, never mind amortizing its principal. This company, both from the debt and equity side, is being priced as if we were $50 higher in liner board prices than we are at the moment.

Q: So you see false hopes?

A: Well, that's the kind of optimism I think has been built into the pricing of corporate securities, both equity and debt.

You've seen it in bank stocks, until a few days ago, and you had seen it in the so-called TED spread, which had been at record narrow levels. You see it in an almost universal bearishness toward gold and precious metals in general.

So I thought -- and think -- that it's something to be contrary about. If everyone is right, and the recession is over and a strong, or at least average recovery is at hand, from here you're not being paid that well to hold securities, to generalize cosmically. But if the recession is not over, as I think, then there are many more suprises.

Q: If the recession is not over, how much longer do we have to go?

A: Certainly to the end of this year, maybe beyond.

There are some interesting anomalies in the way the data are falling out. Computer sales, which account for an important part of capital spending, are weak both here and abroad. The monetary aggregates, commercial and industrial loans from banks, are strikingly weak for what is advertised as a recovery already under way.

Q: HOw about the bond market? Care to take a wager on the long bond by yearend?

A: Do I ever not? It's a fine question, and I can only tell you if I knew I would not be writing 6,500 words every two weeks.

I tend to think that Treasury bond yields will surprise us by going higher rather than lower. I think the weight of supply will continue to surprise us.

I say that knowing full well that in the past supply has been a non-issue in a bull market. It simply hasn't mattered because private credit demands fall away far faster than public credit demands increase.

But what makes this particular time interesting is we're beginning to see the tangible consequences of the socialization of credit risk. The insurance of bank deposits and the federal guarantee of mortgages are now costing real dollars. And that is being added to the fiscal deficit at once.

So I think that the federal government's credit is coming into play in a tangible way. Already people ought to be more surprised or curious at the fact that the long bond is at 8.50% at this moment. It should be lower by rights.

Q: Would you give the U.S. Treasury a triple-A?

A: If the Treasury were a triple-A 10 years ago. It can't be the same caliber triple-A today.

Q: You're an unbashed conservative. This is from the June 24 National Review: "It's hard to keep a good thing down, and the rebound in the junk bond market proves that."

A: conservatives, for reasons I am mystified by, have chosen to rally around Milken as some sort of political martyr, when in fact he isn't.

I will say there is an overwhelming irony of Milken and the Feds on this matter. Time was, not so long ago, when the federal government defined the currency as a weight of gold bullion and balanced its budget and did not intervene in the affairs of private individuals.

Now the government has its budget chronically imbalanced, has debauched the currency, has socialized -- and arguably ruined -- the banking system, but is breathing down the necks of individuals as never before about their affairs. I find that tragic and infuriating, and in that sense -- and only that sense -- Milken is a symbol of government run amuck.

Q: But...

A: But as to the financial merits of this business, junk bonds, as packaged and sold, were for fools.

The market broke in 1989, it didn't have anything to do with the recession. Much of the market was corrupted either by sheer money lust or greed, or by a form or commercial bribery having to do with the payment of warrants to the fiduciary.

As the Times said today, it went to excess onthe downside. But that doesn't vindicate the people who purveyed this in the 1980s or make some sort of political hero out of Micheal Milken.

Q: But people seem to have very short memories. Will we see junk bond-financed leveraged buyouts ny time soon?

A: Lessons of history on that score are not as clear as they might be.

For instance, the crackups and debt liquidation that began in 1929 and reached a climax in 1931 and kept going in 1932 and 1933 so traumatized a generation that for 20 years common stocks yielded more than bonds. It can't be said people of that generation had a short memory.

So what we have to ask ourselves is, How extreme were the excesses of the 1980s?

In my reading of it, putting it in the context of the credit market history of this country going back 100 years, is that the recklessness shown by commercial banks, the money lust shown by investment banks, and, finally, the lack of judgment shown by people on Wall Street were almost unprecedented.

My working hypothesis continues to be that there will be some symmetry between the upside and downside, not necessarily hour for hour, but perhaps in degree. That as people sought high yields, so will they seek low yields, that is, safety. And I think gold will be the ultimate beneficiary, because it's the epitome of the preservation of principal.

Q: Let's turn from corporate junk to municipal junk. Bridgeport recently filed for bankruptcy. The Bond Buyer reports daily on budget problems at the state and local level. Should tax-exempt bond buyers be worried?

A: I am astonished they are as confident or, again, complacent as they are.

We at Grant's are neophytes in the municipal bond area, and we've just saved up enough to subscribe to The Bond Buyer. But I am struck by the pricing of these securities -- again, as very much an outsider to this market.

If you go to the back of Barron's and look at the closed-end municipal bond funds, you see that most of them are trading at premiums -- some substantial premiums -- to net asset value.

What I find hard to square is the credit news chronicled daily by The Bond Buyer with the pricing of these things. It's as if the budget problems don't matter, or that they're over and that we in the news media are merely chronicling the lagging indicators of a recession that's now over.

I don't get it. I would think there should be greater distinctions drawn between gradations of credit risk in the municipal bond market.

Q: Why are states and cities in such bad shape?

A: If you talk to Louie Goldstein, [state controller] in Maryland, he will tell you that this is the first time since the invention of the Maryland state sales tax -- 1946 or so -- that there has been a year-over-year decline in receipts. So one part of the states' problems has to do with the severity of the recession.

I think another cause has to do with the decayin the federal finances.

To again pick on Maryland, it is getting less money than it was accustomed to getting from the federalis. The Feds themselves are in the unenviable position of a government in a recession, of not being able to be expansive. It was expansive, but during the boom. So now in what is manifestly not a boom, except on Wall Street, government has to become prudent.

Q: How about a preview of your book? Your working title is "Money of the Mind"?

A: It should be out early next year. The idea is to ask the question of how it was that they they sent credit cards to golden retrievers, or how was it that Trump was able to borrow as he borrowed. In other words, how it was it that all these things happened, because they hadn't happened much before. The book goes back and describes the evolution of American credit.

Just to pick one topic, consumer finance is very interesting.

ONe hundred years ago, there was a severe depression in the Gay '90s, and New York City was full of hungry people and misery was widespread. The money people got together and asked what could be done. No one then thought that there was a business opportunity in making a loan to a workingman, because the consumer wasn't even working.

So what they did was form something called a provident loan society, which is a high-grade, very dignified, and very successful pawn shop. And the working poor would bring in their chattels and borrow against them.

It wasn't until the late 1920s that Citibank got into the personal loan business, and that was only at the urgng of the New York State attorney general, because something had to be done about the loan sharks.

That was how consumer credit evolved -- very, very slowly. It wasn't until fairly recently in the nation's history that banks deemed ordinary people to be a good credit risk, but they turned out to be fabulous credit risks, and were in the Depression and in every cycle until now.

I think one of the credit issues to be thought about is consumer finance -- credit cards, the rate of return on credit cards, and the extent to which banks are dependent on fees and credit card income for their income -- that is, heavily dependent.

So the evolution of consumer credit is a fascinating story, and helps to remind you of how very recent some of our credit conventions and attitudes are.

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