http://online.wsj.com/barrons/article/0,,SB108639081396029410-search,00.html?collection=barrons%2F30day&vql_string=seth%3Cin%3E%28article%2Dbody%29Looking Both Ways
An optimistic pessimist discusses bad government, good stocks and strong China
By SANDRA WARD
An Interview with Seth Glickenhaus -- It's hard to find someone as optimistic as Seth Glickenhaus. It's also hard to find someone as pessimistic. At age 90, you're bound to be a bit of both. That very yin and yang has enabled the courtly proprietor of Glickenhaus & Co., the $1 billion Manhattan-based money management firm that bears his name, to produce solid returns year in and year out for his clients, all the while limiting their risk. He worries so his clients don't have to. Now that the deflation and depression he fretted about the past few years haven't come to pass, he can turn his attentions to other concerns. World War III, for instance. Yet, as usual, he's also got some good ideas for making money.
Glickenhaus says that "if Kerry is elected, the doctrinaire Republicans will sell stocks for a day or two, but then the market will go up considerably."
Barron's: Is this market keeping you young or making you older?
Glickenhaus: We like the market best when the pluses far outweigh the negatives, and we don't have overhanging fears of negatives that can bite us. We also like the market when there are so many negatives and very few pluses that we stay away from it in a mincing way -- that is, we go short. Today, the market is a shade on the high side, but only slightly in terms of the price-earnings ratio. The pluses and minuses balance each other, so it is difficult to be very pessimistic or very optimistic. This is always a time when we are uneasy.
Q: Would you like to enumerate the pluses and minuses?
A: The political picture has never been as negative as it is today.
Q: Does that matter to the market?
A: It matters tremendously. If Kerry is elected, the doctrinaire Republicans will sell stocks for a day or two, but then the market will go up considerably.
Q: Because?
A: Because Bush has been worse than zero as a president. He is bush-league. No. 1, he got us into a war and spent billions of dollars, dollars unfortunately which don't have any positive offset in better housing, schools and infrastructure. And people are being killed. It is a war without any purpose other than to get rid of Saddam Hussein.
Secondly, he spent all his time campaigning for his next election, rather than overseeing the various departments of government. The military has many internal problems, which are surfacing in Iraq and Afghanistan. He hasn't consolidated and integrated the CIA and the FBI and his new department of Homeland Security, all the military intelligence, which he desperately needs to do.
He has alienated foreign countries. He has failed to address environmental concerns. And in his approach to the Israel-Palestine War, he has been unaware that Israeli Prime Minister Ariel Sharon's policy of non-negotiation is destined to fail, resulting in increasing mutual hatred and many more deaths and no solution. Fiscally, Bush has been totally irresponsible.
Q: And Kerry?
A: Kerry is a mediocrity. He is a typical senator who votes for the moment. He isn't a statesman.
Q: If Bush gets re-elected, what happens?
A: If Bush gets re-elected, he will see it as a total affirmation of all his policies, and the deficits will grow. Perhaps we will have another war in addition to the two that exist, however preposterous this seems.
Q: Won't whoever is elected have to tackle the deficits?
A: The only time they will tackle the deficits is if they can't sell the bonds. And when that day comes, I don't want to be long anything except very short paper. It isn't a probability because foreigners don't have better places to put their money. But they own a great percentage of our debt and are buying a big percentage of new issues. We are at their mercy.
Q: What about the notion that deficits are a necessary part of stimulating the economy?
A: We have never had anyone incur such a huge deficit, without producing any offsetting goods and services. This administration is unaware that the Third World War has begun. Never again in our lifetimes will we have wars like World War I and II, because every other country recognizes the U.S. has such a superior Navy, Air Force and Army it would take any nation 15 years to catch up with what we have.
But World War III has begun. It is a war that is fragmented in many different countries, fought by people working independently, and distinguished by poverty in every case, and often by fundamentalist religious fanatics fighting the establishment. We allude to them generally as terrorists, but in some cases the governments themselves are the terrorists and the rebels are fighting for a good cause. This war exists not only in Iraq and Afghanistan, but in Haiti, Colombia, Peru, the Congo and many of the African countries, Sri Lanka, India, Pakistan, the north and south of Ireland, Egypt, Saudi Arabia. This is ongoing. You may say we are here to talk about economics and the stock market, not the world at large. But the point is all these things affect the markets.
Q: People point out that during the Vietnam War, the market had its normal cycles.
A: True, but overall it was a negative. I'm not saying you can't have a bull market, I'm just saying that psychologically and often business-wise, many of these things are a negative. Another negative has been the Federal Reserve, which has kept interest rates much too low for too long and overstimulated the housing market and auto sales, among other things, and borrowed dreadfully from the future.
Q: But people seem to think that's about to change. What is your take on rates?
A: It is about to change to a minor degree at first, and then we will see. In a way, it isn't really changing. If the federal-funds rate goes to 1.25% in June, it is still pretty low. But the direction is changing, and that has had an impact.
A greater impact, though, will be when we hit 2005 and 2006 and the normal demand of those years won't be there, and that's because we accelerated it in 2003 and 2004.
Q: There is always China.
A: That's one of the positives. We will talk about the positives, but I want to make sure I haven't left out any important negatives. Did I mention the income disparity? Bush's tax bill so grossly favored the wealthy that the income disparities have been widened. If Bush is re-elected -- and I don't think he will be -- those of us who regret not having been born during the period of the French Revolution are going to have their innings.
Q: This is something you regret?
A: Yes, it would have been a fascinating time to have been born.
Q: Is that it for your negatives?
A: Another negative is the gargantuan growth of credit. Also, business is so strong we are apt to have higher interest rates and that will result in a fall in bond prices. This will hurt P/E ratios, because if you can get 8% in a good tax-exempt bond, you won't pay 32 times earnings for a growth stock; you might only pay 22 times.
Q: People are afraid of investing in bonds right now.
A: Until they get 8%, they'll be afraid. The return on tax-exempts is at 5%. What happens if conditions really deteriorate?
Q: We would have to see rates really leap from here.
A: Isn't it true that when a trend changes in the U.S. it often goes much farther? Who ever would have predicted five or six years ago we would get down to a 1% bank rate?
Q: And maybe it will take us a long time to get back to much higher rates.
A: Maybe yes, maybe no. Maybe it will happen quicker than we think, if foreigners all of a sudden decide they don't like the level of the dollar. And I don't have to tell you about the adverse balance of trade.
Q: And oil?
A: Oil isn't a negative. I don't want to even mention oil. This has been so ridiculous. We will keep driving. The amount spent for gasoline is such a tiny part of people's income that it has been greatly overdone in the media as a factor. Plus, a good part of the price of gasoline is taxes that are levied on it, rather than the basic price of oil.
Q: On to the positives.
A: Big corporations have rationalized their operations, gotten rid of marginal employees and plants and brought in wonderful new technology and improved their products. Labor has become more cooperative to keep their jobs. The U.S. has become somewhat more competitive, except where very low wages have given other countries a great advantage.
Another positive is -- and this is a mixed blessing -- that the public has decided to invest more money in American companies. That has sustained the stock market. The monthly inflow into mutual funds has helped the stock market a great deal. It is a trend that also created the absurd 1998-99 boom and even the follow-up in 2003 and this year.
Q: What else should we be happy about?
A: Wages have gone up. National income keeps going up.
Q: I thought we were seeing a slowdown in wages.
A: But they still are going up. People are able to sustain enormous consumer credit. You don't have great defaults. Home prices go to new highs all the time. Even though we aren't employing enough people to take up the six million who enter the work force each year, we still have more people working at higher wages than ever before.
Q: So you don't get alarmed when people talk about unemployment?
A: I'm alarmed by the three million who can't get jobs and the people at the low end of the income scale who won't be able to keep up with impending inflation.
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