How is this for confidence? I am scared but fully invested
A Voice of Caution in a Chorus of
Gamblers
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By KENNETH N. GILPIN
hen Robert Rubin went to Washington in 1993 as
chairman of President Clinton's National Economic
Council, the Dow Jones industrial average was under 4,000,
the Standard & Poor's 500-stock index was trading at less
than 500 and the federal budget was $255 billion in the red.
As he leaves as treasury secretary, the budget is in surplus.
The decline in interest rates as the budget deficit receded has
allowed an estimated 19 million mortgages to be refinanced,
saving homeowners $23.4 billion, according to the Mortgage
Bankers Association.
At least some of that money has found its way into the stock
market, which has done stupefyingly well.
Rubin isn't uniquely responsible for all these good things, of
course. But he will be a tough act to follow. And he couldn't
have picked a much better time to cash out.
The bad news is that all good things must end, a fact that
worries Barton M. Biggs, chairman of Morgan Stanley Asset
Management. Biggs took time last week to discuss Rubin's
years at the Treasury and the markets he is leaving behind.
Q. The sense seems to be that Rubin would not be leaving
Treasury if he wasn't confident the worst of last fall's
financial crisis had passed. Do you share that view?
A. I am not necessarily convinced Rubin thinks that things
are improving. At a small reception about two weeks ago,
Larry Summers, his likely successor, cautioned people
against being overly optimistic about global economic
recovery. There are a lot of trouble spots, particularly Japan.
Q. What do you consider Rubin's most important
contributions to the country?
A. We all had the confidence he was a steady hand, that if
the markets and the global financial system got in trouble, he
knew what to do. He did it with Mexico in 1994 and 1995
and again last summer. He understood markets and had great
intuition. The fact that he decided to announce his departure
now is because he felt the market was stable.
Q. Has this view influenced your investment strategy?
Worry about the future doesn't seem to be priced into too
many of the world's equity markets just now.
A. I am scared but fully invested, and we are hugging our
benchmarks because we are scared about the tremendous
excesses we see in these markets. There are literally no
cheap markets in the world right now.
Q. How have you weighted your portfolio?
A. We are slightly overweight in equities, underweighted in
the United States and Europe but overweighted in the United
Kingdom and Japan by about 10 percent in each case. We
are overweighted in non-Japan Asia and in the emerging
markets.
About 62 or 63 percent of our portfolio is in equities. The
remainder is in bonds.
Q. Given the performance of Japanese stocks the last
decade, how can you say that market is expensive?
A. Compared with the United States or Europe, Japan is not
expensive. But compared with important market bottoms in
the past, it is. Here is a country that is in a depression, and
its market is selling at 75 times earnings and two times book
value. In the 1930s, the U.S. stock market sold at half of
book value. So, Japan is not exactly cheap by historical
standards.
Q. What about the emerging markets?
A. Japan, other Asian markets and the emerging markets are
coming out of long bear markets. They will be the best place
to invest after the next bear market and will be the best
places to be in the short run as long as this bull market lasts
because they are going to go up more and come down less.
But I can't say they're cheap.
The same is true for small and mid-cap stocks in this
country. They are as cheap as they have been in a long time
relative to the S&P 500, but at about 15 times to 17 times
earnings, they are not historically cheap.
Q. On what is your worry about a looming sell-off based?
A. Our economics people are looking for a recovery, but I
think the United States is going to lose some momentum,
that the Japanese are going sideways at best and that the
Germans are bottoming out.
There is still a great deal of overcapacity in the world. I was
in Europe last week talking to businessmen and industrialists,
and I didn't meet anyone who said economic activity was
picking up, either from orders abroad or within Europe itself.
These markets are priced for perfection, and if something
bad happens, the market has the potential to go down a great
deal.
Q. In this environment, what advice would you give to
individual investors?
A. I would say they should not be deluded by advertisements
that suggest any amateur can make money in the stock
market.
We are perpetuating a gambling mentality that is similar to
the 1920s. I read somewhere recently that 15,000 new
Internet trading accounts are being opened every week. That
is frightening.
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