This seems like a good time for posting a few pieces of this story from Barron's, get prepared!!
We're in a consolidation period, says an 88-year-old contrarian, and a depression lies ahead
An Interview With Seth Glickenhaus -- Not since the 'Thirties has the proprietor of Glickenhaus & Co., a Manhattan investment firm with more than a billion dollars under management, seen a bear market like the current one and, at age 88, Glickenhaus has just about seen it all. Many years of discerning the ins and outs and the ups and downs and the whys and wherefores of Wall Street have imbued Glickenhaus with a knack for sensing seismic shifts in the stock market.
"You see discount stores doing beautifully, whereas other stores, even the ones that cater to billionaires, are beginning to curl up. The consumer is up to his neck in debt."
That, along with careful research and a value discipline, has allowed him to deliver outstanding returns for his private clients through thick and thin. His longest-running (started in 1981) fund, the Dorchester Fund, has gained an average of 16% a year. Overall, his shop has produced average composite returns of 16.1% a year. And after toughing out the bubble years of 1998-1999, Glickenhaus showed he hadn't lost his touch; his portfolios gained 16.7% in 2000 and were flat in 2001, against two losing years for the Standard & Poor's 500. Always one to tell it like it is, Glickenhaus doesn't hold back now.
Q:You mentioned "wild debt" as a consequence of the boom years. Is the level of consumer debt going to be a problem here?
A: It's already beginning to be. The great majority of states are finding sales-tax revenues off sharply this year. For the last three months they have averaged down 30%. You see the discount stores doing beautifully, whereas other stores, even the ones that cater to the billionaires, are beginning to curl up and not do so well. The consumer is up to his neck in debt. Because of the work the Federal Reserve has done bringing interest rates down, a huge number of cars and a huge number of homes are being sold. The average person doesn't ask what a car or a home costs, he asks what the carrying charge will be. In the auto world, you just saw General Motors, which had been giving very big incentives, adding to the incentives by reverting back to zero financing. But the auto world is cannibalizing future sales terribly by encouraging people to accelerate purchases they might have waited to make a few years out. They've created a situation where normal demand in future years is going to be below average. The same is true in housing.
Q: Isn't there still a large pool of first-time homebuyers and pent-up demand?
A: That is perfectly true. Home-building has been very good. The one sustaining influence that's maintained itself has been construction, but I suspect we are on the verge of seeing that go south.
Q: What else troubles you about the economy?
A: There's still too much capacity. Consider the auto world. The people running the three major U.S. auto companies, in their infinite wisdom, made a deal with the United Auto Workers two years ago where they have to pay them 90% of their wages if they fire them, so that it actually pays them not to close plants and fire people but to produce at a loss. All of these companies have to pay retiree health benefits in addition to high wages, and that has become very, very painful and puts them in a very precarious position. Retiree health benefits account for a bigger part of a car's cost than steel does. And automakers around the world have the capacity to produce 60 million to 65 million cars a year, even though there's demand only for about 50 million cars globally on an annual basis. When the UAW contract comes up a little over a year from now and with all this overcapacity, it is going to be fascinating to see what happens. I would not be surprised if there were a major strike. The companies can't afford what they've been paying, but the concessions they are going to attempt to extract could make the union leadership vulnerable if they acquiesced.
Q: How does this compare with other bear markets?
A: It's an entirely different market than any that has existed since the 'Thirties. The bear markets we've had for many years now have been very short in duration and often had a crisis involved. In the 'Sixties, the Cuban crisis triggered it, then there was the oil embargo in the 'Seventies. There were several wars. But this is different. This is a full-fledged business-recession-inspired bear market. This is going to be comparable to what happened in the 'Thirties.
This is very bleak picture I'm giving, but unfortunately it is what I believe. If 10 years ago, I said to you General Electric would lose 40% to 50% of its price, IBM would lose almost half its share price in a relatively short time, AT&T, one of the great icons like motherhood and apple pie, would be going to hell, and our steel business would be in dreadful shape to the point where they need all sorts of subsidies and Bethlehem Steel stock sells for less than a half a point, you would have said, "Seth you better take a rest." We have four or five key industries in trouble, including the autos, steel, phone companies and metal companies. It is going to be very, very negative and deflationary.
Q: You think this could be turning into a depression?
A: Not only could be, it will be. We are not there yet -- the unemployment rate isn't even at 6% yet -- but it is going to go much higher. |
