In Georgetown, when they talk about "Henry," it probably is Kissinger. In Wall Street, when they talk about "Henry," there is no doubt: the reference is to the financial district's most famous forecaster, Henry Kaufman, 55, of Salomon Bros., a New York bond-trading firm.
Short and seemingly benign, Kaufman's pessimistic projections can cause cardiac arrest or, if they're good, push the Dow Jones index up by 38 points in a single day. (That happened last August.)
Kaufman's father was a meat merchant in Wennings, Germany. In 1936, when Kaufman was 9, the family fled from the Nazis, settling in New York, where Kaufman got degrees through doctorate in banking and economics at NYU.
Kaufman is not only chief economist for Salomon, directing an enormous research staff, but a senior partner as well. As such, he pocketed over $10 million when Salomon -- which does annual underwritings of $10 billion -- was acquired by Phibro Corp., a commodities trading firm, in 1981.
In his private and public pronouncements, Kaufman has been far from infallible. But he scored his highest marks when he predicted correctly in the spring of 1980 that the prime rate would hit 20 percent. His partners and friends suspect that while Kaufman could go on forever, piling up the millions, he might some day like the challenge of running the Fed. The appointment would have to come from a conservative president -- to match Kaufman's own instincts -- but definitely one divorced from monetarist ideology. Hobart Rowen is the economics correspondent of The Washington Post.
Q: Along with Al Wojnilower (of First Boston Corp.), you're sometimes re ferred to as Dr. Doom and Dr. Death. I forget which is which. Are you Doom or Death?
A: I'm Doom.
Q: You're (also) sometimes called a guru or a seer. Do you prefer any of those names?
A: Not really. I don't feel that I view things with a pessimistic eye. My position here has always been, I should try to say which way events will go rather than which way events should go. We have to be realistic. Over the last five years in the United States, the situation economically and financially has deteriorated. That is just a fact. Here in an important Wall Street firm, optimism would have cost us a huge amount of money. And it (wouldn't have done) the country a service.
Q: Are you conscious when you go out there and meet the press and make a prediction that it's going to be flashed over the wires? People are going to say, "This is what Henry says"?
A: No, no. If I evaluated first the impact of what I'm going to say on financial markets, I'd have a difficult time saying anything.
Q: We've had a record number of bankruptcies. We've had a considerable number of bank failures. We've had savings and loans merging. Is Depression conceivable to you? Any kind of a worldwide economic collapse?
A: Twenty years ago I would have said the odds were 1,000-to-1 against it. Ten years ago, 100-to-1 against it. Today, the odds are 8- to 10-to-1 against it.
Q: What will they be (in 1983)?
A: If we only get a very subnormal recovery, maybe it will be 6-to 7-to-1.
Q: When you look at the whole picture as you sit here in this beautiful office overlooking the harbor, you're worried?
A: Oh, yes. I'm worried. If we were just in a typical business cycle where we're coming out of a recession and going to an early part of an economic recovery -- .
Q: You mean, we're not in the kind of old- style business cycle where we had a recession and then we have a recovery?
A: No. We haven't been, Bart, in that old- style pattern for a number of years. We're trying to go from a period in which we've had a high rate of inflation by moving into disinflation. Going into a period of disinflation has extraordinary unknowns to it.
Q: Are you using the word "disinflation" to be more or less synonymous with the prolonged recession?
A: No, I'm using it as a period in which yin ou go from high inflation to gradually lower and lower rates of inflation -- but without the culmination of things that we had in the '30s. We are trying to go that path, and we have very little to go by.
Q: We also have entered this period where our own economy and high interest rates have had a severe impact on the rest of the world. We've seen what's happened in Mexico and Brazil and Bolivia. They can't buy as much goods and services from us. Is this accumulating into a world-wide phenomenon?
A: The general slowing in economic activity is now a world-wide phenomenon. American growth is absent. European economic growth is very marginal. The growth in real terms in Japan is, by Japanese standards -- not that good. The growth in LDCs -- the less developed countries -- has slowed to a trickle. And the world is interrelated. Twenty percent of our industrial production is exported. Forty percent of our farm products are exported. Many of our large commercial banks have 50 percent -- in some instances more -- of their total loans to foreign borrowers.
Q: Are any of these banks under the gun if there are defaults by major countries, such as Mexico and Brazil? Do you see the possibility of such a default?
A: I don't think that the banks are under the gun in that sense -- that there's going to be a run on these financial institutions. But I do sense that the financial system is under the gun. In order to keep our system and economies moving globally, there's the need to extend new money. That's a very difficult thing for private-run institutions to do. They have a responsibility to themselves, to stockholders, to depositors.
Q: Isn't there a Catch-22 situation here? The banks -- as they look to be responsible to their shareholders -- have to pull back. (But) that will exacerbate the situation within these borrowing countries. In turn, that impinges on the flow of trade. Doesn't the cure itself have some elements of worsening the disease?
A: Well, there are two dimensions. To take a portion of that ($500 billion to $600 billion) debt and to extend the maturity of it, 5, 10, 15 years, or whatever.
Q: This is what they call rescheduling?
A: Rescheduling. That's one aspect. Then, the funds have to be provided to give new accommodations to some of these borrowers.
Q: How do you do that?
A: You can either strengthen the role of the International Monetary Fund or perhaps even create a new official lending institution -- whose capital is going to have to be provided by industrial nations and maybe some very rich oil-producing nations -- which will then either make loans to some of these borrowers abroad or acquire some of the maturing debt to free private institutions to then make the new loans.
Now, the dilemma with that is that all major countries today are carrying very large budget deficits. So you go to each one of these nations and say, we need from the United States $20 billion. We need from Germany a sum of money and the U.K. and so on. You have to go to Congress. I think it's very difficult in the first go-round for congressional people and political people to understand the linkages that exist between us and the rest of the world. That we're not insular anymore. That therefore we have to subsidize as a nation, as individual citizens, this situation if we are going to move ahead without rupturing the system altogether.
Q: Henry, when you put the problem this way, it begins to sound like almost a hopeless thing. Are we getting to a point where there's really a nothing outlook for success?
A: Well, there are things stirring and -- hopefully -- the stirring will increase in intensity. It has become quite obvious that the Federal Reserve is far more concerned about the international debt problem. (Secretary of the Treasury) Don Regan has talked about some need of an overhaul of the system. A little vague, but he talked about it. The Federal Reserve Bank of New York, in its quarterly review, had a very lengthy article on the international debt situation -- it was quite explicit. So we're raising the level of concein rn.
Now, I must say, after having said that, there is a dilemma. We've had a change of government in Germany, and it's going to be very hard for a new political leader to immediately focus on such a complex issue. Very hard. We have a change of government in Japan. Canada has its own problems. The president of the United States now has gone to South America -- maybe he's becoming more sensitive to the problems.
Q: Looking at it right now, what would you say is the single greatest threat to the American economy?
A: If I had to say one thing and one thing only? I think that the gravest threat to the American economy right now is the potential of stalling out in economic recovery.
Q: You say stalling -- you mean without slipping back into another downturn before it turns up?
A: That's right. Without slipping. That's really the greatest challenge -- that you don't slip.
Q: Can you visualize a situation, Henry, in which the economy does make something of a recovery -- particularly in the high-technology industries and in services -- and we have our old traditional industries like steel and autos foundering? What does that do to the social fabric and the moral fabric of the country? Can we sustain that kind of continued, almost double-digit unemployment when the rest of the country seems to be prospering?
A: A lot of people talk about the great need in the United States to have large capital investments and so on. This is not the issue. The issue is that we have to make greater investment in human capital. The retraining of people to make sure that people that are in the ghettos get the educational and vocational skills that make them productive. That we have young people that are motivated into those areas.
Q: What do you do about this whole generation of blue-collar workers who just may be out on the streets forever?
A: They're going to eventually have to be placed into other vocational endeavors. Being a mechanic or a carpenter or who knows what. These people must be retrained.
Q: Do you think that Japan is past its zenith and perhaps overrated as an industrial power and that we have contributed to that overrating?
A: I think Japan faces some difficult issues because world economic activity has slowed and therefore it has to find either new markets somewhere in Asia or find different outlets in the rest of the world. But I really think five years from now they'll find their way out of this. I suspect Japan is well aware that its exports have high visibility. Autos, cameras, TVs and so on. I would assume that in five to 10 years when you look at what's being exported by Japan, it'll be hard to tell. It'll become the component here and the service there and some specialized product there that is an essential ingredient of a bigger entity that's being manufactured or processed. And in that sense it will diffuse that Japanese identity. I suspect that the Japanese will work on that.
Q: Henry, when you get away from this office, what do you do for recreation? Are you into sports? Art? How do you get a way from the pressures of money, bonds and stock?
A: I think it's impossible to get away from it. I do a lot of reading and writing in the evenings and on weekends. The little bit that I can get away, I try to do some swimming. I have a kind of amateurish interest in art and paintings.
Q: I see from the office here that you do have some interest in art.
A: Yes I do. I like American art. There's this bronze. Done by Leonard Baskin. It is a bronze of the biblical Abraham. This here is done by Ratner. It's a painting of the fall of Icarus. The son didn't take the advice of his father. His wings are being melted by the sun.
Q: That goes with Dr. Doom.
A: I'm particularly fond of the bronze of Abraham. He was the father of a nation and had enormous beliefs that stood well.
That's a painting by Rockwell Kent. Not Norman Rockwell, Rockwell Kent in Ireland. The sunshine over Ireland.
Q: That has a kind of uplifting quality there with the sun breaking through.
A: Oh, yeah. I had a painting in here that was lent to me by the Whitney. Called "The Trapper." You see a snow scene. It shows the trapper against the background of these enormous mountains. It showed the insignificance of man. It shows that we're all part of a universe. No matter how important we all think we are as individuals, when it comes down to it, we're not that important. At times we better recognize that. That life goes on, thank goodness. That we better recognize our role in society.
Q: Would you have any general guidance for the average person as to where he personally should be investing his money?
A: The problem in answering that question is we have all different investment requirements. But leaving all of those specifications aside, I think this is still an environment in which investors should generally seek investments of very high quality. High quality provides assurance of repayment and interest payment. It would seem to me that individuals with a moderate amount of money -- and not even too far up in the tax bracket -- probably would do quite well by considering investing at least a portion of their money that they do not need -- do not need -- in high-quality, tax-exempt obligations. For an individual that's easier to do in some kind of an investment trust. In the fixed-income market, the relative values are very good today in the tax-exempt market. For example, today a high-quality obligation in the tax-exempt market yields roughly 90 percent of the yield that is available on a long government bond. That's extraordinary, by historical standards.
Q: In other words it's possible, for example, to find a high-quality, tax-exempt bond that will pay 9 percent, whereas a taxable bond might pay 10 percent. And when you referred before to unitrust, you were talking perhaps of some of the money-market funds that are based on tax-exempts.
A: On tax-exempts, either money-market funds -- money-market, of course, is short maturity -- but I'm talking about the longer- maturity ones. Where someone can put aside money for let's say, 10 years or 11 years or 12 years, and get 91/2, 10, 101/2 percent, tax exempt.
Q: The other thing he has to risk there is a sudden, upward burst in interest rates, right?
A: Interest rates always fluctuate. If you're in the 30 percent tax bracket, if you're getting 10 percent tax-exempt, you're practically getting 14 to 15 percent before taxes.
Q: Do you think that the new insured money-market-fund equivalents that the banks and the S&L's are offering are going to prove attractive to investors?
A: Yes, I do. I think ultimately these institutions will raise the rate that they're going to pay above the yield that's available on the money-market fund. I think it will be of some greater assistance to housing financing, particularly since the savings and loans associations are involved here. I think it is another way of pulling cash that will become even more interest-rate sensitive. In that sense, (it will) make life a little more difficult for the central bank which has to manage all of this volatile money.
Q: One last question, Henry. Does Henry Kaufman follow these same guidelines in making his personal investments?
A: I'm in a very difficult situation because I have some visibility. I have to try to conduct as passive an investment strategy as possible. I certainly can't take positions. That would be terribly incorrect. I can't spend my time managing a portfolio. I've got too many other things going on, so I have a good portion of whatever I have in high-quality obligations.