Legendary Jewish-American hedge fund manager Michael Steinhardt is not concerned about the volatile state of the world's stock market. In an exclusive interview with "Globes" earlier this month, he spoke about the global economy, his views on the US elections, and his investments in Israel with Shari Arison, Eduardo Elsztain, and Effi Eitam's Golan Heights oil exploration project.
On the world's economic situation, he said, "When people ask me what I think, I'm so old that I only think about the US that's how I relate to markets. What I have been saying for a long time and I will say again is that the market in the US will continue to go up even though it is certainly not cheap but it will continue to go up until interest rates are raised meaningfully and I think that that will be the death knell of the American market. But between now and then I think it's sort of OK.
Steinhardt and his chief investment strategist Luciano Siracusano were in Israel for the launching of WisdomTree's operations in Israel. He serves as chairman of the Exchange Traded Fund (ETF) pioneer, having invested in the company at the start. He recommended to the institutional investors that he met in Israel to use these ETFs as a way of spreading overseas investments and limiting risk
He said, "Considering the fact that the markets are only a few percentage points off their highs, the attitude at the moment is really negative and attitudes are not positive. For a market that's near its highs and basically doing alright, there is a pall on the market. There is not great optimism there and no one is saying that this election is going to do any good for anybody. You go on and on and the fact is, for me at least, the fact that there is so little optimism leads me to believe that the markets are OK but with one little caveat. That caveat is that once they really start seriously raising interest rates that will be the end."
The US markets ended 2015 and began 2016 with a sharp drop of 12% amid expectations that US Federal Reserve Chair Janet Yellen would raise interest rates four times in 2016. But it now looks, market sources believe, as if there will only be one rate hike of 0.25% in 2016.
Steinhardt agrees with this assessment, "I think they are going to raise interest rates but not in a way that it severely affects. If we're in June now I would say that within the next three months interest will be raised. But it's minor. Another quarter of a point or something like that. But at some point the markets must take into account a more serious competition for stocks than is being offered now."
Meanwhile, Steinhardt and Siracusano are watching the US presidential elections campaign as Hillary Clinton and Donald trump emerge as the likely Democratic and Republican candidates.
Steinhardt said, "There probably will be a difference between them. Hillary Clinton is fairly predictable. He's not particularly predictable on what he is going to do because he has no background and no experience. But it is not unreasonable to think that her policies will be a continuation of what we've seen.
Siracusano does not entirely agree, "The only thing I would add to it is that simply because Republicans control congress a lot depends on what Paul Ryan is going to put forward. The President can't do anything on domestic policy and fiscal policy unless he gets the Speaker of the House behind the process, so if we have a Trump presidency there is a bigger chance to pass something that's big and meaningful. I think if Hillary is there the only way you can pass something is by figuring out a bipartisan compromise and there is not enough room to pass anything there, partly because the third party vying for power in Washington is the tea party along with the Republicans and Democrats and the reality is that the base of the Republican party is almost de facto not the Republican party and that's what happened in 2010 and 2012. Congress didn't change and as a result the people voted out the establishment. So it's really very difficult to pass a meaningful budget. Obama wasn't able to do it and as a result there was no fiscal policy and everything has been on kind of automatic pilot."
Siracusano added, "We have the highest tax rates in the developed world and he is talking about lowering corporate taxes to 15%, which would be extraordinarily powerful for the equity markets and one thing that Michael didn't touch on was that there has never been more cash on the sidelines. Even though markets have gone up it's been a narrow participation. The amount of cash just sitting as cash and getting no return whatsoever, I would think if you had lower corporate tax rates that would get put to work. Steinhardt said, "The American economy will continue to grow but not very quickly. The only thing that might change that is the fact that there are certain areas where some bigger risk spending would be broadly accepted, for instance, there has been so little infrastructure spending for a long time in the US. So if the decided to do that the railways and the bridges etc., I think that that would strengthen the US a lot."
On the other hand, Siracusano said, "In Democratic circles maybe. But I don't see the Republicans willing to add to the deficit and debt. The Republicans are willing to do tax cuts. The Democrats will do infrastructure. But infrastructure expands deficits and the question is what impact does that have on the dollar and what does it do to global markets when people think our debt is getting out of control.
Steinhardt commented, "One thing I say is that if Hillary wins and she is favorite to win - personally I can't stand her - If she wins you'll see some excitement. If she wins and declares that she is investing in infrastructure that will be good."
Siracusano, for his part, said, "I think that in this election you have a more pro-growth approach from the Republicans versus a more redistribution of wealth socialistic approach from the Democrats. The markets would do much better under Trump with the tax cuts than under the Democrats but of these two men I'm far less sophisticated with politics.
Asked about the global economy, Siracusano said, "Well you know Europe is growing by about 1.5% and all the pieces of their economy are starting to kick in and 1.5% is good. We are starting to see lending to small and medium sized businesses. Interest rates are coming down across the continent to create the lending that creates private sector growth so I would say the European recovery is very much intact. I think interest rates will be low there for a very long time. They have a debt problem and they are still dealing with it and that is truly a growth problem. In order to get faster growth they need to get more lending."
"China has a 20% tax rate, the US has 35%. If Trump can get corporate tax below 25% that would create an issue for China because Chinese manufacturers are competing with the States and anything that makes China grow slowly is a problem."
He added, "The world does as well. The global economy is a $73 trillion economy and we are $18 trillion so it's important that we continue to grow but it's very complicated because when Trump talks about bringing money back, US jobs back and putting up protection walls, anything that slows down global growth creates problems so the real challenge is how to keep the global economy growing as well as the US economy. But China is managing well. They are starting to put a lid on the outflows. Their foreign reserves have stabilized. They are managing the fact that a lot of debt has built up and people are worried that this debt can hurt the banks.
Globes: So China is the scariest thing in your eyes?
Siracusano: "It is one of the big risks. The other problem is in Europe and the solution to the European design. If the British vote to pull out it is very important. It sends a signal. The vote is coming up on the 23rd and it's about 50-50 if you trust the polls because they didn't do very well on the last UK election.
He added, "It could be a big risk because nobody knows what that means to have to renegotiate all these trade agreements and all these rules and regulations. They'll have to be redone and it's going to be a 2-year process. So there is going to be a lot of uncertainty if it happens and it's going to take its toll on the British economy. So there's a big risk in Europe and a big risk in China. The big risk in America is that if we don't grow as fast as we are right now then there is no productivity growth and no wage growth and if there is no wage growth then there is more inequality and people get angry about that so if we want to fix the equality problem then we must grow faster to give people better paying jobs."
On the popularity of Bernie Sanders, Steinhardt said, "Sanders captures a meaningful minority of American opinion that is fed up with the system and senses a certain political lack of integrity in the system. This feeling does relate to bankers and Wall Street but it's more a case of American CEOs make so much money compared with what they used to make that this affects a meaningful minority.
Steinhardt's career got going in 1960 after he graduated from the University of Pennsylvania's Wharton School with a degree in business administration. After working as an analyst for top brokers, he set up his first hedge fund in 1967, which eventually became Steinhardt Partners and over a period of 28 years earned annual returns of 24.5% - triple the S&P 500 average. These figures meant he became recognized as one of Wall Street's "biggest trader of all' as Forbes called him.
In 1995 he surprised his investors by closing down his funds and from then on, to their great disappointment, only investing his own money. The decision to retire at 55 meant that he never amassed the same wealth as others such as George Soros. According to Forbes he is worth $1.2 billion today while Soros is worth $24.9 billion. He owns 8.75 of WisdomTree and 5% of Effi Eitam's Genie Energy, which among other things is searching for oil on the Golan Heights. He is Genie's second largest shareholder after founder Howard Jonas (23% and 725 voting rights).
Steinhardt revelas that genie is currently his biggest investment in Israel. "Some day if I live long enough it will be a really good investment. Frankly I feel good about it. Even if I lose I feel good about it. You've got to be an absolute 'meshuga' to think about investing in the Golan Heights for oil. But I did it.
Steinhardt also revealed that he did well with a previous investment in Bank Hapoalim. "I once knew Shari (Arison) and I remember walking in, I think to the King David or some other hotel, and I walked up and I think she jumped up from a chair and she was with a very tall guy and we reintroduced ourselves and she introduced her then husband. I made a miraculous sale. One day another Israeli character came over named Dankner and he made us an offer for our shares. I was going to sell them to him but she jumped into the middle and said I'll buy your shares and she offered a little bit more and that was the end of it. So I was overjoyed to be out of Bank Hapoalim, which I sold at a good profit and now I'm really ready to roll the dice."
But on another Israel investment, Steinhardt is not faring so well. "Yes I did invest with Eduardo Elsztain and we'll see. I started by investing in Argentina and I did moderately well. He's got real estate and shopping centers. He has all these complicated structures but I didn't do so badly in Argentina but then he came here.
Globes: He spent billions on this investment which is currently worth perhaps a couple of hundred millions. I mean what is going on here. I've asked him but we never got a really good answer.
Steinhardt: "I sympathize with that because he doesn't speak in such a way that there is clarity. You are right.
Will there come a point when his investors say enough
Steinhardt: "I don't think so because he controls the show and his investors are relatively passive.
Published by Globes [online], Israel business news - www.globes-online.com - on June 19, 2016
© Copyright of Globes Publisher Itonut (1983) Ltd. 2016