Topics >  Money and Finance >  Financing a Small Business > 

Economic Forecaster Stanley Salvigsen

Interview with economic forecaster who advises on reducing debt to prepare for hard times ahead.

Reduce your debt now, warns one of Wall Street's top fund managers, even if it means slowing down growth -- hard times lie ahead

Inflation is over, depression is coming, warns Stanley D. Salvigsen, the Paul Revere of Wall Street. For several years, Salvigsen has been imploring the locals to reduce their borrowings and to safeguard their houses and businesses, but until disaster struck last fall, few citizens paid heed. What suddenly transformed the 45-year-old chairman and chief executive officer of Comstock Partners Inc. into an alarmist with authority was the fact that hardly a month before Black Monday, he sold out the equity holdings of a $100-million mutual fund his advisory firm manages.

The tactic was so convincingly prescient that shortly Salvigsen was able to go public on the New York Stock Exchange with his own investment pool, the Comstock Partners Strategy Fund. And there were plenty of believers: the IPO took in a massive $1.2 billion, one of the largest equity offerings of any kind ever. Not one to suspend his own disinflationary theses any longer than necessary, by close of business the next day, all 10 figures had been invested. Not in stocks, of course, nor even in AAA-rated corporate bonds, but virtually all in the most reliable securities the free world offers -- debt obligations of the U.S. Treasury.

For investors stuck with stocks they paid too much for and don't know what to do with, Salvigsen has become a visionary. Unfortunately for them, his vision is even bleaker than ever, as revealed in this interview conducted by INC. senior writer Robert A. Mamis at Comstock Partners' Manhattan offices. Among his near-term worries: hard times spreading to other sectors beyond the Oil Patch and Farm Belt, a crash in real estate from Los Angeles to New York, and interest rates declining to spectacularly low levels due to a stultified economy.

To give wider voice to his concerns, Salvigsen left his position as chief investment strategist at Merrill Lynch Capital Markets in 1986 -- the very year he was named the industry's top portfolio strategist by Institutional Investor magazine -- and, together with two former Merrill Lynch associates, Charles L. Minter and Michael C. Aronstein, founded Comstock Partners. The trio now consult with institutional clients and can be hired to manage portfolios for individuals and corporations. In case you're interested after reading this month's interview, the minimum amount is $50 million.

* * *

INC.: Last October's 500-plus-point stock-market dip seems not to have startled many people in the end. Are you still holding to your dismal precrash view of depressions rolling through the economy?

SALVIGSEN: The current willingness to dismiss the '87 crash as an event unto itself with no important consequences in the real economy is wishful thinking in the extreme. The crash wasn't the beginning of an immediate recession, necessarily, but we think it started the deceleration process in the system. It marked the beginning of the end of the credit inflation that began in the 1960s, and its implications are considerable. Until we see otherwise, we'll stick with that.

* * *

INC.: Even though you're dismissed in some circles as gloom-and-doomers?

SALVIGSEN: We are not doomsdayers. All we're saying is that for at least 25 years, debt growth has become synonymous with growth. That the system grows on credit is not revolutionary. We argue that the system isn't growing fast enough to service all its debt. It's not even growing fast enough to keep up with the compounding of the interest on the debt. Our theory is that after the best-quality paper, such as U.S. Treasuries, goes to a higher rate of return than major corporations can earn on their equity, the system shuts down. People would rather just buy that paper than construct a plant to make the paper.

(continued)

INC.: Yet bulls insist that our system of economics is a perpetual-motion machine -- that it can be manipulated and sustained.

SALVIGSEN: We say debt is cumulative and eventually debilitating. It's like walking up an incline with a backpack; throw a rock in the backpack every mile or two, and at some point your knees buckle.

* * *

INC.: Can you put that in concrete terms?

SALVIGSEN: When you start with a clean balance sheet, like America had 25 years ago in the early '60s, the first incremental dollar of debt is like a stimulant, because it's very easy to service. It's like getting an extra unit of growth for nothing. That works, so let's use some more of that debt, and some more of it. You're getting the juice of using the extra credit. Spend it today, owe it in the future. But credit is cumulative. What used to be stimulative starts to become regressive, because the credit market makes a distinction; it says this is not as safe as it used to be. There's not enough gross national product to go around for all this debt. So interest rates go up. That's what has been happening in the '80s.

* * *

INC.: Are you saying the economy has to expand at a faster rate than the interest rate? No way.

SALVIGSEN: Well, if it doesn't, it's falling behind. Part of our rationale is that the interest on the interest is sapping the lifeblood of the system. You have $11 trillion worth of debt, and it has an interest rate of 9%. Every year, the debt accrues nearly $1 trillion in interest alone, not even including what's added in borrowing. The base GNP -- the total wherewithal that society has to pay back its debts -- is only about $4 trillion a year. Interest amounts to more than a quarter of the total GNP. If total interest paid increases by 10%, nominal GNP has to grow by about 20% merely to cover the incremental interest that's accruing, with no growth, no nothing.