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Byron Wien, Still Contrarian After All These Years

Byron Wien, Still Contrarian After All These Years

Why the veteran market guru likes Japan, gold and emerging markets and why retail advisors should gravitate to the fee-based, asset-gathering model.

Byron Wien is a Wall Street fixture, having honed his craft in a career that has spanned more than 40 years. He began as an analyst and portfolio manager, but became famous as a strategist, a role he has occupied for more than 20 years at some of Wall Street's most respected firms. Wien spent 21 years as the U.S. investment strategist at Morgan Stanley. After Morgan Stanley, he joined Pequot Capital as chief investment strategist, and he's now senior managing director at Blackstone, where he advises both the firm and its clients.

Wien is best known for the annual tradition he began at Morgan Stanley: his Top Ten Surprises, a list of non-consensus predictions on the market and economy. He doesn't attempt to forecast gains or losses for individual stocks, but focuses on big-picture issues that can help guide decision making and provide an overall backdrop for investing.

Since he began publishing the list, he successfully warned about the “Y2K” hype, called both the 2001 and 2008 bear markets, and predicted that Barack Obama would be elected President. By his own reckoning, he usually gets six or seven of the 10 right; in 2009 nine out of 10 hit the mark. We spoke to Byron about his outlook for 2010.

Registered Rep.: You're most well known for your annual top ten predictions. Talk a little bit about your past record there, how you got started with that.

BYRON WIEN: The first year was 1986. I started on Wall Street in 1965 as a securities analyst and then I became a portfolio manager. Then in 1985, I became the U.S. strategist for Morgan Stanley and there were a lot of smart people doing U.S. strategy at the time. And I was trying to figure out something I could do that could differentiate myself from others who were doing it. So I came up with this idea of developing a list of surprises — 10 surprises that I would announce at the beginning of every year. I presented it to Morgan Stanley and management thought it was a really dumb idea, because I could get all 10 wrong. If I got all 10 wrong, I would embarrass myself and humiliate the firm. They didn't care about my personal embarrassment, but they did care about humiliating the firm. So they turned it down, initially, but then they finally agreed to let me give it a try. And I've been doing it for 25 years. This is the 25th year of doing it. I don't do it for sport, I do it to stretch my own and other people's thinking. And I think the idea works on that level.

RR: What's your perspective on any forthcoming legislative and regulatory overhaul from the Obama Administration, Congress and the SEC? What would this mean for both capital market banks and registered reps?

BW: My view is that Obama was very combative [in late January], probably in reaction to the disappointment in Massachusetts. He felt he ought to do something to respond to the populist surge. I think he sort of moved away from [Treasury Secretary Tim] Geithner and [Obama economics advisor Larry] Summers and toward [former Fed chief and Obama advisor Paul] Volcker. I think Volcker's idea is that banks should lend money to corporations and individuals, and brokerage firms should go back to the days when they were partners with themselves. I think the financial service industry has evolved and you can't turn back the clock. I don't think proprietary trading is very important to commercial banks; it's obviously very important to investment banks, but he just doesn't want the commercial banks to take deposits to do it. And it isn't a big part of commercial bank profitability — it is a big part for investment bank profitability and I think it will continue there. The problem is that it shouldn't be eliminated — it's only that proprietary trading and the leverage that might result from it should be regulated. I don't think it'll be eliminated. But commercial banks are now not just domestic, they're international. They buy bonds from their own accounts, so they should have an opportunity to hedge some of that hedging that's viewed as proprietary trading. So I don't think it should be eliminated; it should be controlled.

The big thing to control is the leverage of the financial institutions. That's something that was not done properly in the past; it should be done going forward.

RR: It seems as though they're advocating the return of a Glass-Steagall-type environment. Which aspects of that do you think are most useful and could perform and what do you think they're missing? It sounded as though you expressed some skepticism that we could turn the clock back in the manner they might be advocating.

BW: First of all, some of the commercial banks have already done that. Citibank has spun out Smith Barney to a joint venture with Morgan Stanley. I think the banks are emphasizing their traditional businesses, but I don't expect J.P. Morgan to get out of investment banking. There's a natural fit there. For a bank, they could advise on investment bank transactions and do some of the financing for it. So, you know, I don't think we're going backwards to a point where commercial banking and investment banking are going to split, as they were in 1935.

RR: One of the advantages of partnerships is, of course, people have their own money on the line so they're less incented to take enormous risks and lever up 30-to-1. But at the same time, while none of the big investment banks prior to the meltdown were partnerships, there was significant and enormous employee ownership, on a both a dollar basis and as a percentage of the firm. But at both Lehman and Bear, the employees did not seem to be behaving like owners at all.

BW: Yeah, I know. They didn't behave as owners when they tried to leverage their own equity with other people's money to that degree, and it backfired on them. I think that's right. Look, I don't think being private is practical right now. These are global institutions; you've got to improve it in capital. They're too big now to be dependent on the people working there. It's just a different business than it was as recently as the 1970s. You know, you can't do it with partners retiring, withdrawing their money. You've just got to have permanent capital and it has to be substantial. So you can't rely on the wealth of the employees for the capital of those businesses.

RR: Let's talk about your current outlook. Tell me a little bit about what you're doing at Blackstone and your outlook for 2010 and beyond.

BW: My view of what's happening is, of the major industrialized markets, I think Europe and the United States are not going to make much progress this year. The market I like that's in a very extreme position is Japan. Of course, I'm the only person on the planet who likes it, or one of the very few. Japan is a perfect surprise. It doesn't have to move in a positive direction, it just has to stop being such an awful market. Because everybody who could have sold Japan has already done so, and so expectations are extremely low.

RR: It sounds like, one of the things you keep returning to is being non-consensus. I mean, it sounds as though Japan is sort of your most controversial call and your most non-consensus call. Do you see a relationship between those two things? In the past were your least-warmly received predictions your most accurate?

BW: Somehow I can't make that connection. Some work that way, some don't. The point is, without question, my view on Japan is an extremely non-consensus one. It's a perfect surprise. And even if I'm wrong on that, since everybody's already sold it, the chance of me losing money — this market is selling about a quarter of what it was in 1989 — the chance of me losing money from here is pretty small, even if I don't make any money.

RR: What else on your list this year has engendered the most response or interest from people?

BW: One of them is that I think Obama's going to bring a nuclear program for generating electricity. That one is very controversial. Probably the most relevant for your audience is that I think the U.S. growth is going to be stronger than the consensus expects. Namely, I think we'll have 5 percent GDP growth. Most people are at 2 to 3 percent growth for the year.

RR: And what underlies that perspective? Where do you see the strength coming from?

BW: I've got this recession and history on my side. Usually when you have a severe recession you have a pretty strong recovery. And we had a very severe recession, down 3.9 percent. Usually when you go down that hard, you have a 6 to 8 percent recovery. And I think there are some structural impediments so the recovery won't be that strong, but I do think it could be 5 percent.

RR: Is there anything else you think is particularly relevant or crucial to be thinking about, both in terms of markets in general and our readership in particular at the current time?

BW: Yes, I think traditional asset allocation has to be rethought. I don't think that the historical returns for U.S. equities, European equities, bonds are going to be replicated. I don't think the United States or Western Europe are going to grow faster than 3 percent any time in the next five years. I think you have to put more into the emerging markets. There's a lot of opportunity there. I think most individuals should own some gold because people who have a lot of money and financial assets should have some insurance against the erosion of currencies. That's not only true of the dollar, it's true of the yen and the Euro, too.

So, I think you have to be creative in asset allocation and the traditional components of it, stocks, bonds, you know, are probably not sufficient. I think commodities should play a role and alternative investments with the ability to go short should play a role as well.

RR: Which of the traditional asset classes do you think is least attractive right now? What should people be avoiding?

BW: U.S. Treasuries. I think interest rates are going up on U.S. Treasuries, so I would deemphasize intermediate and longer-term U.S. Treasuries. It's because our debt burden leaves us dependent on the kindness of strangers, and foreign lenders, like China and the Middle East; they are becoming a little leery about how much U.S. Treasuries debt they hold.

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