Are we headed to Dow 100,000? An interview with Charles W. Kadlec, Managing Director, J. & W. Seligman & Co. Inc.(Interview)

(This interview took place on July 30, 2002.)

J. & W. Seligman & Co. Incorporated is a New York based investment manager and advisor. Founded in 1864, Seligman has a distinguished history in the financial services industry, creating, delivering and managing investment products of the highest quality for individuals and institutions. Currently, the firm has more than $20 billion in assets under management J. & W. Seligman & Co. has an additional office in Palo Alto and its affiliates have marketing offices in London, Hong Kong and Buenos Aires.

Seligman is known for its innovation in developing investment products and strategies for the retail and institutional markets, and is one of the world's largest investors in the technology sector. Today, Seligman manages one of the world's largest U.S.-based technology mutual funds, as well as its offshore counterpart. In addition, it is recognized as a leader in providing investment opportunities in venture capital and private companies.

From the earliest days, Seligman played a major role in the geographical expansion and industrial development of the U.S. In the late 19th century, the firm helped finance the westward expansion of the railroads, the construction of the Panama Canal and the launching of urban transit systems.

In the first part of the 20th century, the firm helped fund the growing capital needs of public utilities, large-scale mining and land ventures, and the development of the fledgling automobile and steel industries. It participated in hundreds of successful underwritings, including those for some of America's most renowned companies such as General Motors, Victor Talking Machines and Maytag.

In 1929, the firm established Tri-Continental Corporation, now the largest diversified closed-end investment company listed on the New York Stock Exchange. Throughout the ensuing decades, Seligman applied the same insight and careful judgment that had made it a leader in raising capital, to the management of investment for institutions and investment company shareholders around the globe. Since its founding, Seligman has been an active investor in technologies that have shaped the age.

The firm has expertise in both institutional money management and mutual funds. Institutional clients include a roster of some of America's best-known corporate, public and endowment/foundation entities. Seligman offers a broad range of on-shore and offshore mutual funds to individual investors, working with some of the world's premier financial advisors. Those offerings include a range of retirement services and Seligman College HorizonFunds, an option offered within North Carolina's College Savings Program.

Seligman is proud of its distinctive past and the values that continue to shape the firm's decisions and investment judgment While much has changed over the years, the firm's commitment to providing prudent investment management that seeks to build wealth for clients remains a solid foundation as the firm enters the new millennium.

Charles W. Kadlec is a Managing Director of J. & W. Seligman & Co. Incorporated. Mr. Kadlec manages the Seligman Time Horizon and Harvester Funds and serves as Chief investment Strategist for Seligman Advisors, Inc., distributor of the Seligman Group of Funds.

With his broad business and academic background, Mr. Kadlec provides unique insight into how economics and politics impact the overall investment environment. He is the architect of several investment strategies, chief among them Seligman Time Horizon Matrix, which is based on an investor's time horizon to reaching goals, and Seligman Harvester, a strategy addressing the unique concerns facing retirees.

Mr. Kadlec is a member of the international Advisory Council of the Institute of International Education. He served as an economic advisor to Jack Kemp during his 1988 presidential bid and maintained a close advisory relationship with him during his tenure as Secretary of Housing and Urban Development Mr. Kadlec has also testified before Congress on Monetary Policy, Government Poverty Programs, and before the Flat Tax Commission. He is currently a columnist for Investment News, and his articles appear in The Wall Street Journal, The New York Times, and other investment periodicals. In addition, he has appeared on CNBC's "Squawk Box" and is a frequent guest on CNNfn's "Market Call," Bloomberg TV, and Reuters Television. Mr. Kadlec is the author of the book, Dow 100,000: Fact or Fiction published by Prentice Hall in September 1999.

Prior to joining Seligman in 1985, Mr. Kadlec was Executive Vice President and Director of Research at A.B. Laffer Associates, an economic consulting firm based in San Diego. Previously, he was a partner in H.C. Wainwright & Co., Economics, in Boston, and officer of Crocker National Bank in San Francisco, and a contributing editor to Business Week magazine in New York. He received his MBA with honors from the University of Chicago, and his BA from the University of Illinois (Urbana).

Q. Mr. Kadlec, when your book, Dow 100,000: Fact or Fiction, was published in 1999, the Dow Jones Industrial average was at approximately 11,000. You predicted that it could reach 100,000 by the year 2020. The Dow reached a high of 11,723 on January 14,2000, but during the last week of July 2002 it was below 8,000. How do you feel about your prediction now?

A. I have never felt better about having written the book and believe the book and the messages it contains are more relevant today than when it was published. In the book, I said that the probability, the chances, of a Great Prosperity -- a prosperity that would last at least 20 years and would create an incredible amount of wealth that could lift the Dow to 100,000 -- was about as high as it ever gets. I identified three key "signposts" that historically have been associated with periods of above-average growth and above-average stock market returns: falling tax rates, overall price stability and free trade. I then noted five historical forces that were reinforcing the movement toward such a positive economic policy environment, including the End of the Cold War, the Aging of the Baby Boomers, the Technological Revolution, the Spread of Freedom and Global Competition.

But I also cautioned that prosperities are always vulnerable to policy errors. Five risks were identified that were potentially powerful enough to end our prosperity. They are: war, terrorism, a disruption of the world's trading system, an international monetary crisis and expanding Medicare in a way that would lead to significant tax increases down the road. There was also the risk of simply taking our prosperity and our freedom for granted.

My goal in writing Dow 100,000: Fact or Fiction was to provide a guide book that would help us understand and analyze the future as it unfolded, to answer the question: Is our prosperity intact, or would a future market decline indicate the beginning of an extended period of below-average economic growth and stock market returns? Hence the title, Dow 100,000: Fact or Fiction. The second goal was to show the reader that just as the present was not predetermined, the future is not pre-ordained. As a free people, each of us has the opportunity and responsibility for the future that we create, in our families, our communities, our businesses, and, through the political process, our nation as a whole.

Q. In the book you stressed that we could be sure of one thing, that "the road to 100,000 on the Dow will not be straight," and that we would have "to distinguish between short-term shocks, and era-threatening changes." Have we lust been through a short-term shock? Or is this an era-threatening change?

A. Well, we've certainly been through a short-term shock. The fact that the Dow Jones Industrial Average has gone from nearly 12,000 to around 8,000 tells us that there are some important issues facing the economy, the stock market and the American people, issues that have to do with the economic and legal policies that are coming out of Washington right now. We're at a moment of truth, when the new path in the road ahead will be charted.

One of the risks that I warned about, a terrorist act against the United States, has happened. Another threat, the risk of war, has increased, both in the Middle East and between two nuclear powers, Pakistan and India. A third risk, one which I did not identify explicitly, but which would certainly fall under the general warning against taking our freedom and prosperity for granted, is centered on the crisis in confidence surrounding the behavior of CEOs and the failure of the institutions that were supposed to assure good corporate governance.

Q. That sounds like a formidable list Let's start with terrorism. You went so far as to warn, in what I think was an almost eerie prediction, that a terrorist attack might be directed against a major U.S. city such as New York or Washington, D.C. You wrote this in 1999 and here we are, faced with real and potential terrorism on a scale that we couldn't have possibly imagined before September 11, 2001.

A. Terrorism and our response to it cloud the outlook for the economy and reduce our prosperity in three ways.

First, in order to counter this threat, the Federal government is spending enormous sums of money that could have been spent on our families, on education, or taking care of our social goals, either through government programs or through private institutions, or on research into new miracle drugs or productivity-enhancing tools. Defense spending and spending on homeland security is vital to our safety, but it crowds out other kinds of economic activity.

Second, the terrorist threat interferes with our ability to go about our business, and therefore acts as a hidden tax on our economy. U.S. companies are now expected to spend between $50 billion and $100 billion a year on security. Costs like these are real resources spent not on producing a higher living standard, but rather on maintaining our safety. In addition, increased security makes it more difficult to travel, more difficult to get goods across our borders, and in other ways too subtle to measure, interferes with our ability to do business. As a consequence, less business gets done.

Third, the war on terrorism unleashes powerful social forces that are already reversing the trend toward lower taxes and freer trade. One of the …