EDITOR'S TRACK RECORD
The editor-in-chief of The MiniMax Review, Dr. H.W. Brock, has earned worldwide acclaim over the past 20 years for helping clients outperform the market - largely by educating them as to how international markets and economies actually behave. Before the advent of the MINIMAX platform, his insights were only available in the form of in-person visits to institutional clients worldwide, as well as through his team's quarterly PROFILE research reports published continuously as part of his Cred-Intel Service since 1985. Dr. H.W. Brock is known to audiences worldwide for his ability to render highly complex and counter-intuitive issues understandable - indeed enjoyable - to a broad range of investors.
Please read below examples of our editor-in-chief's track record in forecasting myriad structural changes and other developments that drove the markets and the economy over the years - and that surprised many.
CONFUSIONS ABOUT INFLATION, FED POLICY, AND "LIQUIDITY": In two essays appearing in the Autumn 2006 and Winter 2007 PROFILE reports, Dr. H.W. Brock emphasized the need to distinguish between two very different kinds of inflation: Inflation on Main Street (consumer goods inflation), and inflation on Wall Street (asset market bubbles). He showed that the drivers of each are completely different, and thus that the two types of inflation are often uncorrelated. Thus, during the past decade, asset prices soared while CPI inflation fell and leveled off. This in turn means that the Fed cannot and indeed should not control both simultaneously via changes in the Fed funds rate. The correct policies for fighting each type of inflation were identified.
Furthermore, the two essays reconsidered and clarified the meaning of "liquidity". If the Fed really has been the culprit behind the surge in asset prices by "printing too much fiat money" as many claim, then why has inflation on Main Street USA remained very stable - unlike in Zimbabwe where money printing has created 1,800% inflation? Most discussions of liquidity are badly confused, and these essays provided a completely new perspective on the murky topics of money, liquidity, and the Fed.
FORECAST OF MUCH HIGHER OIL PRICES: In the Winter 2004 PROFILE, Dr. H.W. Brock in conjunction with oil market expert Matthew Simmons identified a series of structural changes that would cause the price of oil to increase dramatically in the near future. This began to happen only two months after publication of this essay, and the reason was precisely the supply and demand imbalances Brock and Simmons had foreseen. Brock then predicted in an Autumn 2006 article that both commodity prices and P/E ratios of oil and mining companies would fall, but that both would start rising again in 2008 - permitting an interim buying opportunity.
Brock also explained that the highly perplexing volatility of many commodity prices is much less explained by market speculation than by highly price-inelastic demand and supply functions. Finally, he predicted that the 2004-2006 oil shock would not significantly impact core inflation. To the surprise of many, it never did.
THE CRASH OF 2001: In the Autumn 1999 PROFILE, Dr. H.W. Brock predicted that capital spending would plummet in the US during 2000. He also cited the rapid deterioration of IT profits as the principal reason why. Based on this analysis, Brock also predicted that both the economy and the stock market would take a hit. They did, as all who experienced the collapse of 2001 remember.
PRODUCTIVITY AND INFLATION: In the Autumn 1997 PROFILE (based upon an invited White House Memo Dr. H.W. Brock wrote in late 1996), Brock explained in detail why productivity growth in the US had remained so low for so long despite the advent of the computer and IT revolution. Moreover, he predicted this was about to change radically, and that the US would experience a pronounced "S-curve" of accelerating productivity even if the tech boom came to an end and capital spending fell off - as it did. He identified four main reasons why this acceleration would occur. Finally, Brock predicted that soaring productivity growth would slash unit labor costs and thus inflation. All three forecasts came true, and Brock's highly original analysis of why this would happen was largely confirmed by the research of Professor Dale Jorgenson at Harvard University.
EQUITY MARKET BEHAVIOR: Dr. H.W. Brock predicted that US companies would experience remarkable earnings growth after the 2000-2002 crash, because of (i) the extraordinary productivity growth he had predicted in 1996, and (ii) a labor force weakened by higher unemployment due to the 2001-2002 downturn, and the soaring "outsourcing" of jobs to Asia. All this happened, and in 2005 profits accounted for the largest share of US income in half a century. Yet Brock also predicted that indexed equity returns would be disappointing - as they have been: Broad equity market indices remained lower in 2007 than they were six years earlier in real terms.
Why was this the case? Because the US market has been and will be experiencing a long-term down-cycle in the valuation of equities. Indeed, the P/E ratio of the principal indices has fallen by 45% since the millennium, and this will gradually fall further for reasons recently discovered by researchers at Stanford University.
LOW BOND YIELDS AND "THE GREENSPAN CONUNDRUM": Brock predicted that long-bond yields would remain persistently low during the 2003-2007 era despite soaring energy prices and sixteen hikes in the Fed funds rate and an ongoing economic recovery. The reason stemmed from the seminal concept of an "asset market equilibrium" developed in the 1950s and 1960s by James Tobin of Yale University, the first economist ever to win the Nobel Prize in financial economics. Drawing upon Tobin's work, Brock predicted that a growing disenchantment with equity returns and subsequently with real estate returns during the period would force an overall "portfolio adjustment" by aging and yield-hungry investors out of stocks and (later) real estate into fixed income products.
This forecast came true, and the resulting reallocation of the entire $55 billion "stock" of household net worth is what largely explained the "Greenspan conundrum" of surprisingly low yields. This stock-of-wealth impact swamped that of ongoing purchases of US Treasuries by Asian central banks, falling savings rates, and other "flow-of-funds" variables to which the financial press entirely restricted its attention.
STABILITY OF 'MAIN STREET': In a series of essays in PROFILES dating back to the late 1980s, Dr. H.W. Brock showed that recessions had become ever less pronounced during the past eighty years. In doing so, he identified nine structural changes during the 20th century that explained why the impact of a given shock (e.g., the capital spending and stock market collapses of 2001) should and would have much less impact on household income, spending, and GDP growth than ever before. This analysis has been widely cited, and his forecasts have proven right for the right reasons (e.g., the stabilizing influence of the advent of two incomes per family, and the ever lower correlation between the sectors comprising the economy). For example, during the slowdown of 2001, the US economy never experienced a statistical recession at all to the astonishment of many observers. The same story held true during the "credit crunch" and Savings & Loan downturn of 1991.
PARADOX OF FOREIGN CAPITAL FLOWS: In essays dating back to the mid-1980s, Brock predicted that, when foreign investors become disenchanted with US markets for whatever reason, the impact of their reallocation of funds would be to drive the dollar lower but not to drive up US yields. Moreover, he did so via a model developed from first principles in collaboration with Professor William Branson of Princeton University. This view flew in the face of all conventional wisdom on this topic, and still does. This is not surprising since the underlying reality about "foreign capital flows" is as counter-intuitive as it gets. Interestingly, The Economist magazine admitted in a September 12, 2005 article that it had itself been wrong about this entire matter for two decades.
Moreover, it cited an August 2005 US Federal Reserve Board paper showing statistically that US yields had been positively correlated with the dollar during the post-Bretton Woods era, not negatively correlated as was (and still is) widely assumed to be the case. Two decades before, Brock had shown from first principles why this would be have to be true, and had published a summary of his analysis in a New York Times Op-Editorial column on April 27, 1985.
STOCK PICKING: In a series of essays starting in 2000, Dr. Brock proclaimed the advent of an entirely new "investment regime" in which indexing would yield US equity returns as meager as they had been spectacular during the 1981-2000 regime. As part of this story, he joined Professor Garth Saloner of Stanford Business School in co-authoring an essay on why stock-picking would become much more profitable than it had been in the past - and on how to pick stocks. This essay was entitled "Stock Picking Redux" and it appeared in the autumn 2003 PROFILE.
ASSET ALLOCATION THEORY: Moving from prediction to prescription, Dr. Brock developed a complete conceptual and mathematical reformulation of optimal asset allocation in the autumn 2004 PROFILE. This demonstrated why the "fixed policy portfolio" approach of Markowitz (widely adopted by pension consultants during the 1980-2000 period) was both mathematically and intuitively wrong. He showed a more general and rigorous logic of asset allocation implies the need for a highly opportunistic and flexible approach to asset allocation of the kind implemented so successfully by Yale, Harvard and others beginning in the 1990s. The work combined the original research into this problem by Professor Paul Samuelson at MIT (the first American ever to win the Nobel Prize in economics) with the new theory of Rational Beliefs developed at Stanford during the 1990s. Brock's research has subsequently been discussed at length in investment conferences worldwide.
CONCLUSION
Arriving at the above forecasts was never easy. Doing so involved (i) the identification of structural changes coursing their way through the global economy, and (ii) utilizing the right logic to make sense of the often counter-intuitive implications of these changes.
The important point is that Dr. H.W. Brock has been right for the right reasons about numerous issues of importance to investors. And that is the true benchmark we have set for ourselves in our MINIMAX service.