If you are in the business of understanding changes in news and price, then you had better have an ability to interpret the news better than others do. Or else you had better have an ability logically very different to know how price will react to the news better than others do. It is the possession of either or both of these skills that is the foundation for legitimate strategies of active management.

- H. "Woody" Brock


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Track Record

Dr. H. "Woody" Brock has earned worldwide acclaim during the past 20 years for helping clients outperform the market largely by educating them as to how international markets and economies actually behave.

Here is a sample of the topics covered, the theories utilized, and SED's track record.

CONFUSIONS ABOUT INFLATION, FED POLICY, AND "LIQUIDITY": In two essays appearing in SED's Autumn 2006 and Winter 2007 PROFILE reports, Dr. 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 kind are completely different, and 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 attempt to control both types simultaneously via changes in the Fed funds rate. Wholly new strategies are needed.

Furthermore, the two essays reconsidered and clarified the meaning of "liquidity". If the Fed really did cause the surge in asset prices by "printing too much fiat money" as many claim, then why did inflation on Main Street USA remained very stable unlike in Zimbabwe where true money printing has created 1800% 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 SED's Winter 2004 PROFILE, Dr. 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 that Brock and Simmons had foreseen. Brock then predicted in an Autumn 2006 article that both commodity prices and the 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. 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 remember the collapse of 2001 know all too well.

PRODUCTIVITY AND INFLATION CONFUSION: In SED's Autumn 1997 PROFILE (based upon an invited White House Memo Dr. Brock wrote in 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 soon 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 MISBEHAVIOR: Dr. 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 back in 1996, and (ii) a labor force weakened by higher unemployment due to the 2001-2002 downturn, and to 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 in real terms than they were six years before.

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 already fallen by 45% since the millennium, and this will gradually fall further for reasons recently discovered by researchers at Stanford University.

STABILITY OF "MAIN STREET": In a series of essays in PROFILE dating back to the late 1980s, Dr. 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.

PARADOXES 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 US yields higher. 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 the market and in fact most economists had been wrong about this entire matter for two decades.

Moreover, it cited an August 2005 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 have to be true, and had published a summary of his analysis in a New York Times Op-Editorial column on April 27, 1985.

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 seventeen hikes in the Fed funds rate and ongoing economic recovery. The reason stemmed from the seminal concept of an "asset market equilibrium" developed in the 1960s by Professor 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 would force an overall "portfolio adjustment" by aging and yield-hungry investors out of stocks and (later) real estate, and into fixed income assets.

This forecast came true, and the resulting reallocation of a portion of the $54 billion "stock" of household net worth largely explains the arrestingly low bond yields of recent years - the so-called" Greenspan Conundrum". This "stock-of-wealth" impact on yields swamped the "flow-of-funds" impact due to ongoing purchases of US Treasuries by Asian central banks, and other flow variables. Yet market commentators and the financial press focus solely on these less important flow variables.