April 14, 2009
When one of the most brilliant and provocative thinkers of our times warns that monetary and fiscal policies may not solve the current crisis, you take notice. That was the message of Woody Brock, who was a featured speaker at the Altegris Strategic Investment Conference on April 4.
Government policies are losing their punch, Brock said, and he is not optimistic about the future.
Brock is CEO of the consulting firm Strategic Economic Decisions, which publishes his regular articles on the economy and the markets. Brock certainly qualifies as a brilliant thinker, given his two graduate degrees apiece from Harvard and Princeton.
Brock is fond of Mark Twain’s observation that “history rhymes but it doesn’t repeat itself.” Across economic crises, the rhyming common denominator has been excess leverage, Brock said. In the current crisis, leverage in the banking system expanded from the “correct” level of 10 to its eventual level of 40 times capital, causing logarithmically stronger damage and creating a “non-recoverable catastrophe” – homeowner foreclosures and failures of financial institutions.
“Greed is not to blame; it is the regulators,” he said, who failed to constrain leverage at critical moments. Brock said today’s mantra ought to be “it’s the leverage, stupid,” and he lamented the fact that regulators have capped salaries and bonuses but not leverage.
Many years ago Brock’s father had an account at Smith Barney – when it was still a private partnership – and its margin requirements changed on an almost daily basis, depending on market conditions. That type of discipline, Brock said, would have mitigated much of the risk in the markets.
Brock’s research is directed to the biggest and most salient issues, one of which has been identifying the “necessary and sufficient conditions” for the perfect storm that has hit the economy. One such condition, he said, is that the market as a whole must be wrong about a driver of prices, allowing an “exogenous event” to trigger a collapse. In the 1970s inflation was the culprit, causing a severe bear market. This time it was mortgage default dates.
“Who would think housing prices would drop 29 percent without an interest rate shock?” Brock asked sardonically. “We were wrong.”Display article as PDF for printing.
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