The Return Of Dr. Doom
On Apr. 25, 1994, the economist they call Dr. Doom gave a farsighted speech in New York. "Before the end of this decade, the financial markets of many emerging markets will be hit with turbulence far beyond the gyrations that occurred this year," Henry Kaufman said. "Low inflation will be no guarantee against the emergence of financial excess. History proves this conclusively."
How right he was. And how sweet the vindication for a prognosticator who's made his fair share of bad calls over the years. "Henry gets wiser and wiser as he ages," says Paul A. Volcker, former Federal Reserve chairman.
In the 1970s, when Kaufman was chief economist at Salomon Brothers Inc., his gloomy predictions on inflation and soaring interest rates were heeded the way Federal Reserve Chairman Alan Greenspan's views of the economy are today. But Kaufman's bearishness looked like backwardness during the bull market of the 1980s and 1990s.
UNIFORM RULES. Now, with Asian turmoil bearing out his call on emerging markets, the 70-year-old Dr. Doom is trying to rally support for his dream: a plan to stabilize the world financial system through increased supervision and regulation. He wants the International Monetary Fund to intervene earlier in the affairs of troubled countries, and argues for an international "board of overseers" for private financial institutions. It would enforce uniform rules on such things as capital requirements and disclosure.
Kaufman learned financial conservatism in his childhood. Hyperinflation in the 1920s wiped out his German-Jewish family's wealth and contributed to the rise of Nazism. As a boy, Kaufman says, he cowered in a bedroom as Nazis wrecked the downstairs of his family's house. In 1937, at age 10, stricken with polio and speaking no English, he fled Germany with his family. To Kaufman, a stable financial system is a matter of life and death. "It is very important to preserve the well-being of a growing middle class," he says.
In his adopted homeland, Kaufman earned a doctorate in banking and finance from New York University, spent time at the Federal Reserve Bank of New York, then worked for Salomon for 26 years before going independent as a fixed-income money manager in 1988. His partner, Roger Kubarych, says their assets under management have dwindled from around $800 million to under $500 million, even though they have outperformed bond-market benchmarks. One reason: Investors preferred stocks.
Even Kaufman can't entirely resist the siren call of speculation. In November he helped start a hedge fund, Strategic Advisors International, that uses borrowed money to juice up its gambles on the markets. Isn't that against his principles? He argues that the fund is safe for investors as long as they keep it a small portion of their portfolios. (He himself put in $8 million.) And he says he still favors more disclosure on the financing of highly leveraged transactions.
Kaufman's plan to stabilize the world economy isn't exactly being embraced by nations jealous of their sovereignty. And investors will always crave leverage, as Kaufman's own hedge trading demonstrates. Nonetheless, he is gaining a respectful hearing. On Dec. 2, Greenspan said he agreed with Kaufman's cautions. Dr. Doom's prescription is debatable. But his diagnosis of instabilities in the global financial system is hard to dispute.