The Jerome Levy Forecasting Center has a history dating back over 100 years, spanning three generations of Levy family economic analysis.
Jerome Levy first developed the profits approach at the beginning of the twentieth century, and the approach is now used by his grandson David, who has accumulated a distinguished record of insights over several decades. Among other research products, the Jerome Levy Forecasting Center continues to publish The Levy Forecast®, established in 1949, America’s oldest publication devoted exclusively to forecasting and analyzing general economic and business conditions.
VIDEO: David Levy talks about the history of the Jerome Levy Forecasting Center
The Derivation of the Profits Equation
The profits equation (profits identity) was derived independently by two men a generation apart, Jerome Levy and Michal Kalecki. The first was Jerome Levy, a physicist turned businessman, who sought to explain and solve the unemployment problem. He began his study of economics in 1908 by examining the sources of profits. By 1914, he had derived the profits equation, along the way creating an entire accounting system for the U.S. economy decades before the development of the national income and product accounts and the concept of gross domestic product. Levy’s insights led to a forecasting experiment that was to continue over three generations.
Levy’s work remained generally unknown to academic economists, but the profits identity was derived once again in 1935 by the Polish economist Michal Kalecki. Kalecki’s ideas about profits and business cycles influenced many of his students and associates at Cambridge University and have remained central to the studies of a minority of economists on both sides of the Atlantic.
Hyman Minsky and the Profits Perspective
The discovery of the profits equation did not complete the development of the Profits Perspective. The equation naturally connects to financial aspects of the economy, and Jerome Levy recognized in the late 1920s, for example, that falling asset prices and excessive debt could lead to the devastation of profits. It was not until the second half of the century that another economist, Hyman P. Minsky, a student of Kalecki’s work, explored and described the interrelationships between the financial condition of the economy and economic performance. Minsky departed from the neoclassical paradigm by insisting on greater realism, emphasizing three key points:
- The financial sector, its institutions, and their interactions with the nonfinancial sectors must not be taken for granted or ignored. Events such as bank failures, crises of confidence, and speculative lending have enormous consequences for the entire economy. Balance sheets matter in macroeconomics.
- The economy adjusts to new influences not instantaneously, as conventional theory assumes, but over time, and during that time people’s attitudes and behaviors may shift, changing the nature of the economy’s adjustment.
- Contrary to the assumption of mainstream economics, every participant in the economy does not have “perfect information” or know the probabilities of all possible outcomes. Great uncertainty exists; individuals, firms, markets, and the public sector can be and often are profoundly surprised.
These three modest points shatter a central tenet of mainstream economics, that economies continually gravitate toward stable, full-employment equilibrium. Minsky achieved a much more realistic macroeconomic view by developing ways to analyze financial issues and incorporate them into a framework centered on the profits equation. He thus greatly enhanced the Profits Perspective, achieving a new way to understand and explain real-world economies’ obvious deviations from the prevailing equilibrium theory.
Minsky introduced his core ideas in the early 1960s and continued to expand them, becoming a respected but controversial figure among academics and winning enormous respect among the top Wall Street economists of the 1970s and 1980s. The Levy, Kalecki, and Minsky threads converged in 1990 when Minsky joined The Jerome Levy Economics Institute, where he remained until his death in 1996. That convergence is reflected in the work of the Jerome Levy Forecasting Center.
“The Doughty Maverick” and the Beginning of Industry Forecast
Jerome Levy’s elder son, S Jay Levy, had begun forecasting by the end of World War II. In 1949, with the encouragement of Jerome’s younger son Leon, Jerome and Jay began publishing a monthly analysis of the economy, Industry Forecast. Jerome largely turned over the analysis to Jay, but remained involved until his death in 1967. Jay Levy gained recognition on Wall Street and in the business press for his uncanny ability to predict business cycle peaks and troughs. After many years of citing and praising his record, Barron’s dubbed him the “doughty maverick” in 1967. In 1976 Jay’s son David became involved in the forecasting operation, joining it full time in 1978. Through Industry Forecast and their consulting firm, Levy Economic Forecasts, the two Levys continued the tradition through 1990.
The Profits Perspective Grows in Exposure
In 1986 Leon Levy financed the establishment of the Jerome Levy Economics Institute of Bard College, an independent, not-for-profit, nonpartisan economic policy research organization. In 1991 the forecasting operation ended as a private business and became, for the next ten years, the Levy Institute Forecasting Center. This move reflected the Levy family’s long-standing interest in promoting deeper understanding of economics, and over the course of the decade the Levy Institute Forecasting Center was able to introduce thousands of policy-makers, academic economists, students, journalists, and businesspeople to the Profits Perspective. Industry Forecast, which was expanded and renamed The Levy Institute Forecast from 1997–2000, turned 50 years old in 1999.
The Latest Chapter
The Levy Forecasting Center began its second fifty years with a significant change in direction. In 2001, it separated from the Levy Institute and returned to the for-profit sector, now focusing entirely on consulting and research services for major clients. Subscriptions ceased to be available to the general public, and publications were enhanced, expanded, and oriented toward client needs to accompany the expanding consulting activities.
Today, the Jerome Levy Forecasting Center continues to produce powerful and unique analysis for its clients. Having passed a major secular turning point, the apex of what David Levy, now chairman, has dubbed the era of “the big balance sheet economy,” the financial insights from the Profits Perspective are more important than ever. Srinivas Thiruvadanthai serves as Director of Research, bringing a full mastery of the profits approach and a diverse background in finance and economics. Jay Levy followed the economy as senior counsel until his death in 2012, sharing the insights he had developed during more than six decades of maverick economic analysis and forecasting.
Profiting from Insights Over the Decades
The Jerome Levy Forecasting Center’s oldest client is the Levy family. Three generations of the Levy family have used the Profits Perspective for their own business and investment activities. Some highlights:
- 1917 to 1929: Jerome Levy uses the profits equation to successfully manage his wholesale goods business through numerous key shifts in the economy, including aggressive moves to acquire inventories in 1917, liquidate merchandise in 1920, and liquidate his business in 1929 ahead of the stock market collapse.
- Post World War II: Based on S Jay Levy’s insights from the Profits Perspective, Leon Levy goes to Wall Street with tremendous optimism about the U.S. economy’s prospects. When hiring members of Oppenheimer & Company’s research staff in the early 1950s, he makes it a rule not to hire anyone old enough to remember working during the depression because they would not be bold enough. Oppenheimer becomes a great Wall Street success story.
- Throughout the postwar era: S Jay Levy, heir to Jerome as family economist and forecaster, successfully speculates in the stock market, commodities, bonds, and interest rate futures and options, with 90% of his insights coming directly from his economic research.
- 1980s and early 1990s: Odyssey Partners (including Leon Levy, Jack Nash and others from Oppenheimer) capitalizes on major cyclical bond plays based entirely on Jay’s and his son David’s forecasts, setting firm records for profitability.
- 1991: David and Jay are serving on the Board of a not-for-profit organization financed by Leon Levy. David has been speculating in options on eurodollar futures, and Leon asks him to build and manage a $350,000 portfolio for the organization. The positions are liquidated a couple of years later with a value of over $9,000,000.
- 2003-2009: David predicts that the accelerating expansion will end with a severe financial mess and recession that will force the Fed to cut interest rates to the floor. He sets up the Levy Forecast® Fund in 2004 to capitalize on that move. The fund closed in March 2009, having produced a 500% net gain over the duration for its investors.
“I learned to pay attention to the connections between economic theory and daily events by watching my father [Jerome Levy] investing according to his theories on the interplay of capital spending, profits, and the course of the economy... [L]ong after Dad died, I continued to turn to Jay, and then David as well, who have turned Dad’s ideas into a set of tools for making economic predictions.”Leon Levy, former senior partner of Oppenheimer & Co.; founder of the Oppenheimer mutual fund empire; founding partner in Odyssey Partners
“[T]he key determinant of [economic] system behavior remains the level of profits. [My] financial instability hypothesis incorporates the Kalecki-Levy view of profits, in which the structure of aggregate demand determines profits.”Hyman Minsky, seminal 20th century economist whose financial instability hypothesis has gained popularity in the wake of the financial crises of recent years. Often overlooked by his admirers is that the Profits Perspective was at the core of his analysis.
“[Jay and David Levy’s] predictions of the decline and fall of the economy have been right as rain. Father and son, they’ve been at this game a lot of years, and while not infallible (a quality restricted to popes and financial journalists), they have a truly extraordinary record of being right.”Alan Abelson, Barron's
“Mainstream economic theories are not adequately explaining consumer and government behavior in this cycle. Wall Street practitioners are thus turning to alternative theories, and the Levy-Kalecki formula—independently developed by New York physicist-entrepreneur Jerome Levy in 1914 and Polish economist Michal Kalecki in 1935 and then unified by American economist Hyman Minsky in the 1960s—is helping to better elucidate the relationship among debt, savings, and profits.”Jon Markman, MSN Money
“I have followed the Levy forecasts for 45 years. If I had to make do with only one tool to help me succeed, it would be the insights of the Levy Forecasting Center.”Brian F. Wruble, former Chief Investment Officer and Executive Vice President of Equitable Life; former CEO, the Delaware Group Mutual Funds
“I have followed the work of the Jerome Levy Forecasting Center for well over a decade and have found it a uniquely valuable and insightful resource. The Center's dual focus on the sources of profits and the effects of financial activity on the economy substantially differentiates the analysis from traditional Wall Street macroeconomic research. As an aid to me in anticipating economic events and formulating investment strategies in these turbulent times, it stands heads above any other research available.”Chuck Clough, Chairman and CEO, Clough Capital Partners, LLC; former Chief Investment Strategist, Merrill Lynch