Outside the Box

Hoisington Investment Management Quarterly Review, Q4 2012

January 18, 2013

In their fourth-quarter 2012 Quarterly Review and Outlook – today’s OTB – Lacy Hunt and Van Hoisington spell out the consequences of the so-called American Taxpayer Relief Act, as well as the even more egregiously named Affordable Care Act. They quickly conclude that the real effects of the tax increases on both individual taxpayers and the overall economy will be much greater than media reports have suggested.

One of the more interesting impacts is that many corporations, large and small, borrowed multiple billions of dollars to make early or special dividend payments, or paid 2012 bonuses before the year turned over. This, the authors write, “… will cause the fourth quarter national income and product figures to be dramatically overstated and will provide no guide to the prospects for 2013. However … income should show a sharp decline early in 2013.”

They go on to explain the damaging effects of the tax multiplier and the implications for government revenue and debt. The upshot is that our federal deficit will continue to exceed $1 trillion per year and our debt-to-GDP ratio will continue its dangerous climb above the 100% mark – we can expect it to be 107% by the end of the year.

Lacy and Van are deeply concerned, as am I, about the deeply corrosive effect of federal fiscal shenanigans (and Congressional foot-dragging) on economic growth; and they lay out a number of fundamental conclusions, drawn from the work of eminent economists ranging from David Ricardo in the early 19th century right up to Rogoff and Reinhart in the present day, that “strongly suggest that the latest fiscal policy actions will serve to further restrain economic growth. We cannot tax ourselves into prosperity ... We can, however, deficit spend ourselves into poverty.”

We’re going to have to do better, a lot better, if we’re going to restore true prosperity to our economy, and we don’t have a lot of time. This year is crucial.

I am grateful, as always, to Lacy and Van for sharing their work with us. Hoisington Investment Management Company (www.hoisingtonmgt.com) is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $4 billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.

I write this note from Athens, having come back from dinner at a fabulous local restaurant (Abyssinia Café – you must get the chicken), courtesy of our local hosts, Antoine Yazbek and Andre Chelhot. The restaurant has a magnificent view of the Acropolis, which is different from the view of that ancient Greek wonder you see from the rooftop bar of the Grand Bretagne. Interestingly, I had drinks (a nice non-alcoholic beer, thank you) with yet another reader, Jeremy Downward, who moved here from Britain a few decades ago, and the deal that launched his investment bank was the buying and selling of the hotel. When he first bought it, the bar was just a room with a view but was not built out. Today it has one of the greatest views from a downtown hotel in the world. And in the summer, when you can sit outside? I have to come back.

And tomorrow Christian Menegatti (of Roubini Economics) and I will tour the Acropolis and new museum with yet another reader, George Drimiotis, who has been kind enough to arrange a number of meetings as well. It has been 25 years since I have walked those ancient steps, and I am looking forward to it. They say the new museum is fabulous.

I will be writing about what I learned this week, not just here in Athens but all over Europe, as I travel to Geneva on Sunday. But the bulk of the letter will be on Greece. This has been a most thought-provoking trip. We have talked to literally dozens of people (business leaders, central bankers, politicians, investment types), including by means of a few ad hoc meetings in the local tavernas in the evenings. The views there were different from those of the central bankers, but there is a rhyme that I will try to tease out for you.

Until Sunday night, have a great weekend. ΏΠΑ! (Opa!)

Your overwhelmed with information analyst,

John Mauldin

John Mauldin, Editor
Outside the Box

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Hoisington Investment Management – Quarterly Review and Outlook, Fourth Quarter 2012

Tax Consequences: From Gain to Drain

The American Taxpayer Relief Act has lifted the immediate uncertainty of the fiscal cliff. Nevertheless, tax increases that are already in effect from this act, as well as the Affordable Care Act, impose a major obstacle to growth for the U.S. economy in the first half of 2013. The result of these taxes is considerable,…

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Steve Correll

Jan. 27, 2013, 10:18 a.m.

I understand the general conclusions about long-term interest rates and deleveraging. But, what about inflation as a function of the (drastically) increasing money supply ?

Could the current situation be a net outcome of deleveraging temporarily exceeding money printing, and when deleveraging receeds then the obscene money supply is free to drive inflation as a “bang” event.

jack goldman

Jan. 20, 2013, 10:49 a.m.

“The Plan” is right on track. Debase the currency so money is debt and debt notes. Create unlimited debt. Governments sell children and grand children into debt slavery to “The Fed” which is a private, secret, foreign owned banking corporation of global elites, mostly in Europe. The final end game is yet to happen. Collapse the economy and buy up all the assets at pennies on the dollar. This happened in 1929 and it will happen again. This is standard banking practices by bankers, brokers, owners, and government employees who are wealth destroyers and parasites who do not create wealth.

The Dow was $700 in 1964 in real US Treasury silver coins with a 71.5% silver content. The same coins sell for 22 times face value in exchange for today’s bank debt notes. In other words the Dow is $13,000 in bank debt notes but it is only $650 in real US Treasury silver coins from 1964. Dow was $700 in 1964 and is now $650 in the same legal US silver coins. I think silver money explains everything truthfully.

There has been massive increases in prices, roughly 1,000%. Wages are only up 500%. This article explains the symptom but not the cause. The cause is currency debasement, intentionally created to bring parasitic benefits to bankers, brokers, owners, and government. The people who suffer are children, families, renters, and employees and these statistics bear that out.

The solution is simple. Default on the debt. Use real gold and silver money. Cut government by 50% or more. The solution is more painful then the problem which is why drug addicts continue to use drugs. Currency debasement, which is using debt as money, always ends in tears.

Protect yourself. No one else can or will.

Johnny Kicklighter

Jan. 20, 2013, 8:44 a.m.

The final statements: “The key ingredient to fostering monetary growth, and thus final demand, is an increase in the kind of borrowing which (1) aids future productivity and income and (2) increases financial innovation. Presently, after sixty months of the most massive Fed balance sheet expansion, no evidence of an inflationary spiral can be found. Nor, in our judgment, is one likely to occur. The process of unwinding debt overhangs is a long one, and unfortunately our society continues to pile on debt at near record amounts.”

The debt issue seems contradictory to me.  I have read elsewhere that as a society we are deleveraging, esp. with the inability to borrow against equity in homes.  Please elaborate.


Jan. 19, 2013, 3:05 p.m.

I really don’t see that the modest increase in marginal rates on a small subset of of taxpayers has any affect on whether we are “spending ourselves into poverty.”  Federal taxes are low by historical standards as a percent of income, as long as one realizes that history did not start in 1986.  The main question here was what was fair.
There is a spending problem - but I don’t believe an increase in tax revenue has much to do with that problem.  We need to get over the hand-wringing about marginal tax rates on the wealthy and move on to the spending problem.  Let’s face it - the Bush tax cuts were an experiment which failed.

Gerald Ferguson

Jan. 19, 2013, 6:02 a.m.

A fiat money system is not constrained in the same way as the old gold standard. The debt needs a new look, as the USA cannot “run out of money” under a fiat system. High inflation would be a consraint.

Gerald Ferguson

Jan. 19, 2013, 5:57 a.m.

The effect of the accounting debt under a fiat money system is a work in progress. Assumptions from the days of the gold standard may not apply. The USA cannot run out of money, but it could be constrained by high inflation.

jerry murphy

Jan. 18, 2013, 8:24 p.m.

I’m always intrigued by the focus on “entitlements” which are meant to see that citizens of the richest most powerful society the planet has ever seen have the basics of healthcare and minimum income in their later years. The focus never seems to be on the obscene amount of defense spending or the incredible pork barrel tax breaks or the fact that the US is the most income skewed of all developed societies. Guess George Friedman’s right that the US is still in the barbaric stage of development. We can only hope this too shall pass. The analysis of this article is so steeped in the conventional as to be hardly worth the read. But then again when you have trouble with a ban on assault weapons what hope do you have with really tough issues.

Dallas Kennedy

Jan. 18, 2013, 8:16 p.m.

Nice article, especially the enlightening discussion of fiscal multipliers and the failure of Keynesian economics.

... Except for the last two paragraphs. Inflation is running higher than the official numbers and will probably continue to creep up. Long-term inflation trends bottomed in 2010. It is true that most of the increase in the monetary base is not circulating and that what is circulating is mainly inflating asset prices in capital markets.

But the bond market in unquestionably in a bubble. The price of bonds has become disconnected from their nearly vanishing value, in terms of the real income they provide. The bond market is operating on a trade, not investment, the assumption that bond prices will keep rising. That’s a bubble. It will crack, maybe in the next year or two.