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Outside the Box

Hoisington Quarterly Review and Outlook

October 20, 2012

The Hoisington Quarterly Review and Outlook is one of the cornerstones of my reading on where the economy is headed. Van Hoisington and Lacy Hunt do a masterful job of turning data points into cogent, well-argued themes.

This month they waste no time in dissecting the Fed’s recent move to QE3 and similar efforts in Europe, arriving at the conclusion that “While prices for risk assets have improved, governments have not been able to address underlying debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies.”

Their expectation: global recession. The only issue left to sort out, they say, is How deep will the downturn be?

They make the interesting observation that with each injection of liquidity by the Fed, commodity prices have surged: “During QE1 & QE2 wholesale gasoline prices jumped 30% and 37%, respectively, and the Goldman Sachs Commodity Food Index (GSCI-Food) rose 7% and 22%, respectively. From the time the press reported that the Fed was moving toward QE3, both gasoline and the GSCI Food index jumped by 19%, through the end of the 3rd quarter.”

The QE picture gets even muddier. The unintended consequence of the Fed’s actions, say Lacy and Van, has been to actually slow economic activity: “The CPI rose significantly in QE1 and QE2 (Chart 1). These price increases had a devastating effect on worker's incomes (Chart 2). Wages did not immediately respond to commodity price changes; therefore, there was an approximate 3% decline in real average hourly earnings in both instances. It is true that stock prices also rose along with commodity prices (S&P plus 36% and 24%, respectively, in QE1 and QE2). However, median households hold a small portion of equities, and thus received minimal wealth benefit.”

They proceed to tear apart the wealth effect that the Fed is banking on to restimulate the economy, drawing on several solid studies. They also make the key point that “When the Fed actions lead to higher food and fuel prices, the shock wave reverberates around the world, with many foreign economies being hit adversely. When prices of basic necessities rise, the greatest burden is on those with the lowest incomes since more of their budget is allocated to the basic necessities such as food and fuel.”

The next few years are not going to be pretty. We’re looking right into the teeth of a rolling global deleveraging recession—the End Game, I’ve called it. And the decisions we make in the next couple years about how to handle our debts and budget deficits—here in the U.S., in Europe, in China and Japan, and elsewhere—are going to be absolutely crucial.

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.

My daughter Abbi is coming into town tonight from Tulsa with her fiancé, and most of the family will gather over the weekend for dinners and fun. And her twin Amanda is expecting, so another grandchild is in the future as well. Family and friends are among the few permanent fixtures in a world that seems to change almost weekly.

I was with Pat Cox of Breakthrough Technology Alert on Tuesday night. We watched the debate and then went deep into the night talking about the future. And got up the next day and did the same between meetings. We ended up doing a tag team that night for Hedge Fund Cares, which raised a lot of money to help abused children. I talked about the global landscape (which was not so upbeat) and he talked about the changes we see in the biotech world; and we then both answered questions, which was more fun, as we got to think about the marvelous the future that is shaping up. Such totally amazing things are happening. I am really quite the optimist over the longer term.

Have a great weekend, and look for your next Thoughts from the Frontline in your inbox Monday.

Your bullish on the future but bearish on governments analyst,

John Mauldin, Editor
Outside the Box

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Hoisington Investment Management
Quarterly Review and Outlook
Third Quarter 2012

Growth Recession

Entering the final quarter of the year, domestic and global economic conditions are extremely fragile.  Across the globe, countries are in outright recession, and in some instances where aggregate growth is holding above the zero line, manufacturing sectors are contracting.  The only issue left to determine is the degree of the downturn underway.  International…

Discuss This

8 comments

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Comments

Ronald Nimmo

Oct. 24, 2012, 10:05 a.m.

I think this sentence must be incorrect:

The AD curve is equal to planned expenditures for nominal GDP since every point on the curve is equal to the aggregate price level (measured on the vertical axis of the graph), multiplied by real GDP (measured on the horizontal axis of the graph)”.

  Real GDP x Price Level would be the area under the curve, not a point on the curve.
  Another subject which this article raised could be an analysis of how an increase in the velocity of money is related to an increase in the money multiplier. It seems as though they would be related.
  This article implies that an increase in inflation is a desirable way to increase nominal GDP. I think that an increase in real GDP with low inflation is a much more beneficial scenario to have occur. Thus nominal GDP would only be slightly higher that real GDP.

Dushan Lipensky

Oct. 21, 2012, 3:31 a.m.

One of these days the 30 and under crowd is going to find out that the “old guard” (meaning those that protect themselves at a cost to the young)has been screwing them for the past 20 yrs. and then their will be blood.

Dallas Kennedy

Oct. 20, 2012, 5:40 p.m.

This is great. In a few years, I’ll be living off my stocks, which will (I hope) be the only thing keeping pace with commodity inflation.

I just love the way the Fed rationalizes its BS policies with false theories and claims that few ever bother checking. It seems that the Greenspan-cult still lingers. Frequently, you’ll hear some dimwit saying that there’s no “wage-push” inflation like the 1970s, so we don’t have to worry about “real inflation.” But that just means that the commodity inflation we’re putting up with has no compensating rise in wages to accompany it, and companies have no pricing power to compensate for inflation in their inputs.

That’s a *good* thing?! It means relentlessly falling real incomes. With companies out of cost-cutting tricks now, it also means falling real earnings.

The Fed’s tricks can’t raise real aggregate demand, as shown. It’s also not increasing real investment. The capital markets levitation is all speculative, floating on central bank liquidity.

homehere_2000@yahoo.ca

Oct. 20, 2012, 3:06 p.m.

unemployment in many european countries is 52.5 % for young adults under 25 years. these countries are not capable of stimulating and maintainng growth in their economies. the   countries and their citizens are almost broke. with limited possibilities for stable,  long term employment. if a transaction fee were placed on every trade on stock exchanges for all people and organizations trading on these exchanges, there would be considerable funds raised. these monies could be by each country with a specific purpose of infrastructure development.there would be a long term employment future and each country. this process could be adapted by canada and the usa as well.
for the countries that keep printing money instead of working to create alternatives to grow their economies - soon they will realize their standard of living becomes stagnant with no growth.
unemployment rates above 7/ 10 % are debilitating to the respective country. the objective is to stimulate growth and reduce dept.
i am posting additional thought with my original post
gregory symchyshyn

homehere_2000@yahoo.ca

Oct. 20, 2012, 2:52 p.m.

unemployment in many european countries is 52.5 % for young adults under 25 years. these countries are not capable of stimulating and maintainng growth in their economies. the   countries and their citizens are almost broke. with limited possibilities for stable,  long term employment. if a transaction fee were placed on every trade on stock exchanges for all people and organizations trading on these exchanges, there would be considerable funds raised. these monies could be by each country with a specific purpose of infrastructure development.there would be a long term employment future and each country. this process could be adapted by canada and the usa as well.
for the countries that keep printing money instead of working to create alternatives to grow their economies - soon they will realize their standard of living becomes stagnant with no growth.
unemployment rates above 7/ 10 % are debilitating to the respective country. the objective is to stimulate growth and reduce dept.

homehere_2000@yahoo.ca

Oct. 20, 2012, 2:14 p.m.

i think that with the under 25 young adults in several european countries being 52.5 %, these countries not only have to reduce dept, they have to create ways of developing long term employment. the revenue streams of these countries as well as canada and the usa need to increase. one way of doing this would be to have a transaction fee on every stock that is payable by everyone and every organization who trades on any stock exchange. these fees would go to a central depository in each country and could be used for infrastructure development and thus could help provide the funds to keep people employed long term and would reduce the necessity of governments printing money to stimulate a countries economy.

Rolf H Parta

Oct. 20, 2012, 9:38 a.m.

allow me to suggest what may prove an interesting analysis—during past periods of strong growth in the economy, what were the proportions of the GDP components [consumption, investment, net government, and net foreign]?

and what were the apparent key variables in driving each of these components?

**
Just offhand, i’ll hazard a guess that high GDP growth occurred when investment was high as a percentage of GDP and at the same time, income taxes were low or zero.

One just has to wonder if this effect is exactly what those foreign governments that do not tax investment income at all are driving at.

***
A further step after this might be to document the relationship between high GDP growth and national power [including military] and thus the ability to achieve national strategic goals.  I rather suspect it is positive and strongly correlated—if only because a poverty stricken nation generally can’t afford to project any power.

Jay Noe

Oct. 20, 2012, 7:23 a.m.

My Granny once said that “you can’t get something for nothing”, which is unless I am missing something is what QE is all about. It is very informative that macro economic analysis supports this concept.