Long-time readers of Outside the Box are familiar with the names Dr. Lacy Hunt and Van Hoisington. They are a regular feature here, as quite frankly, anything that Lacy writes or says I pay serious attention to. This is their regular quarterly report, where they outline seven things that are likely to retard US growth. An easy read, but take the time to think this through.
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.
And now let's jump right into the essay.
Your loving wi-fi on the plane analyst,
This week’s Outside the Box is an incendiary blog written by Steve Keen on debt deflation and GDP growth. I am not certain as to his math (is he double counting debt and consumer spending?) but he does illustrate very well the problem of a deleveraging recession, which I have been writing about for a long time. This is just a different type of recession we are in. So rather than fret over the absolute certainty of the math, read this for an understanding of the nature of the problems we face. He has the direction right, I think, which is the important part for us to grasp.
Then he just now posted a second blog on Quantitative Easing, which he ends with pointing out why it might “work” but also suggests that it would lead to yet another financial bubble. Again, very Outside the Box thinking. It has me going ‘hmmm.”
Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney, and author of the popular book Debunking Economics. He has won numerous awards and is widely published in academia. Seems quite the serious guy. You can read his material at http://www.debtdeflation.com/blogs/.
Your working on Labor Day analyst,
My long time readers are familiar with Jeremy Grantham of GMO as I quote him a lot. He is one of the more brilliant and talented value managers (and I should mention very successful on behalf of his clients). He writes a quarterly letter which I regard as a must read. I have excerpted parts of his recent letter, where the chief investment strategist really takes the current financial system follies to task. Typical of his great writing and thinking is the quote from this week's Outside the Box selection:
"I can imagine the company representatives on the Titanic II design committee repeatedly pointing out that the Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any failures of the ship's construction, of the company's policy, or of the captain's competence. "No one could have seen this coming," would have been their constant refrain. Their response would have been to spend their time pushing for more and improved lifeboats. In itself this is a good idea, and that is the trap: by working to mitigate the pain of the next catastrophe, we allow ourselves to downplay the real causes of the disaster and thereby invite another one. And so it is today with our efforts to redesign the financial system in order to reduce the number and severity of future crises."
You can get the full letter at www.gmo.com (You will have to register).
Your glad to be back home at least for a week,
This week I offer two short essays for your reading pleasure in Outside the Box. The first is from Ambrose Evans-Pritchard writing in the London Telegraph. He gives some more specifics about the situation in Europe I wrote about this weekend.
He ends with the following sober quote: "My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin." This is a must read.
And the second piece? Last week in Outside the Box we looked at an "Austrian" (economic) view of the inflation/deflation debate from my friends at Hoisington. This week we look at the 180 degree opposite with Keynesian aficionado Paul McCulley, who argues that the Fed should be Responsibly Irresponsible and target higher inflation. This essay has brought some rather heated arguments in print and from some of the people who will be with Paul and me at the annual Maine fishing trip. And you can bet I will put them all together with a little wine to see how the argument ensues. I will report back.
And Paul ends with a great and what is a quite controversial line, "Yes, as Bernanke intoned, there are no free lunches. But no lunch doesn't work for me. Or the American people. While it is true, as Keynes intoned, that we are all dead in the long run, I see no reason to die young from orthodoxy-imposed anorexia."
And finally, this one last note on European banks: "European banks including Societe Generale SA and BNP Paribas SA hold almost $200 billion in guarantees sold by New York-based AIG allowing the lenders to reduce the capital required for loss reserves." (Bloomberg). Want to think about the US taxpayer paying to bail out Europeans banks? Think that might be a tad controversial? This could be explosive.
What happens when inflation once again returns. As this week's Outside the Box writer, James Montier, writes, we may want to start thinking now about inflation insurance and he mentions a few ways to do so. But this letter is a must read for his bringing to light a speech by Fed chairman Ben Bernanke in 2000 given to the Japanese, where he suggest inflation targeting:
"In the speech, he laid out a menu of policy options that are available to the monetary authorities at the zero bound. First, aggressive currency depreciation, as per Romer's analysis of the end of the Great Depression. Second on Bernanke's list is the introduction of an inflation target to help mould the public's expectations about the central bank's desire for inflation. He mentions the range of 3-4%!"
I think you will find this week's OTB to be exceptionally thought provoking. Montier is one of my favorite economic thinkers (and a good friend). He works for Societe Generale in London in their Cross Asset Research group.
This week we do something a little different in our Outside the Box. Every weekend I get a very information-filled blog called Investment Postcards from Cape Town (http://www.investmentpostcards.com) by Dr. Prieur du Plessis. In it he highlights what he thinks is the most important portion of the writings of 10 to 15 analysts from around the world on the state of the economy and investing, and summarizes the news and data. I find it very useful, as Prieur generally finds a lot of interesting pieces that I miss and go on to read in my effort to stay on top of the markets. You can subscribe on your own if you like by activating the subscription option on the blog.
Dr. Prieur du Plessis is chairman of the Plexus group of companies, which is a well established money management firm in South Africa, one part of which is essentially the Morningstar of South African mutual funds. And I am proud to say he is my South African partner.
Every month I read the outstanding commentary by Bill Gross, Paul McCulley and others at PIMCO. This month they have comments by Chris P. Dialynas, Managing Director, Portfolio Manager and Senior Member of PIMCO's Investment Strategy Group.
Dialynas offers his views on the flat yield curve, the new Bernanke era and the theory of a global glut of savings. He sees a global economy awash in liquidity due to the increased risk of investment and the Chinese currency being pegged to the US Dollar. This has caused inflation to show up in some places and the imbalances in the world give Bernanke an extraordinary challenge and that is why it was picked for this week's Outside the Box.
For the last two weeks in my regular Thoughts from the Frontlines, we have been looking at inflation. In keeping with that theme, we turn to today's note from Stephen Roach, Chief Economist of Morgan Stanley, who talks about the nature of what he calls the New Inflation. I think this is one of the more important insights Roach has had among a career with many of them. We close with a few paragraphs on Alan Greenspan from Martin Wolf, who writes for the Financial Times in the US version of the London business daily. Wolf is a jewel of a writer and makes a subscription to the FT worth it all by himself. The Financial Times is now delivered daily in many cities. You can find out more by going to http://news.ft.com/home/us.
These two articles offer us different views of the inflation, asset targeting and the critical role of central banks. They do help us think Outside the Box.
And I should note, I have been writing for some time that I thought Bush would nominate Ben Bernanke as the new Chairman of the Federal Reserve Bank. Now, we will see a lot of people critical of nominating a man who talked about dropping money from helicopters, but let me suggest to critics that they go back and really read that speech and some of his more recent ones. He did not really propose dropping money. It was tongue in cheek.
Bernanke writes and speaks in very clear terms, and I hope this fosters an era of a more transparent Fed. Which, I should note, Bernanke has argued for. I hope he does not adopt of policy speaking in opaque terms such that non one understands what he is really saying. I think a more open, transparent, collegial Fed board, with a very defined mission, would be good for the markets, rather than the guessing we all have to do now.