I look forward at the beginning of every quarter to receiving the Quarterly Outlook from Hoisington Investment Management. They have been prominent proponents of the view that deflation is the problem, stemming from a variety of factors, and write about their views in a very clear and concise manner. This quarter's letter is no exception, where they once again delve into the history books to bring up fresh and relevant lessons for today. This is a must read piece.
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 in to the essay.
Today I am sitting listening to Ralph Merkle lecture on nanotechnology, part of a 9-day-long series of lectures on how accelerating change in technologies of all types will affect our world. 15-hour days and intense discussions are stretching my brain, but I still have to make sure you get your Outside the Box. Fortunately, I came across today's OTB last week from my friends at GaveKal, who offer a way to think about the Greek crisis and what it means for all European bonds.
There are a lot of allegations about manipulation of European bonds. It's those nasty traders. GaveKal shows us data that bond yields are actually quite logical, given the debt of various countries. But they also warn us, as part of their conclusions:
"As of today, there seems to be no additional risk premium related to the possible dislocation of the Eurozone. Clearly, this possibility would have such devastating effect on world financial markets that investors cannot even think of it (even if many talk about it)."
I suggest you read at least the beginning and then the end of this piece, even if the data makes your eyes glaze over. (I must admit the data made me feel all warm and fuzzy, but then I am somewhat of a wonk.)
Have a great week. I am getting overwhelmed here in California, learning about the future. It is going to be amazing, even if our bonds drop in price. We will live in what may be the most interesting and exciting period of human history. What a contrast between the financial markets and what the scientists continue to amaze us with. It is one of the reasons I think we Muddle Through, in spite of our rather negative economic environment.
There is a debate in academic circles on the lessons of the current economic crisis. While most ivory tower debates are of little concern to our daily affairs, this debate should concern you, as it will inform those who hold central bank and political power. Remember, there is no playbook of rules for what to do in deflationary, deleveraging recessions. They are making it up as they go along.
Today we have a short essay by Niall Ferguson published last week in the Financial Times. It speaks for itself, and you should take a few minutes to read it.
In November a paper was published at the Kennedy School of Government and Center for International Development at Harvard University by Riccardo Hausmann of Harvard and Federico Sturzenegger of Universidad Torcuato Di Tella. The title was "U.S. and Global Imbalances: Can Dark Matter Prevent a Big Bang?" They claim the current US account deficit is not a problem because "dark matter" does not show up in government statistics. They propose that this dark matter explains away the deficit and no real imbalance exists. You can read the original paper at http://www.cid.harvard.edu/cidpublications/darkmatter_051130.pdf
This week we will take a look at what two different economists have to say about their theory. The first comments come from Tim Drayson of ABN AMRO in the UK and the second comments are from Martin Barnes of Bank Credit Analyst in Canada. It is always exciting to watch some of the brightest economic minds debate a subject and that is why it was picked for this week's Outside the Box.
This week's letter is by Richard Duncan who is based in Hong Kong and is one of the brightest financial analysts I know. Richard is the author of one of my favorite books called The Dollar Crisis: Causes, Consequences, Cures. A new paperback edition that is revised and updated is now available at Amazon for under $14.
Richard said this piece is really an updated version of one of the new chapters in The Dollar Crisis. It looks at the federal deficit, the dollar, Greenspan and offers another explanation for why the longer end of the yield curve has stayed low while the Fed is raising rates on the short end.
Can the current account deficit undermine the Fed's ability to control US interest rates? Let's find out in this week's Outside the Box.
In a past Thoughts From the Frontline letter, I quoted some economic forecasts from a group in The Netherlands called ECR Research. ECR is an independent financial research group with a team of analysts and economists specializing in medium-term developments in interest rate and currency markets. ECR supplies their research to some of the top financial financial insitutions in the world.
ECR's Global Fiancial Markets report from February 3rd takes a look at the current situation in the U.S. They see short term rates going up more than the market currently predicts and at the same time the dollar will get stronger, then in 2006 the tides will turn and we could see deflation and a weakening dollar. This letter is a little longer than most, but well worth the time because ECR has a few other Outside the Box predictions for the coming year, so let's take a look at what they see in the future.
This week we look at the comments of one of my favorite analyst groups, the Morgan Stanley Global Economics Team, who's most recognizable member is Stephen Roach. I have been a big fan of Roach over the years and part of last week's commentary was a roundtable discussion by the group between Roach, Stephen Li Jen, Richard Berner, Joachim Fels, Andy Xie, Eric Chaney, David Miles, Riccardo Barbieri, Ted Weiseman and Gray Newman.
This distinguished group debates the dollar, deficit and other global imbalances between the US, Europe and Asia. I found it an interesting and highly insightful look at where the world economies stand today. A group as talented as this one is always able to help you think "Outside the Box."