Quarterly Review and Outlook - Second Quarter 2008

There is a reason I call this column Outside the Box. I try to get material that forces us to think outside our normal comfort zones and challenges our common assumptions. And this week's letter does just that. I have made the comment more than once that is it unusual for two major bubbles to burst and for the conversation and our experience to be rising inflation and not a serious problem with deflation.

Van Hoisington and Dr. Lacy Hunt give us a seminar on why it will be deflation that will ultimately be the problem and not the current inflation we are dealing with today. This week's letter requires you to think, but it will be worth the effort. Remember our lesson from Economics 101. If you raise the supply of something, in normal markets the price goes down. And if you increase the price, suppliers will respond by producing more.

Now, if you put all of the various inputs together, Hoisington and Hunt show that theory suggests we will soon be dealing with deflation. It's counter-intuitive to what we see in the stores today, which is why the Bank for International Settlements used the stagflation word in a recent report. The transition that is coming will not be comfortable.

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.