Lacy Hunt kicks things off with a bang in Hoisington's Quarterly Review and Outlook, this week's Outside the Box:
"The standard of living of the average American continues to fall."
The reason, in a word: debt. Lacy explains what happens:
"Efforts by fiscal and monetary authorities to sustain growth by further debt accumulation may produce some short-term benefit. Sadly, these interludes fade quickly as the debt becomes more destabilizing. The net result of increased indebtedness then becomes the opposite of what policymakers intend when they promote economic growth by either borrowing funds for increased government expenditures or encourage consumers to borrow with artificial and temporary incentives."
In other words, you can't get to real, sustained growth of an economy by growing debt after a certain point –one that, sadly, we have already reached.
It gets worse, because, since 2009, private debt-to-GDP has fallen while government debt-to-GDP has surged. And, as Lacy notes, "United States government spending carries a zero expenditure multiplier, as do operating expenditures of state and local governments. Thus, each dollar spent by the federal government creates no sustainable income, yet the interest payment incurred with each borrowed dollar creates a subtraction from future revenue streams of the private sector."
That is, unproductive government debt is killing us. So what gives? It's simple: we either make some big, tough collective decisions, and make them soon; or we come to the "bang point" documented by Reinhart and Rogoff, where the bond market no longer believes the US will pay its bills. Europe and Japan will get there before we do, but the writing is on the wall: we must get our national-deficit act together.
I am doing a road show for Bloomberg in San Francisco, with 8 meetings today and a few more tomorrow. Bloomberg is marketing a very high-end new service called Mauldin Research Trades. My partners Gary Habib and Peter Mauthe have assembled an all-star team of technical trading analysts (who between them have written about 20 books on technical trading), who give us "conviction" trades each and every week. We publish the letter on Sunday evening. I am very pleased with the results so far. If you are interested, contact your Bloomberg Tradebook representative or drop me a note and we will get them in touch with you.
Tonight is dinner with real estate maven John Burns, where I am sure I will pick up a few new insights (I always do with John). Then I'm off to north of Denver for a day, then back home before I fly down to Austin over the weekend to be with Lacy Hunt at his long-delayed wedding reception where the iconic Texas band Asleep at the Wheel will be playing. Lots of friends there at a must-not-miss evening.
And Join me next Tuesday morning in Philadelphia at The 30th Annual Monetary & Trade Conference: Demographics, Politics, and Economic Growth, sponsored by the Global Interdependence Center (click on program title to register). It will be very informative.
Have a great week! I see some great food and conversation in my life in the next few hours.
Your worried about ever more debt analyst,
No one does it like Kate Welling – we're talking financial-world interviews here, "interrogatory journalism," as Kate would put it – and her interview of Dr. Lacy Hunt, which you're about to read, is in my opinion one of the best she's ever done, and the best I've seen with Lacy.
Kate's interviews, which she publishes in welling@weeden, normally get seen only by the institutional investors and other market pros who are her clients; but she has kindly allowed me to share this one, in which Lacy tackles the same fundamental challenge I've been writing about these past few years: How do we deal with the economic crisis we've brought upon ourselves through the buildup of too much debt? How do we get out of the hole we've been digging, when the tried-but-not-so-true Keynesian (and Bernankean) methods just get us in deeper? How do we work through the end game of the Debt Supercycle, when there are seemingly no good or easy choices left, and find our way forward into an era of renewed growth and hope?
Lacy doesn't give us The Answer, but what he does give us that is really helpful is a deep historical understanding of economic forces and the key players who have tried to manage them, guys like Irving Fisher, who completely missed the call of the Great Depression, but learned a thing or two from it. Bottom line: "... if Fisher is correct, and if we try to solve our current problems by getting deeper in debt, then what Fisher is saying is the additional indebtedness doesn't make us stronger, doesn't increase our options. It makes us weaker, reduces our options."
My answer to everything tonight, as my brain, which is still in Cape Town, tries to catch up with my body in Dallas: take in a Mavs game!
Your giving microeconomic forces their due analyst,
The "Quarterly Review and Outlook" from Hoisington Investment Management is one of the most significant pieces that crosses my desk – I try and drop everything else as soon as possible. This quarter's is no exception. The authors, Dr. Lacy Hunt and Van Hoisington, get right down to brass tacks with their opening sentence: "As the U.S. economy enters 2012, the gross government debt-to-GDP ratio stands near 100%." They cite an influential 2010 historical study of high-debt-level economies around the world, by Professors Kenneth Rogoff and Carmen Reinhart, that concluded that when a country's gross government debt rises above 90% of GDP, "median growth rates fall by one percent, and average growth falls considerably more."
And that, Hunt and Hoisington note, is exactly what is happening to us: "After suffering the most serious recession since the 1930s, the U.S. has recorded an economic growth rate of only 2.4%. Subtracting 1% from this meager expansion suggests that the economy should expand no faster than 1.4% in real terms on a trend basis going forward, which is virtually identical with the economy's expansion in the past twelve months."
Bottom line, say the authors: expect recession in 2012, here and in most of the world.
On a personal note, let me say that I consider Lacy Hunt one of the premier economists in the world today. It is my great privilege to call him up (even on his cell phone at night!) and ask questions and get to play the role of student, sometimes for hours, as Lacy takes me through the history, writing, and research in the economic world. It can sometimes be a tad intimidating, as he has seemingly read everything and remembers what he read and how it fits. I do take notes.
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.
Your thrilled to be in Singapore at last analyst,
The last Thoughts from the Frontline featured an interview of me by Kate Welling. I promised another interview she did with my friend Paul McCulley, who (warning) is a consummate Keynesian. For him (paraphrasing closely), prescribing austerity for the US is like putting an anexoric patient on a diet. While Paul and I are very good friends, we do not agree on what to do about the current morass. But this is Outside the Box, and the point is to have views that I don’t agree with. And Paul is nothing if not an articulate proponent of the neo-Keynesian view. The original publication of his interview in Kate’s letter drew some very pointed comments. Right up the OTB’s alley.
Kate Welling is simply the best at doing
interviews and teasing out controversy, but her work is hard to for the average
person to access, as it is now just for institutional clients. I have convinced
her to break out of her shell and offer it to the retail world. She is working
on the “details,” such as price, etc., but in the meantime you can go to welling.weedenco.com
welling.weedenco.comand click on How to Subscribe (Individual Investors) and put in your email address and she will get the information back to you. I assume she will offer a free sample or so. Check it out.
And in the interview, Paul talks about what his new “gig” will be after PIMCO. He is working with David Kotok to launch the Global Interdependence Center Global Society of Fellows, a most worthy group and effort, which I heartily applaud. The GIC encourages the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. You can learn more at www.interdependence.org.
Tonight I am in Geneva and was hosted by Lord Alex Bridport, founder of one of the largest bond brokerage firms in Europe (if not the largest). I will report back Friday. It is an interesting time to be in the markets. OK, one tidbit. He confirmed that banks (and not just in Europe) are really as bad as they look. And with that note, have a good week!
Your going to be 62 in a few hours analyst,
Long-time readers are familiar with the wisdom of Lacy Hunt. He is a regular feature of Outside the Box. He writes a quarterly piece for Hoisington Asset Management in Austin, and this is one of his better ones. Read it twice.
“While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern …”
As I write, Europe is starting to unravel. This is going to be much worse than 2008, at least as far as Europe is concerned, and odds are high that it will be very bad for the US. And the markets are still acting as if the problems in Europe can be resolved. The recent bank stress tests were a joke, as they assumed no Greek or Irish defaults. This simply can’t be. There is a banking crisis of massive proportions in our future.
As Lacy notes, we are testing the economic theories of three (I think von Mises should be added) dead white guys. The dominant theories are being shown to be wrong. The sooner we acknowledge that the better. But don’t hold your breath waiting for the major economic schools to come to grips with their failure.
This is a real problem, and there is just no way to avoid it. I wish I had more positive things to say.
Your trying to figure this out analyst,
Today's Outside the Box is from an old friend, but one who is new to my readers. Jason Hsu is a partner at Research Affiliates and helped create the Fundamental Indexes with Rob Arnott. Starting at Cal Tech, he went on to a PhD in economics, and is now a professor at UCLA and teaches in China and Taiwan. Wins all sorts of awards and has won the Rising Star of Hedge Funds award. In short, he is really smart.
He sent me this piece last week, and I asked if I could use it. He graciously acceded. It is on what Jason and Rob call "the 3-D Hurricane of Debt, Deficits and Demographics."
"Whether deficit spending truly has any significant impact on subsequent growth is rather irrelevant to the discussion; voters and politicians alike would simply misinterpret the economic literature and assume more consumption today will drive more growth tomorrow. In other words, and as scientific as one can put it ñ the Boomers have screwed Generation X."
As the hurricane season approaches, this is not a forecast for fair weather, but it's one we need to prepare for. This is a thoughtful piece with a lot of red meat, so let's jump in.
And if you like this, be aware that I read scores (if not hundreds) of pieces each week for Outside the Box. And now I'll bring you the 5-10 best of the best each week through my new subscription service, Over My Shoulder. If you like Outside the Box, then you're going to love Over My Shoulder. It's like having your own personal filter, with decades of analyst experience and access to exclusive resources. If your time is as valuable to you as your investments, click here to find out more about how I help you home in on the essentials.
Your looking for his all-weather gear analyst,
I am back from Rob Arnott’s conference in Laguna Beach, and I must confess that if I had attended it before I wrote last week’s e-letter I might have had lower odds on the US political class solving the debt crisis, absent a real economic crisis forcing them to. There were several presentations that made the problems quite clear. It remains a tough issue.
This week’s Outside the Box is a recent white paper by Rob, where he argues that the traditional way we look at GDP is flawed, because it overstates what is happening in the real, private part of the economy, which is the productive part. Government spending is either money collected from the private sector in the form of taxes or borrowed money that future generations must repay. While not likely to become a mainstream economic view, this is very useful for our own thinking about what constitutes productivity and investments. This is a short but powerful piece from one of America’s most honored economic writers.
And let me note that I will
be speaking at the annual Agora Financial Investment Symposium, perhaps the
only conference in the country where I am the bull in the crowd. It is July
26-29 in Vancouver. You can find out more and register at http://www.agorafinancial.com/
Have a great week. It is good to be home. I am off to see the Texas Rangers, after a happy hour with David Tice of Prudent Bear fame. And I must say that watching the Mavericks-Lakers game Sunday from the Admiral’s Club in LA, while waiting for my plane, was quite fun. Not as good as being there, but fun!
Your trying to remember there is more to life than economics analyst,