We have been assaulted with economic news of all sorts, from every corner of the globe, while trying to watch the Olympics and while we would rather be enjoying summer and decompressing (at least in the Northern hemisphere).
But the data keeps coming. My friend John Silvia, the Chief Economist of Wells Fargo, has been with me in Maine this past weekend. And as we caught fish and shared our thoughts, we also both managed to get out our respective writing done. His note this morning is a particularly interesting analysis of US data, which has him wondering about his call for tepid growth but no recession
“A run of weaker-than-expected economic data in recent weeks has engendered the usual speculation of whether or not the economy is poised to slip back into recession. In this piece, we describe the critical role of industrial production in the current cycle and discuss how deterioration here could signal trouble for the broader economy. We also analyze what has happened in past cycles when these components have simultaneously slipped into contraction territory.”
My son Trey and I have been going to these Maine summer events for six years. The last time the conversation was as, let’s say, “concerned,” was in August of 2008. This year the concern about Europe has been evident. My main thesis is that the US should not fall into recession unless it is pushed. And Europe could be the catalyst, if they do not control their problems. Much of the continent is in recession, and Greece, Portugal, and Spain are in what can only be called depressions.
The longer the Europeans vacillate about what to do, and continue to offer up nothing more than hope and endless summits, the worse it will get. They cannot avoid a very costly decision. Either breakup or a full fiscal union is going to be massively expensive. The only thing that can be more costly is to avoid doing either. If they don’t act decisively, they will most certainly drag the US and global economy into recession as well.
The last month has been perhaps the most intellectually stimulating of my life. I write this on a plane home. (The economy may be tepid, but the planes I have been on in the US have been oversold for the last few months. Which means the free upgrades are getting harder to come by.) I am looking forward to digesting what I have been confronted with. Some of it has been enormously positive, and some of it disturbing. The true surprises really have been to the upside. The past month has reinforced my very-long-time (admittedly almost extreme) positive outlook, though we face an immediate future that we may best characterize as not so bullish. And if I were a citizen in most any European country, my prospects would seem dark indeed.
But that is a topic for later letters. For now, let’s look at what John Silvia and his most solid team have to offer us.
Your mind on overload 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,