Mr. Mauldin’s letters which come out frequently (they are free), nor do I subscribe to Ms. Welling’s [email protected] research service. Hoisington is a $4 billion bond investment management firm. I don’t know Dr. Hunt nor am I an investor in Hoisington’s funds.
I found the rather long interview to be an interesting, disappointing, surprising, and mostly correct read. The “surprise” was that he agrees with my forecast for a recession in 2012.
When I hear that someone is “thinking outside the box”, my interest is automatically piqued. What I found out about Dr. Hunt was that despite his slightly outside the box approach, he comes to some correct conclusions about the economy. This is often the case with what I call “conservative” neo-Keynesian, neo-classical, econometric economists such as Dr. Hunt.
Dr. Hunt’s god is economist Irving Fisher, with Hyman Minsky being a lesser deity. I am not an Irving Fisher fan. He was an early monetarist, with what I would call Keynesian ideas about many things. According to Hunt, Fisher focused on aggregate debt rather than aggregate demand (like Keynes and Milton Friedman), and to prevent an economic crisis you needed to prevent “unreasonable” debt build-up at the source rather than let it get out of hand. Thus he advocated a form of “100% money banking” which is another way of saying that we shouldn’t have fractional reserve banking which promotes fiat money credit expansion.
Well there are good things to say about Fisher, but we Austrians think he came at the problem the wrong way. Whatever. The point is that Dr. Hunt sees the world through Fisherian glasses. That yields some interesting views. If you think debt is the problem and fractional reserve banking system is the problem, then that coincides with some Austrian ideas. Of course the Austrians view sees the central banks’ control of money supply as the main problem, compounded by a fractional reserve, fiat money, duration mismatch, banking system.
I would explain our current history rather differently than Dr. Hunt does, and much of the interview is devoted to his world view. He doesn’t give a very satisfactory explanation of what he refers to as “over-trading”, the behavior that causes “manias, panics, and crashes.” Why did we have “credit excesses?” I couldn’t find an answer in this article other than the fractional reserve banking system. Which is partially true, but he doesn’t seem to assign any role to the Fed as the primary driver of this phenomenon. This is better than Keynes’s “animal spirits” explanation, but it is only half-way there—i.e., why does “extreme” credit explode at a particular time?
So, here we have a slightly unconventional econometrician who comes to some similar conclusions about the economy. Which is interesting and worth exploring.
What does he say? You can read the entire article here. Here are some of his highlights.
1. We will have a recession in 2012.
He focuses on four things that will bring about recession this year: weak exports, weak consumer spending, weak capital spending, and weak government spending. You will note that we have been saying much of the same things, except for government spending and capital spending. Government spending is a negative by any measure because it sucks money out of the private economy and spends it on things that the government wants which are usually unproductive. Such fiscal stimulus has never worked. Dr. Hunt takes the conventional view on this. What he does bring out with regard to capital spending is interesting: the accelerated depreciation rules expired on December 31, 2011, which removes additional incentives for businesses to spend on capital equipment. Kudos there. What that means is the capital spending boom has in part been driven by tax policy which has grabbed future expenditures and pushed them into the time frame of the tax benefits.
2. Debt is still too high and deleveraging is essential.
This is another theme that we have been stressing. His view comes from the Fisherian concern about excess debt. Mine comes from Mises’s concept of malinvestment of capital during the boom. Credit expansion as a result of artificially low interest rates and other inflationary policies by the Fed is the prime driver along with fractional reserve fiat money banking. Hunt also notes the problem with our low personal savings rate. He sees a low savings rate as an aid to personal debt reduction. Austrians agree, but savings are more important as a source of new capital for future growth.
Hunt says that the best way to deleverage is to “let it burn out,” a phrase he borrowed from another economist (Kindleberger). This is another important theme in Austrian economics. That is, the government should not interfere with the process of liquidating failed projects and related debt. He sees it mainly in terms of “moral hazard” (bailouts only encourage future reckless behavior) where we Austrians see it as being necessary for a quick recovery (redirect capital from unproductive assets to productive ones). Like the Austrians, he says “extreme” indebtedness is a deterrent to growth (see #3).
3. We are close to a debt tipping point similar to Europe.
His main theme in this interview is debt, private and public: it is far too high. He stresses that when public debt reaches a point where a government’s fiscal needs to repay debt and fund mandatory programs is too high relative to existing revenues, it will overwhelm an economy—no one will lend to the government and the only answer is lower spending (austerity; not politically popular—see Greece), higher taxes (bad for the economy), or default. Unfunded liabilities, combined with an aging population, only can mean that debt levels in Europe will increase in the future. This he sees as a ticking time bomb. There is some interesting data here on total public and private debt-to-GDP ratios: Europe (450%); Japan (500%); U.S. (350%). He believes the U.S. is heading dangerously higher. These debt levels are at precipitous levels now and we will see the fallout from this soon. His discussion and warnings are well worth reading.
4. This is bullish for Treasurys.
Hoisington has been bullish on bonds, being bond investors, and points to a 20 year cycle where risk premia have not been sufficient to reward stock investors and where bonds have outperformed stocks (after price inflation). He says that after inflation, the historic bond yield mean is 2%, and that is where we are headed with long-term Treasurys. He is right. He recommends zeros as a relatively risk free investment. Their Wasatch-Hoisington Treasury Bond Fund was up 41%+ in 2011.
There many part of Dr. Hunt’s analysis where I think he is quite wrong. But, he reminds me of some other very sharp economists and investors who look at the world and see what it actually is rather than what they want it to be, despite their theoretical flaws. I put David Rosenberg and Ray Dalio in that category. Even Bill Gross, whom I have thrown onto my pile of Crony Capitalists, has jumped on the recession bandwagon. Despite his Fisherian approach, Hunt comes to many correct conclusions and his other conventional views don’t detract from his insight.
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