Here are a few excerpts from the Quarterly Review of Hoisington Investment Management company. Hoisington manages about $4 billion in various funds, both public and private. Their website is:
http://www.hoisingtonmgt.com/
There are numerous other very interesting insights in this report, but they are too many to quote here. The authors studied debt bubbles and debt deflation periods in several countries over a period of 150 years, and concluded that the economy will show little or no growth for at least three years. In fact, they said it is more likely to persist for a decade of more! During the periods of debt deflation they studied, all of them resulted in periods of economic "further wealth drain" for 20 years! They concluded with the following:Presently, major sectors of the U.S. economy are experiencing a debt deflation that is causing a massive destruction of wealth, thereby curtailing jobs, income and spending. Irving Fisher who, according to Friedman, was the most brilliant of all U.S. economists has noted that when the economy enters a period of "debt and price disturbances", those forces will eventually engulf the economy... Once extreme over indebtedness occurs, fiscal and monetary policy become impotent in spurring economic growth because money velocity will decline -- something that is currently happening. Individuals and businesses struggle to repay debt with harder dollars, and saving begins to rise as caution prevails.
The debt level of the U.S. has reached unprecedented proportions. More important than the level, however, is the fact that for the last few years the debt was improperly loaned and financed... This type of lending activity implies there is little likelihood of repayment of principal and interest. Stock prices have plunged, and with home prices plummeting, and commercial and industrial properties losing value, a deflation of assets has clearly begun while the underlying debt remains constant.
Will this deflation overwhelm the best efforts of the Federal Reserve, invalidate Friedman's theory and prove Fisher correct? Most naturally feel and hope that the superiority of unbridled monetary and fiscal stimulus will overwhelm incipient price declines and stem the expanding cyclical downturn in economic growth. Our judgment is that the power of monetary policy revolves around the ability to initiate a new borrowing and lending cycle. This can only happen if lenders are willing to lend and borrowers are wanting and able to borrow. Presently, neither are so inclined. If price declines in assets continue, then Shakespeare's admonition of "neither a borrower nor a lender be" will become the economic mantra, meaning that a period of very low nominal growth will likely extend for a decade.
...The Fed has invented many new vehicles for injecting liquidity into the economy, but few outward signs suggest that these actions are engendering a recovery. Our analysis suggests that the Fed will not achieve the desired results...
Fiscal stimulus will not work well, and may even be counterproductive, and this applies to both spending programs and to certain tax programs as well...
The private sector has demonstrated the greater flexibility and creativity to expand the economic pie, increasing productivity and thereby improving living standards for all. The risk is that increased federal borrowing will stunt the private sector's ability to grow.
The entire quarterly review can be read here. Very interesting read without political spin or agenda! Thanks to Hoisington for making the report public!While the historical record indicates that the ultimate low in Treasury yields lies years away, the path to the ultimate low will be anything but smooth or linear as significant volatility continues. As the experience from... history indicates, many "false dawns" will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand. During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase. If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation.
