After reading this long, but excellent interview with the Chief Economist at Hoisington Asset Management, I’m left rethinking my previously reluctantly bullish view on risk assets broadly and equities in particular. I had been thinking that global political and monetary forces would be effective in their reflationary efforts if for no other reason than persistence or bullheadedness and lack of viable attractive alternatives. If they want inflation and keep running the printing presses in a global race to debasement, eventually you’ll get what you wished for – and in that environment you had better own something that can keep up.
After reading this this, I’m not so sure. Because of the amount of indebtedness globally and the level of delevering required to get to sustainable levels – pumping more money into the system may never result in the reinvigorated economic growth it is attempting to achieve. and the bigger danger is that it will lull us back into complacency allowing us to keep forestalling dealing with unpleasant reality that the structure of the current global economy is far from stable or sustainable.
He goes into some detail on the current global debt mess, the implications this is likely to have on the US and global economies, and a good amount of historical context for thinking about the current environment.
My main takeaways are: 1)The US is the prettiest ugly girl in the room, 2) Exports are likely to be under pressure by sustained relative strength of the dollar, 3) Real growth is going to be scarce for a really long time, 4) Longer term, austerity measures are the only answer – we’re not going to grow out of this problem or solve it with debt stimulus.
The folks at Hoisington own long duration Treasuries and are bullish on them – definitely out of consensus – but they’ve been really right – and they put together a pretty compelling argument that this positioning is appropriate going forward.