I have always liked contrarian thinking, especially if it goes against the usual sound bites dispensed by the government or even Wall Street.
Forbes had this to say in “What recovery? This Bond Investor Says It’s A Hoax:”
The markets may be saying a recovery is imminent but a famed bond investor with a record of prescient calls thinks that’s bunk–and is sticking with a big bet the slump is here to stay.
A sort of gunslinger of the fixed-income set, Van R. Hoisington of Austin, Texas, says he won’t budge from his risky strategy of letting nearly half of the $4 billion he manages ride on long-dated, zero-coupon government bonds. Those can tank on even a whiff of recovery.
It’s a bet that has worked out wonderfully for his eponymous money management firm–until recently. In the last three years a mutual fund run by Hoisington Investment Management has returned 10% annually vs. 6.4% for the broad bond market. But the fund has fallen 19% so far this year as signs emerge the economy may be bottoming.
On Friday came more bad news, so to speak, for the 68-year-old investor.
The Commerce Department reported that housing starts unexpectedly rose 3.6% in June. Investors saw that as yet another sign the economy is reviving and dumped Treasuries, including Hoisington’s zeroes, in favor of other assets. That in turn pushed the yield on the benchmark 10-year note to 3.64%, the highest in nearly a month.
Ever the contrarian, Hoisington, along with his partner, Lacy H. Hunt, believe the market’s got it wrong. The yield will shift direction and fall, they say, eventually hitting 1.5% or so.
Now that’s low. Even during the depths of the credit crisis, when many investors feared capitalism itself was in peril, the 10-year yield never sunk that far–hitting 2.06% after Lehman Brothers failed.
…
In the summer of 2007, when economists from Goldman Sachs and Merrill Lynch were pulling back from their forecast of a slowing economy, Hoisington predicted a recession in a year and a 10-year yield of 3.5% within two. He turned out right on both counts.
Now the markets are suggesting the economy is on the mend again and inflation, that scourge of fixed-income investors, is around the corner.
Hoisington advice? Forget what most investors think and focus on the only two things that matter for inflation: demand and supply. And right now, he says, there’s too little demand and too much supply for prices to rise.
In fact he thinks inflation’s opposite will prevail–deflation, or a sustained fall in prices. He points to a litany of depressing figures of late, including factories running at their lowest levels in six decades, unemployment broadly defined at all-time highs and people lucky enough to have jobs working the fewest hours per week on record.
And if that isn’t bad enough, Hoisington argues all the new government spending eventually will slow the economy, not speed it up. He says bigger federal outlays mean bigger federal debt, crowding out private investment to devastating effect. While I don’t necessarily agree with Hoisington’s investment approach, I do agree with him on the state of the economy and the effect of government spending. Sooner or later, even Wall Street with its infinite wisdom will have to realize that the alleged recovery is not on track as hoped for. Once that happens, you will see the current trend reverse and head the other way. I am not sure when that will happen, but I suggest for you to be prepared to deal with it.
[Emphasis added]
Comments 7
I too am concerned that the market surge may be a bit of a paper tiger but here is my thought: The market lost (S&P;) nearly 57 of it's value from 1500 to approx 675. A portion of that was probably market correction but a portion was also due to just a combination of negative economic factors. So the drop was probably below what a true valuation adjustment should have been.
So the question is: Has the surge brought prices back up to a more in line level? My guess is yes, meaning a huge dropoff may not be in the works, but if the market goes much higher at this point than I think a steeper drop is likely considering the huge underlying problems we still have.
Let's face it: most companies are not in a growth mode right now. If the housing recovery becomes sustained and layoffs become less common than hiring than maybe the bulls can really return. I agree that it's good to be in market now but, as Uli states, an exit is essential.
CC, Cincy, OH
Today, there was an interesting article, titled "Hope Builds for the Economy and the Stock Market Surges" in "The Washington Post." The article said that the stock market's recent gains seemed to be due to an absence of bad news rather than an emergence of good news. The artlele went on to say that we were probably at the bottom of the recession and would see and it would be over in several months. Interesting interpretation of the facts. While home sales increased and the number of people filing unemployment claims decreased, this, among other things did seem to me to be an emergence of bad news, which the market, and some high-profile prognosticators, have been paying little heed to for several months.
The article went on to say that housing prices are still falling, while home sales are rising. I have to wonder if a lot of these sale are foreclosure sales, as the government keeps saying that the banks who were given the TARP money haven't used it to stop foreclosures. It also said there was an oversupply of homes for sale.
There was also other bad news. While there were less jobless claims, the jobless situation, overall, is terrible, and according to many prominent economists, including Fed Chair Bernanke, it threatens to bog down the whole economy. I think we also have to consider, not only the unemployed, but the partially employed. The partially employed were not recorded during the Great Depression, but the partially employed, now, is higher than the unemployed, but it gets very little attention.
Corporate earnings are not really, really bad, in general, but they are usually considerably under what they were a year ago. But the corporations are trying to offset this by "prior announcementments" that their earnings will be lower, so that when they do come out lower it's not a surprise; or they might be higher than the "prior announcement" and be considered positively. These corporations are really doing the "spin doctor" routine with this earnings game.
In another section of the "Post," either today or yesterday — I can't remember — it said that the federal outlays probably were really going to slow down the economy. My father, who is 90, lived through the Great Depression when there was deflation. He said it stopped business transactions dead in their tracks. You could not count on what was going to happen, so nothing happened. Deflation would be a different animal than almost anyone who is alive, in this country, has seen. It sounds monsterous. If we're headed for deflation, I think we're in real trouble.
While the stock market is doing well, I don't think it's a good mirror of our economy right now. Although the technical indicators are there that it will keep on being bullish for a while, at least, I think it's running on hope, a lot of people wanting to get the money they lost in the market crash back, and big institutional fund managers "needing" to have their client's money in the market, instead of having their client's money in cash, in order to appease their clients. It really doesn't matter what it's running on, though, if you're making money from it from a monetary viewpoint, but I am very concerned about our economy.
My father said, during the Great Depression, if you had a job you weren't hurt too badly, but if you didn't have a job it was a nightmare. While some of us are doing OK, there are a lot of people, in our country, who are hurting very much. I think we've probably done some things, which haven't helped them and also, in the long-term are going to make the economy worse.
I can remember not too long ago when 125K-150k jobs were not created each month to soak up the new people that come into the economy every month there was a dive in the mkt. Now the operative is if there isnt 665K job losses each month that is a good reason to spark a rally.
Seems as I remember when the mkt was at 660 or so folks that run fundamental numbers said that the classic earnings per share were still a bit high.
So if yu call radical cost cutting and massive personnel cuts a pathway to nirvana then the rally and profits have legs. If you think not of it is sustained with 11% unemployment and 75% of the economy is spending well then wait for the feature event.
I think more & more Wall St and the 10% that have 85% of the wealth are in a real disconnect with so called main street and the other 90% or at least 60% that is feeling the recession in some form or another the least of which is higher fees everywhere and reduced services. Not an atmosphere for a thriving entrepreneurial spirit to carve out some of that consumer (non-existent)disposable income .
Vermcj,
Well said… my sentiments exactly.
Ulli…
Exactly, too!
I believe Hoisington is right that supply and demand are very operative. There are too many houses for sale, so housing prices are down. There are more goods and services than people want to spend their dollars on (for those who have disposable dollars), so this drags down the economy. And what a joke sending out $250 to every person on Social Security was, regardless of their income. Does our government really think that amount of money is going to make any significant difference to stimulate the economy?
There is a disconnect between Main Street and Wall Street. People investing in the stock market have disposable income. It seems they are not too concerned about the state of the economy and are mostly overlooking the bad news (although there is less bad news than earlier). This is different than the way the stock market traditionally worked; it used to react more negatively to bad news than it reacted favorably to good news. It's puzzling. Anyway, from an investor's fairly short-term, at least, point of view, the market looks bullish. The technical and analytical indicators don't show bearish signs. Why shouldn't people with money be in the market and make money? It's the American way.
However, it does highlight what I think is an alarming trend in America. People, even of very modest means, had a shot at achieving "the American dream." There was an elaborate chart, in "The Washington Post" about how the administration hopes to get money to small businesses. It was too complicated for me (and I have 12 years of college)to understand, so I imagine it's going to be too convoluted to work. As the second anonymous commenter wrote, what's happening now is not condusive for the entrepeneurial spirit upon which America was built. This is an example of some of what saddens me about the changes in our country, which could have been avoided and still could be improved.
I disagree somewhat with the previous writer who states that the times are not conducive to the entrepreneurial spirit. On the contrary, the last few years have proven that there is all kinds of entrepreneurial activity–the only problem is that it is centered in three (bad) places: Wall Street, Investment Banking, and Washington D.C. Obviously, it is largely the wrong kind. The activity of the first two make enormous money and profits for themselves by trading with each other, charging enormous fees, etc. but produce nothing tangible such as goods or needed services. Like our health care system, it is based on shuffling paper. That means it takes away from everyone else, and as someone else pointed out, it is carried out by the top 10% of the nation. Much of the remainder hurts. Hardly a road to inflation when unemployment increases, people won't buy (in an economy based on consumption), they start saving vigorously, and sit tight because no one knows where we are heading. The third entity, government, keeps doing stupid things that interfere with the entrepreneurial drive, turns capitalism into socialism but only for the wealthy and powerful, worry about Wall Street while telling the failing States (often because of demands by the Feds) to drop dead, etc., etc. Isn't it interesting, that China, a controlled communist, but partly capitalist, government has avoided some of our problems by throwing money at their infrastructure rather than propping up insolvent enterprises? Where can any of this lead, but more deflation and more misery, until the going "thinking" changes, and then we will be in for massive inflation, and very quickly. Can't print money like it's going out of style and avoid the inevitable.
I don't disagree with Cacurmudgeon about entrepeneuralship. Wall Street, investment banking, and Washington are not good examples of entrepenualship, so I didn't even bother to mention them. I live in the Washington area, though, and not much entrepeneurialship is happening here. In fact, quite the opposite; businesses are closing at a far greater rate than I see new ones opening. I'm not so sure about investment banking, either. I think it might be a job (I won't say profession) of the past, but I don't know and really don't care. If they can find suckers who will let them "invest" their money with them for IPOs, I guess it's "buyer beware" time.
I think you're probably right, though, that instead of deflation, which is a possibility, with this recession and goofy stimulus stuff, which most likely will lead to inflation, we probably will have tremendous inflation. I guess if I had to choose between the two, I'd choose inflation. Do we get to pick out poison?