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Hoisington Q4 14 Review And Outlook

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Van Hoisington and Lacy Hunt hit the nail very fairly and very squarely on the head, again imo. Beautifully clear thinking, well presented.

Worth a read every quarter imo


"The proximate cause for the current economic maladies and continuing downshift of economic activity has been the overaccumulation of debt. In many cases debt funded the purchase of consumable and nonproductive assets, which failed to create a future stream of revenue to repay the debt. This circumstance means that existing and future income has to cover, not only current outlays, but also past expenditures in the form of interest and repayment of debt. Efforts to spur spending through relaxed credit standards, i.e. lower interest rates, minimal down payments, etc., to boost current consumption, merely adds to the total indebtedness. According to Deleveraging? What Deleveraging? (Geneva Report on the World Economy, Report 16) total debt to GDP ratios are 35% higher today than at the initiation of the 2008 crisis."

Followed by a lovely assessment of 'currency wars'

"Recognizing the economic malaise, various economies, including that of the U.S., have instituted policies to take an increasing “market share” from the world’s competitive, slow growing marketplace...

...Historical experience in the period from 1926 to the start of World War II (WWII) indicates this process of competitive devaluations impairs global activity, spurs disinflationary or deflationary trends and engenders instability in world financial markets."

Is there a lesson from history?

"It is interesting to ponder the ultimate outcome of this process, which ended with World War II. The extreme over-indebtedness, which precipitated the process, had not been reversed. Thus, without WWII, this so-called “race to the bottom” could have continued on for years."

"The existence of over-indebtedness, and its resulting restraint on growth and inflation, has forced governments today, as in the past, to attempt to escape these poor economic conditions by spurring their exports or taking market share from other economies. As shown above, it is a fruitless exercise with harmful side effects."

The conclusion concerns US Treasury yields - which is the main market in which Hoisington advises:

"Conditions will be sufficiently lackluster that the Federal Reserve will have little choice in their overused bag of tricks but to stand pat and watch their previous mistakes filter through to worsening economic conditions. Interest rates will of course be volatile during the year as expectations shift, yet the low inflationary environment will bring about new lows in yields in 2015 in the intermediate- and long-term maturities of U.S. Treasury securities."

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an earlier quarterly review nodded to the fact that subprime lending was increasing again in the US

here is another analysis that has twigged the same thing too


'Nonprime': http://www.bloomberg.com/news/articles/2014-01-29/subprime-called-safer-makes-comeback-as-nonprime-mortgages

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