Submitted by Taps Coogan on the 26th of April 2019 to The Sounding Line.
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Hoisington Investment Management’s Lacy Hunt recently spoke with Macro Voices about his outlook for the global economy and credit markets in a wide ranging and fascinating interview.
Dr. Lacy Hunt:
“The overriding concern for us is that the US economy, and all of the other major players in the global economy, are extremely over-indebted and this debt is a hindrance to growth and it is also a factor that retards inflation and is the main ingredient that has controlled the environment of low interest rates for an elongated period of time. And it has been our view that trying to solve and indebtedness problem by taking on more debt is not the solution, that it only aggravates. You can take on more debt so many times, as we have done, and there is a transitory benefit to the economy, but the benefit fades very quickly. And as a result of that, the transitory spurts in economic activity and inflation, which do occur, are relatively short lived and they give way to periods of weaker economic activity and lower inflation and lower interest rates. And as long as the indebtedness problem remains at the forefront of the domestic and global economic situation, it’s our view that we are going to continue to persist with this lower inflation and interest rate environment for a longer period of time.”
“The economy is very weak. We are in a downturn. The economy held up reasonably well in the first quarter, principally because of a very substantial drop in the current account deficit, which contributed about 1% to GDP growth in the first quarter and also a very sizable increase in inventory investment in the first quarter after a large contribution to growth from inventories in the fourth quarter. So, the first quarter’s growth rate will start off somewhere around 2.5%, which is more or less about the same as it was in the fourth quarter, but more forward looking elements of the economy deteriorated. The rate of growth in consumer spending was only a 1.5% annual rate in the first quarter, down from 2.5% in the fourth quarter. In fact, it looks like the six-month rate of growth in real consumer spending for the latest six month period is approximately the weakest since 2013, which is a very significant statement… By the end of the year I think growth will be only barely positive, perhaps even stationary…”
“A couple of things that we are looking at suggest this: the Federal Reserve has engineered a very significant monetary deceleration, one that has reduced the rate of growth in bank credit and money supply in the United States to very weak levels and the Federal Reserve’s very restrictive policy has reduced world dollar liquidity which has in turn caused a major monetary deceleration in Europe, Japan, and China. And the Fed’s restraint has also resulted in a synchronized global downturn. In fact, the downturn is more significant in Europe and Japan than in the United States. Now, a lot of folks are optimistic because the Chinese pumped in a record amount of new debt in the first three months of this year and they’re assuming this new surge in Chinese debt will lift the Chinese economy and the Chinese economy will provide some propulsion to the global economy. But one of our critical points is that when one looks at the production function of the US and the global economy, the overuse of a factor of production such as debt capital results in diminishing returns at some point and we think the Chinese economy is at that point. So, contrary to most folks that are very optimistic about China’s growth picking up significantly as we go throughout the year, we expect that the huge injection in debt will be very short lived and that the Chinese economy will falter as we move into the later part of the year. We think this synchronized global downturn is going to be very very difficult to shake.”
There is much more to the interview, so enjoy it above.
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