Dr. Lacy Hunt is Executive Vice President of Hoisington Investment Management Company, which has compiled a long time investment record, mostly by staying long and strong Treasury bonds, a profitable stance in light of the US, and world, anemic “recovery” the last few year. From an interview with Erico Matias Tavares of Sinclair & Co., via linked in.com (bold type added):
We had the great pleasure of speaking with Dr. Lacy H. Hunt on the current state of the economy, the limitations of monetary policy and potential solutions to the overindebtedness problem in the main global economies.
Erico Tavares: Dr. Hunt, thank you for being with us today. Your firm manages over $6 billion in treasuries. With the S&P500 at record highs, do you share equity investors’ enthusiasm with the economic prospects of America?
Lacy Hunt: I think the S&P is disconnected from the fundamentals in the US economy. Growth last year was a quarter slower than it was in 2013. We’re on the cusp of either zero inflation or deflation. Corporate profits using the Bureau of Economic Analysis numbers, compiled using data from the Internal Revenue Service, showed year over declines in all the first three quarters of last year (4Q is not yet available). In the third quarter, the after-tax profits adjusted for inventory gains/losses and over/under depreciation were 7% below a year ago.
The standard of living declined again in 2014. And a lot of the growth we had in 2014 really was a massive building of inventories, which is often the case when stock prices are high and top line is decelerating.
The economy enters 2015 in very weak shape. None of the big ticket sectors are doing well. Capital spending is declining, being paced by extreme weakness in oil & gas drilling, which has really been the driving force in manufacturing over the last four years. The best you can say about the housing sector is that it is flat. Not a very important sector.
Vehicle sales are below the best levels of last year and the trade sector is deteriorating. It is very difficult to move the US economy forward by selling things over the counter and through the shopping cart. The US economy is very fragile. And the fragility is highlighted by the fact that firms simply do not have pricing power.
ET: Historically the S&P used to lead the economic cycle by a few months, sometimes there was a lag. In a sense the signaling of equity markets has been muffled by the excitement about central bank intervention. Is that correct?
LH: Well I’m not an equity investor but I don’t believe in the wealth effect. While a theoretical possibility, it is not supported by economic fact. Let’s go back and look at a few historical examples.
The stock market did not turn down in 1927 and then the Great Depression started two years later. The stock market only turned down in 1929 in the same year as the economy. The stock market didn’t turn down in 1998, two years before the recession. It turned down coincidentally. The fact of the matter is the stock market is not a very good indicator. The wealth effect is a theoretical possibility but no one can really measure it for the reasons that I discussed.
Another problem here is that the threshold studies done by econometricians who look at folks that have income less than $130,000 can’t even find a wealth effect and for good reason. These folks don’t have equity holdings. Upper income individuals do, but they are not income constrained. So the fact of the matter is the wealth effect is a theoretical possibility but nothing more than that. And the stock market is not a good guide to the economy.
https://www.linkedin.com/pulse/search-solutions-interview-dr-lacy-h-hunt-erico-matias-tavares
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