Publication: Investor's Notebook
LACY HUNT EXPECT LOWER INTEREST RATES | |
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Investor's Insight - November 28, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
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LACY HUNT: EXPECT LOWER INTEREST RATES
by Scott Burns
AUSTIN, Texas -- Economist Lacy Hunt takes a measured
view of things. That's what economists do, of course,
except for the ones on television. But my regular pil-
grimage to the offices of Hoisington Investment Manage-
ment is a mission in grounding -- Hunt will have assembl-
ed one of the best economic chart books in the business.
We're talking about a good deal more than pretty pictures
here.
Over the last 15 and 20 years the fixed-income institu-
tional portfolios managed by Van Hoisington, Hunt and
other team members have beaten the Lehman Aggregate Bond
index by about 2 percentage points a year.
That's a long time to be making good calls.
It's also a margin of superiority that few can claim.
Skeptics should consider the institutional shares of the
fabled PIMCO Total Return fund, run by the equally fabled
Bill Gross. Its annualized return over the last 15 years
is only 88 basis points ahead of the Lehman Aggregate Bond
index.
Listening here is good.
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"The yield curve is inverted," Hunt says. Noting that
short-term rates are higher than the yield on a 10-year
Treasury, he points out that recessions nearly always
follow. Add the decline in the leading economic ind-
icators index and that makes it virtually certain we'll
have a slowdown next year. Maybe a recession.
No, he isn't ready to declare that recession is in-
evitable. Oil prices have declined enough that we just
might luck through. But the odds aren't good.
Another big factor is the decline in the growth of
money. "We've had two years of contraction. The Fed
has brought monetary growth down rather significantly,"
he says.
His biggest concern: housing. "It's only 6 percent of
GDP," he points out. "But it has a disproportionate
impact on employment and an enormously disproportionate
impact on consumer spending."
It has been so in every economic cycle, Hunt explains,
but it is more so this time because of the amount of
money people have been borrowing out of their houses
to support their spending. With both housing starts
and housing prices turning down, we'll get a double
whammy. The borrowing will end and, with it, so will
the spending. Cash-out refinancing never amounted to
more than $50 billion in a year before 2000, his charts
show, but is running at more than $75 billion a quarter
so far this year.
It will turn down.
Lots of people who were pouring concrete and nailing
up Sheetrock last year will be looking for work. Since
January 2002, Hunt points out, 1.3 million of the 5
million jobs created were related to housing. That's
26 percent of the total.
Needless to say, Hunt isn't alone in worrying about
the home price bubble. To cite an extreme, economist
Gary Schilling has gone on record expecting a 25 per-
cent decline in housing prices. This would literally
bankrupt millions of homeowners.
You'll be glad to know that Lacy Hunt isn't expecting
anything that extreme.
What's worrisome is that other sources of economic
strength don't look very promising to Hunt, either.
How about foreign consumer demand?
Not likely, he says.
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How about business investment and capital spending?
Hunt, always the proper economist, doesn't say
"fuhgeddaboutit" -- but he might as well have. "With
GDP slowing, it's very hard to believe capital spending
will continue."
The bigger picture -- the one beyond this economic cycle
-- is more positive. Hunt believes we have entered a new
period of global markets and productivity. Like the long
period from 1871 to 1930 -- with major increases in
agricultural, manufacturing and transportation product-
ivity -- we may be in a long period of low to nonexistent
inflation. Back then prices actually fell slightly every
year. They averaged a 0.2 percent decline annually. Treas-
ury yields averaged only 2.9 percent.
So interest rates may fall further still.
Could something happen to throw a monkey wrench into this
picture of benign deflation?
"Yes," Hunt says. "We have to worry about the law of un-
intended consequences. If the new Congress raises the tax
rates on investment income, it would put us in a bad pos-
ition. We can't compete internationally on labor costs.
So we've got to have strong capital investment. Raising
the taxes on capital would take away our edge."
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