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Below is a synopsis of a report* by none other than John Mauldin in his latest Outside the
Box commentary** on Hoisington Investment Management Quarterly Review and Outlook Third Quarter 2012. Words: 507
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Mauldin says, in part:
Van Hoisington and Lacy Hunt do a masterful job of turning data points into cogent, well-argued themes and this month they waste no time in dissecting the Fed’s recent move to QE3 and similar efforts in Europe, arriving at the conclusion that:
While prices for risk assets have improved, governments have not been able to address underlying debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies.
Their expectation: global recession. The only issue left to sort out, they say, is How deep will the downturn be?
They make the interesting observation that with each injection of liquidity by the Fed, commodity prices have surged:
During QE1 & QE2 wholesale gasoline prices jumped 30% and 37%, respectively, and the Goldman Sachs Commodity Food Index (GSCI-Food) rose 7% and 22%, respectively. From the time the press reported that the Fed was moving toward QE3, both gasoline and the GSCI Food index jumped by 19%, through the end of the 3rd quarter.
The QE picture gets even muddier. The unintended consequence of the Fed’s actions, say Lacy and Van, has been to actually slow economic activity:
“The CPI rose significantly in QE1 and QE2 (Chart 1).
These price increases had a devastating effect on worker’s incomes (Chart 2).
Wages did not immediately respond to commodity price changes; therefore, there was an approximate 3% decline in real average hourly earnings in both instances. It is true that stock prices also rose along with commodity prices (S&P plus 36% and 24%, respectively, in QE1 and QE2), however, median households hold a small portion of equities, and thus received minimal wealth benefit.”
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They proceed to tear apart the wealth effect that the Fed is banking on to restimulate the economy, drawing on several solid studies. They also make the key point that:
“When the Fed actions lead to higher food and fuel prices, the shock wave reverberates around the world, with many foreign economies being hit adversely. When prices of basic necessities rise, the greatest burden is on those with the lowest incomes since more of their budget is allocated to the basic necessities such as food and fuel.”
Conclusion
The next few years are not going to be pretty. We’re looking right into the teeth of a rolling global deleveraging recession—the End Game, I’ve called it – and the decisions we make in the next couple years about how to handle our debts and budget deficits here in the U.S., in Europe, in China, in Japan, and elsewhere, are going to be absolutely crucial.
*Original report: http://www.hoisingtonmgt.com/pdf/HIM2012Q3NP.pdf
** Original source of article: http://www.mauldineconomics.com/outsidethebox/hoisington-quarterly-review-and-outlook/
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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