Tuesday, February 14, 2012

John Mauldin's Outside The Box: The Pain WILL be Shared


Face The Music

Road Back To Prosperty Is Through Shared Sacrifice, Says Lacy Hunt

Last time Dr. Lacy Hunt, the chief economist at Austin, TX-basedHoisington Investment Managementwas interviewed in these pages, in July, 2009, the rebound in stocks from their crisis lows was only months old — yet he remained firmly in the bull camp— on bonds. As it turns out, Lacy, and the entire portfolio management team at Hoisington, led since the firm's founding by Van R. Hoisington, couldn't have been proven more right: Rates, which "couldn't go lower" have continued to sink. Much to the benefit of Hoisington's institutional clients and investors in the Wasatch-Hoisington U.S. Treasury Fund, which the firm sub-advises. When I gave Lacy a call earlier this week, he — always a gentleman and a scholar— patiently explained not only why he's still bullish on long Treasuries, but why there's simply no easy exit from the debt morass in which the whole economy, public and private, is trapped. Listen in.
Happy New Year, Lacy. And thanks for sending all those charts to background me for our conversation. I have to say the first one stopped me — showing debt as a percentage of U.S. GDP all the way back to 1870? What data goes back that far?
Dr. Robert Gordonat Northwestern Universityhas been very helpful to me, recreating a lot of data. The National Income and Product Accounts (NIPA) from the Bureau of Economic Analysis (BEA) only start in '29. But NBER (the National Bureau of Economic Research) funded two studies, one by Christina Romer and the other by Robert Gordon, to estimate the nation's GDP back to 1870. So we have those data sets. They're not identical, obviously, but what most economists do, including me, is use an average of the Romer and the Gordon estimates, which seems to work out pretty well.
Still, I suspect most folks looking at a line on a chart interpret it as "historical fact" instead of as an estimate based on spotty data on the workings of a very different economic environment.
Well, what the profession is saying is that economic propositions need to be tested and verified over as complete a sample as possible. Admittedly, some of these earlier periods, you didn't have a central bank; you didn't have an income tax; you had various political regimes; sometimes you were on the gold standard, sometimes you were off. The point is, most people feel that these institutional differences shouldn't obscure the verifiable observation of basic economic relationships. So you want to test this over as much time as you possibly can and I think that's a reasonable proposition. Anyway, that's my approach, and that's increasingly the approach in the profession.

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