Submitted by Taps Coogan on the 2nd of March 2019 to The Sounding Line.
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Hoisington Investment Management’s Lacy Hunt and CME Group Board Member, Yra Harris, recently spoke with FRA about the outlook for the global economy, interest rates, and inflation. Dr. Hunt, who has been correctly forecasting lower long term interest rates and slowing global growth for years, feels that the economic recovery from the Coronavirus outbreak will be slow and weak.
Some excerpts from Dr. Lacy Hunt:
“As we came into this year, our view was that we would see weaker economic growth, slower inflation, and lower long term bond yields… The first argument was that the domestic and global economy is experiencing a massive debt overhang. We have too much debt and too much of the wrong type of debt. It’s triggering the law of diminishing returns which is making economic activity weaker not stronger and that the general approach remains that we are trying to solve an indebtedness problem by taking on more debt and we are getting counter-productive results. The second consideration that led us to this conclusion was that we felt that there was a considerable deterioration in global economic growth in 2019. The key metric that we are looking at there was that the volume of global trade declined by 0.6% last year, which was only the third decline since 1980 and the other two were in the very deep recessions of 1982 and 2009. Historically, world trade growth is normally 5%… and global GDP growth has been about 2.75%… Moreover, trade does not typically turn down until you are already in a recession, which suggests that we were very vulnerable and very frail. The third consideration that we were looking at is that in spite of the three cuts in the federal funds rates and a $300 odd-billion increase in the Fed’s balance sheet, and an acceleration in M2 growth, that the thrust of monetary policy was still constrictive. There are very long lags here… We have been experiencing declining trends in velocity (of money) and we have had declines in velocity for five consecutive quarters, which means that the actions taken by the Federal Reserve have been trapped in the financial markets… Another consideration that pointed to weaker growth and inflation, and lower bond yields, is that corporate profits have been stagnating for a considerable period of time. In fact, since the second quarter of 2014, profits have dropped about 4%. Our view is that the stock market is not a good leading indicator. In fact, it’s a worthless leading indicator… Finally, we feel that one of the conditions that has been retarding growth for many years now has been very weak demographics. Global propitiation (growth) last year was the slowest in about 80 years. In the United States, our population growth was only about 0.5% per annum, which was the lowest since 1919, which was the year of the (Spanish) flu virus… It’s very difficult, on a consistent basis, to overcome those negative demographics.”
“I don’t have any knowledge of viruses and whether they can be contained or how long they will last. the only perspective that I will add is that once and if this is contained, there will be a very difficult recovery. There will be a recovery, but it will not be ‘V’ shaped. The major economies of the world are just too fragile with too many problems…”
The only thing that I would add to the discussion above is that a slow economic recovery does not necessarily mean a slow recovery in financial asset prices. In fact, this expansion has produced the lowest correlation on record between the two.
There is much more to the interview, so enjoy it above.
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