Hard Times Are Upon Us

04/16/2008 12:00 am EST


Van Hoisington

President & Senior Investment Officer, Hoisington Investment Management Company

Van Hoisington, founder, president, and chairman, HIMCO, did not paint a rosy picture for the US economy in his keynote address

Sometimes, you just don't hear what you want to! Van Hoisington opened the recent Las Vegas Financial Advisor's Symposium by telling attendees that the US is going to be in for some hard times over the next couple of years.

He built his support for this assessment of the domestic economy by first giving a brief history lesson of the relationship between bond yields and inflation, noting that since 1985, yields have declined from 9% to less than 2% today. And since he expects the US economy to continue to weaken, his forecast is for continued falling yields. Yet, in recessionary times, he feels long-term bonds are still very desirable as prices will go up and coupons remain stable.

Hoisington also anticipates that the declining price of labor and rising unemployment will also affect the US dramatically.

Citing as evidence the leading economic index as well as the ratio of coincident to lagging economic index, Hoisington told his audience that we are currently in a recession, but the key to its longevity lies with the fate of personal consumption expenditures. He noted that despite slower job and income growth in the recent past, consumers propped up spending by tapping the equity in their homes-more than $51 billion per quarter. That avenue for funds has now disappeared for the most part-due to deteriorating house prices as well as higher proportional mortgage levels-two situations that are expected to put a big damper on spending in the near future.

Compounding the problem is our worsening savings rate, declining from around 7% in 1948 to some 0.3% in the last three years. Should Americans' concern about the economy drive them to increase their savings, consumer spending will take a direct hit from that normally 'positive' plan.

And lest that isn't enough good news, Hoisington put the kibosh on the current 'decoupling' school of thought-saying that since 35% of all the goods we purchase come from overseas, and exports account for 46% of the economy of developing nations, our slowdown becomes the world's slowdown.

Wrapping up his remarks, Hoisington noted two additional important factors that don't bode well for our near-term economy:

1) The new stimulus program will not help. He cited statistics from the 2001 stimulus initiative, commenting that just $1 of every $4 was actually spent, and 65% of the spending went overseas.

2) The total reserves of depository institutions have been negative in the last two years and continues to be very tight, a big worry for long-term investors.

However, Hoisington did end his talk with one bright note, saying that the long-term drop in the dollar may be near an end, as the trade deficit seems to be on an improving trend, and the dollar may get a boost from that.

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