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Strategies & Market Trends : Galapagos Islands -- Ignore unavailable to you. Want to Upgrade?

To: Jorj X Mckie who wrote (28938)	2/25/2003 11:27:14 AM
From: plugger301	Read Replies (1) \| Respond to of 57110

Aidono?

To: Jorj X Mckie who wrote (28938)	2/25/2003 11:28:30 AM
From: MulhollandDrive	Read Replies (1) \| Respond to of 57110

i think this article pretty well lays out what lies ahead on a fundamental level...of course TA is already confirming...xyz and i were commenting on the big negative wrt our lousy demographics....this article doesn't mention it specifically, but you can read between the lines. the debt overhang and overcapacity will simply have to be worked off...those of us positioned with little or no debt and cash will do fine in this environment, especially those unwilling to drink the cash out koolaid and decimating their RE equity. we see the "hunkering down" on the corporate level...and after a spending binge fueled by consumer debt, the consumer is sure to follow. chron.com Feb. 24, 2003, 12:33AM New view says 'debt deflation' to delay recovery By SCOTT BURNS Universal Press Syndicate AUSTIN -- After spending the better part of an afternoon with economist Lacy Hunt, I pondered, "What does it take to overcome a lifetime of conditioning?" That, as much as factual data, is the issue virtually all of us face. We're conditioned to fear inflation, to assume that recessions are dutifully followed by recoveries and to be wary of higher interest rates. Hunt and Van Hoisington, the two prime movers at Hoisington Investment Management Co., march to a different drummer. In their view, any recovery will be delayed and slow. Despite the apparent low level of interest rates, they believe rates are likely to decline further. This is far from the conventional wisdom. Nonetheless, the $3.6 billion in fixed-income investments the firm has under management is committed to exactly that future. So listen to the supporting facts that Hunt uses when he talks with his institutional clients. "Right now, we're moving into an economic environment that no one alive has any experience with. I think we're already in debt deflation." I asked what debt deflation was. "It occurs when debt levels are unmanageable. Money that might be spent comes out of spending and goes into debt reduction. If you look at Japan in the '90s, debt deflation was first. Price deflation followed. It was the same here in the Depression. "We've got the highest levels of debt (relative to output) since 1933. Check the bankruptcy figures." Hunt flipped through a barrage of charts: · Homeowner equity as a percent of total home values -- a decline from more than 80 percent in 1952 to about 56 percent today. Home values may be rising but, collectively, we're borrowing equity out of it faster than it comes in. · The highest residential mortgage foreclosure rate in 30 years. · A record level of business and consumer bankruptcies. · A rising ratio of debt to gross domestic product, now about 160 percent. How would people handle this? "There are two ways," said Hunt. "It can be handled through income or through wealth. But we've lost 2.2 million private sector jobs since December 2000. We're seeing the weakest wage increases since 1993. So we're not likely to handle it through (higher) income. We're in a debt deflation that will take time -- it may take years." I asked if this meant a liquidation of consumer assets: forced sales of houses, cars, boats, etc. Hunt didn't foresee anything that dramatic. He thought it would more likely work out as a long period of hunkering down. I asked if this recession was different from others. "Yes. The 1990s was an investment-led expansion, not a consumer-led expansion. It was the first such expansion since the '20s, and that was the first since the Grant administration after the Civil War -- the one where we built our national railroad network." He pointed out that all three periods had great excesses, corruption and misinvestment, and that all had ended with excess capacity, enormous debt and financial strain. I asked what the government could do. "There are no silver bullets for this. Neither monetary policy (changing interest rates) nor fiscal policy (stimulating the economy with new government spending) can do much. In fact, we've already had the second largest shift in fiscal stimulus since the Korean War." Pointing to another chart, Hunt observed that we'd gone from a 2.2 percent of GDP federal surplus to a 1.8 percent of GDP federal deficit, a 4 percent shift to stimulus. Another chart showed that state governments had done the same, shifting from a 0.6 percent of GDP surplus to a 0.5 percent of GDP deficit over the same period. Altogether, it was a whopping 5 percent shift. "That won't happen going forward," he observed. "The states will be increasing taxes and fees. No income tax cut or additional spending increase will be nearly as large, either." Hunt shrugged his shoulders. "Besides, if government spending was the key to prosperity, Japan would be in a stock market boom. They aren't." What do Hunt and Hoisington expect? Long-term Treasury yields as low as 3.5 percent.