Lacy Hunt at Hoisington Management has another sterling post in its third quarter review and outlook.

Here are some snips from the latest Hoisington Management Quarterly Review by Lacy Hunt.

 

World Dollar Liquidity

The Fed’s balance sheet constriction reduced world dollar liquidity, which is defined as the monetary base plus foreign central bank holdings of U.S. Treasuries at the Federal Reserve Bank in New York. This quantity effect also served to underpin strength in the U.S. dollar, which has had the result of draining foreign central bank holdings of U.S. Treasuries impacting foreign financial markets.

 

World Trade Volume

The more restrictive monetary conditions spread worldwide as the velocity of money fell sharply in all their countries to levels far below the United States. Not surprisingly, global economic growth moderated in concert with U.S. economic moderation. World trade volume, which has fallen over the past year, clearly points to the universal nature of current global downturn and the result has been a disinflationary pricing of goods.

 

Debt Overhang

Despite the evidence that monetary policy works with long lags, the Fed appears to be waiting for a downturn in the coincident economic indicators before attempting to “get ahead” of where the market has priced interest rates. The lags between initial inversion and recession have been variable but the market is presently within the historical lagged periods. The current overrestraint of Fed policy is why 5, 10, and 20-year Treasury security yields have not set new record lows, but it is only a matter of time.

 

Slumping Marginal Revenue Product of Debt

For the current three-year period, using the partially available data for 2019, each dollar of global debt generated only $0.42 of GDP growth in the major economic sectors, which was down 11.1% from ten years ago. This deterioration was greater in all the major foreign economies than in the United States.

The largest percentage decrease in debt productivity, of more than 38%, was registered in China over the past ten years. The decline in the marginal revenue product of debt in Japan, the United Kingdom (U.K.) and Europe were all more than two and one-half times greater than in the United States. Over the current three-year period, the debt productivity in the U.S. was $0.40, versus $0.38, $0.36 and $0.34 in the Euro currency zone, the U.K. and China, respectively.

 

Outlook

The global over indebtedness has clearly restrained growth, and therefore has had a profound disinflationary impact on every major economic sector of the world. This fact, coupled with an overzealous U.S. Central Bank have created the conditions for an economic contraction in the U.S. and abroad. This has also created a worldwide decline in inflation and inflationary expectations.

A quick and dramatic shift toward greater accommodation by the Fed could begin to shift momentum from contraction toward expansion. However, policy lags are long and slow to develop, therefore despite the remarkable decline in long term yields this year, we are maintaining our long duration holdings. A shift towards shorter duration portfolios would be appropriate when the forward-looking indicators of expansion, in the U.S. and abroad, begin to appear.

 

Quiet Bond King

I am pleased to have Lacy Hunt as a friend. We chat frequently.

Hoisington has been at the long end of the curve, and accurately so, for long time.

Last year, Lacy informed me that Hoisington's average duration was 20-21 years.

I asked again this morning, and got the same answer. Hoisington's average duration is still 20-21 years.

When Lacy shifts duration dramatically lower, it will represent a major tuning point for bonds.

I expect that is still off in the distance.

Meanwhile, please recall all the accolades given to the alleged "bond king" Bill Gross.

Yet, how many incorrect bond market tops did Gross call?

The quiet bond king all along has been Lacy Hunt, seeing no notoriety or fame, but deserving both.

This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD holding onto range, amid trade tensions, ahead of FOMC minutes

EUR/USD is trading around 1.1050. The US Senate's support of Hong Kong protesters has aggravated tensions with China. The Federal Reserve's meeting minutes are eyed.

EUR/USD News

GBP/USD remains pressured after the Johnson-Corbyn debate

GBP/USD is trading around 1.29, after Labour leader Corbyn beat expectations in his debate with PM Johnson. Further opinion polls are awaited. 

GBP/USD News

USD/JPY trades in red below 108.50 as 10-year US T-bond yield erases more than 2%

Dismal market mood helps JPY find demand on Wednesday. 10-year US Treasury bond yield erases more than 2%. US Dollar Index recovers to 98 area ahead of FOMC minutes.

USD/JPY News

US Dollar Index stays close to 98.00 ahead of FOMC

The US Dollar Index (DXY), which gauges the greenback vs. a basket of its main competitors, keeps the positive note albeit below earlier tops beyond the 98.00 mark.

US Dollar Index News

Cryptocurrencies: Flashing lights trying to misdirect anxious buyers

Bitcoin and Ripple look far from turning upwards in the short term. Ethereum can give the surprise of the year and take the bullish leadership.

Read more

Forex Majors

Cryptocurrencies

Signatures