What Recovery?

I have always liked contrarian thinking, especially if it goes against the usual sound bites dispensed by the government or even Wall Street.

Forbes had this to say in “What recovery? This Bond Investor Says It’s A Hoax:

The markets may be saying a recovery is imminent but a famed bond investor with a record of prescient calls thinks that’s bunk–and is sticking with a big bet the slump is here to stay.

A sort of gunslinger of the fixed-income set, Van R. Hoisington of Austin, Texas, says he won’t budge from his risky strategy of letting nearly half of the $4 billion he manages ride on long-dated, zero-coupon government bonds. Those can tank on even a whiff of recovery.

It’s a bet that has worked out wonderfully for his eponymous money management firm–until recently. In the last three years a mutual fund run by Hoisington Investment Management has returned 10% annually vs. 6.4% for the broad bond market. But the fund has fallen 19% so far this year as signs emerge the economy may be bottoming.

On Friday came more bad news, so to speak, for the 68-year-old investor.

The Commerce Department reported that housing starts unexpectedly rose 3.6% in June. Investors saw that as yet another sign the economy is reviving and dumped Treasuries, including Hoisington’s zeroes, in favor of other assets. That in turn pushed the yield on the benchmark 10-year note to 3.64%, the highest in nearly a month.

Ever the contrarian, Hoisington, along with his partner, Lacy H. Hunt, believe the market’s got it wrong. The yield will shift direction and fall, they say, eventually hitting 1.5% or so.

Now that’s low. Even during the depths of the credit crisis, when many investors feared capitalism itself was in peril, the 10-year yield never sunk that far–hitting 2.06% after Lehman Brothers failed.

In the summer of 2007, when economists from Goldman Sachs and Merrill Lynch were pulling back from their forecast of a slowing economy, Hoisington predicted a recession in a year and a 10-year yield of 3.5% within two. He turned out right on both counts.

Now the markets are suggesting the economy is on the mend again and inflation, that scourge of fixed-income investors, is around the corner.

Hoisington advice? Forget what most investors think and focus on the only two things that matter for inflation: demand and supply. And right now, he says, there’s too little demand and too much supply for prices to rise.

In fact he thinks inflation’s opposite will prevail–deflation, or a sustained fall in prices. He points to a litany of depressing figures of late, including factories running at their lowest levels in six decades, unemployment broadly defined at all-time highs and people lucky enough to have jobs working the fewest hours per week on record.

And if that isn’t bad enough, Hoisington argues all the new government spending eventually will slow the economy, not speed it up. He says bigger federal outlays mean bigger federal debt, crowding out private investment to devastating effect.

[Emphasis added]

While I don’t necessarily agree with Hoisington’s investment approach, I do agree with him on the state of the economy and the effect of government spending.

Sooner or later, even Wall Street with its infinite wisdom will have to realize that the alleged recovery is not on track as hoped for. Once that happens, you will see the current trend reverse and head the other way. I am not sure when that will happen, but I suggest for you to be prepared to deal with it.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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