“Investing in a 30-year US Treasury bond at a paltry yield of 2.4% on December 31, 2019, appeared to be a poor investment choice, particularly since it was the lowest year-end yield since the inception of the 30-year bond in 1977,” reads the first line of Hoisington’s latest quarterly review and outlook.
If you know anything about Lacy Hunt, you can probably guess where it goes next.
“However, in a short 12 months the 30-year US Treasury realized a 20% return compared with a 18.4% return in the S&P 500 and a 7.5% return for the Bloomberg Barclays Aggregate Bond Index,” Hoisington went on to say.
They’re still bullish on bonds. That’s hardly surprising.
Even if you knew nothing about Hoisington, you could make the argument. Bonds are surfing a four-decade bull market, so why throw in the towel now? Especially when the pandemic added a slew of new deflationary risks to an already powerful set of structural disinflationary forces.
I often find myself in a somewhat odd position vis-à-vis commentary from Hoisington. I’d venture that scarcely anyone writing daily for public consumption has been more vocal about the prospective “scarring” effect of the pandemic than I have.
I’ve spilled gallons (upon gallons) of digital ink lamenting the structural damage caused by COVID and elaborating on the read-through for the economy from the massive debt incurred as a result of efforts on the part of governments and the C-suite to cushion the economic blow and shore up balance sheets, respectively. The slideshow (below) offers a comprehensive visual tour.
“The massive void in economic activity and destruction of wealth created by the virus and related shutdowns of businesses in the US and abroad will take years to fill,” Hoisington wrote.
No arguments there. Below is another excerpt that’s worth a quick read, even as it’s just a recitation of factoids Hoisington plucked from various publicly available sources:
Government benefits now account for nearly 20% of total personal income; one in four households haven’t been able to meet their monthly bills since March; one in 15 homeowners are in some sort of loan forbearance relief plan; 75% of the government stimulus went to debt paydown and saving; one in three households dipped into savings or retirement accounts over the past year and one in six has borrowed from a family or friend to cover bills. Additionally, it should be noted that the National Multifamily Housing Association found that over three quarters of households made full or partial rent payment for the month ending December 6th, down almost 8% versus last year. Specific industries are reporting catastrophic declines as typified by the National Restaurant Association warning that “more than 500,000 restaurants are in free fall.” The same might be said of other entertainment venues and service industries. The severity of the downturn has decimated many small businesses and they may not survive in their former state. As is also the case for office buildings, shopping centers, convention facilities and airlines.
Again: Far be it from me to downplay any of that. As even the casual Heisenberg Report reader will attest, I’ve personally written more on each and every one of those subjects in the past three months than most mainstream media outlets. Most asset managers won’t write as much in their lifetimes as I write in a week — even those with PhDs.
So, as smart as Lacy is, there is nothing (not a damn thing) he can tell me about this narrative. I’ve got it down cold. I can recount it in my sleep. If I were still allowed to imbibe, I could regale you in the crispest of terms even after a dozen Hendrick’s gimlets.
The point is: I’m on board with the deflation case. Which is precisely why I’m also on board with the fiscal stimulus case.
And this is where I get annoyed (for lack of a more eloquent way to describe it) with folks like Hunt. It’s not that he’s wrong about the economy. And it’s certainly not the case that he’s been wrong about deflation or bonds. He’s been the opposite of wrong — namely, he’s been right.
The problem with folks like Hunt are statements like this one (also from Hoisington’s latest):
Government funding is derived from taxing and borrowing from their citizens. This process reduces the resources of the private sector which provides productivity growth expanding the economic ‘pie.’
That isn’t true. It’s a pernicious canard. An old saw that serves to stymie progress and (conveniently for folks like Hunt) perpetuates myths about government finance that are ultimately conducive to slower growth and lackluster inflation outcomes.
The US government does not “derive” its “funding” from “taxing and borrowing from citizens.” Congressmen and women perpetuate that myth for a number of reasons, not least of which is that it provides cover to leverage deficit debates for political gain.
But ultimately, the US government “derives” its “funding” from the fact that it is the sole, legal issuer of US dollars on planet Earth. It doesn’t “need” to “borrow” your dollars or tax them away from you in order to fund itself. In case you couldn’t surmise that by the fact that the Pentagon doesn’t solicit you when it wants to buy an F-35, it became abundantly clear in 2020 when, instead of taxing you, the government deferred your obligation to pay taxes and sent you free money instead.
Now, you’ll say that the government “borrowed” to do that, just like you’ll say the government borrows to buy fighter jets. That’s kind of true, depending on how you conceive of the word “debt.” Is something really “debt” if both the principal and interest are denominated in a currency that you issue? Not really. Which is why Treasurys are better conceived as interest-bearing dollars, not “debt.”
Further, Hoisington’s (Hunt’s) contention that public sector deficits “reduce resources of the private sector” has it backwards. The public sector deficit is a private sector surplus — by definition. It cannot be otherwise.
“Fiscal surpluses rip financial wealth away from the rest of us, leaving us with less purchasing power to support the spending that keeps our economy going,” Stephanie Kelton wrote, on page 111 of “The Deficit Myth” for those who still haven’t read it.
I cite Kelton not necessarily as an “authority,” but as an economist who speaks to the public in common sense terms that are based on facts, not theory. And that’s one of the great ironies of the term “Modern Monetary Theory.” It’s not really a “theory” at all. It’s descriptive.
None of that is to say that deficits are always “good,” and it’s certainly not to say that deficits necessarily produce desirable, let alone equitable, economic outcomes. Here’s Kelton again:
Fiscal deficits have the potential to lift millions of small boats, but too often the benefits of Uncle Sam’s deficits aren’t spread widely enough throughout the economy. Tax cuts that go disproportionately to the biggest corporations and the wealthiest people in society funnel riches into their buckets, while millions of families struggle to keep their boats afloat. If the goal is broadly shared prosperity, then we need fiscal deficits that channel resources more equitably. For example, investing in health care, education, and infrastructure won’t just benefit the medical professionals, teachers, and construction workers who get paid to do those jobs, it will also benefit the patients, students, and drivers who benefit from better public services. And, when fiscal deficits help low- and middle-income families, those dollars aren’t hoarded in off-shore bank accounts. They get spent back into the economy, helping to lift the boats that belong to families like theirs.
Notice how that has a kind of “well, when you put it that way,” feel to it. That’s why I quote Kelton.
The days of the public being lectured about what’s “best” for the economy by ostensibly well-meaning folks like Larry Summers or regaled with the same quarterly letters over and over again by folks like Hunt, are over. People — regular people, I mean — have had enough of it.
It’s not that traditional economists and asset managers aren’t smart. And it sure as hell isn’t that they aren’t successful. They’re both. That is: They’re smart and successful. The problem is that they simply refuse to countenance the idea that times change. And soft sciences have to adapt. If anyone should know that, it’s people like Hunt. If a deflationist doesn’t know that something’s gotta give, then who does?
This story is just ironies piled atop ironies. People like Hunt claim dominion over “facts.” While Kelton presides as the “chosen one” over “theory.” In reality, Hunt is presenting theory as fact, while Kelton is presenting facts as theory (although she clearly knows that what she’s saying is factual).
But don’t be fooled. Hunt can read the writing on the wall. There is one caveat to his ongoing bullish call on US Treasurys, for example. Here it is:
Provided there are no major changes by Congress to the Federal Reserve Act we believe it is prudent to expect that long dated US Treasury rates will eventually gravitate to lower levels as inflation continues to recede.
What do you think he means by: “Provided there are no major changes by Congress to the Federal Reserve Act”?