Hoisington Q3 2012 Letter

Growth Recession

Entering the final quarter of the year, domestic and global economic conditions are extremely fragile. Across the globe, countries are in outright recession, and in some instances where aggregate growth is holding above the zero line, manufacturing sectors are contracting. The only issue left to determine is the degree of the downturn underway. International trade is declining, so weaknesses in different parts of the world are reinforcing domestic deteriorations in economies continents away. With this global slump at hand, a highly relevant question is whether the U.S. can escape a severe recession in light of the following:

a) the U.S. manufacturing sector that paced domestic economic growth over the past three years has lapsed into recession;

b) real income and the personal saving rate have been slumping in the face of an interim upturn in inflation, and

c) aggregate over-indebtedness, which is the dominant negative force in the economy, has continued to move upward in concert with flagging economic activity.

New government initiatives have been announced, particularly by central banks, in an attempt to counteract deteriorating economic conditions. These latest programs in the U.S. and Europe are similar to previous efforts. While prices for risk assets have improved, governments have not been able to address underlying debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies.

To avoid recession in the U.S., the Federal Reserve embarked on open-ended quantitative easing (QE3). Importantly, the enactment of QE3 is a tacit admission by the Fed that earlier efforts failed, but this action will also fail to bring about stronger economic growth.