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Hoisington - 3Q 2009


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As always, an interesting read.  This view will probably have some impact on the management of FFH's bond portfolio.


It's nice to see a point of view that counters some of the popular media's bleating that the recession is over.  I'm solidly with Van Hoisington's view that you can't unwind a credit bubble in 12-18 months.  There'll be more hurt to come.



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I agree with you SJ, I'm not a doomsayer but I prefer to read bad predictions then good. It helps avoid dumb mistakes. TV news are basically saying to all investors, close your eyes and cross the street right now... that screams risk to me.


Ah, by the way, I try to stay away from any media coverage of the economy. Their job is to report information not to be good at analyzing it.



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actually the first graph shows that in 1933 (bottom of the market), debt was at its highest point (299.8% of GDP).

At the time I imagine lot of people were frigthened by the level of debt!


Another point the 373.4% ratio includes the financial debt. Is there double counting here?


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I have been fortunate enough to know about Irving Fisher's theory in -- "The Debt-Deflation Theory of Great Depressions". The more prescient is what he calls the "consequences in nine links" on page 342. I posted these nine points several years ago as one of the bull cases for FFH's bond portfolio when we at one time had a minus $1B or so on a mark to market basis.


Anyway, if one is interested, you might want to read up on the Japan experience via Richard Koo's books "The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession" and "Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications."










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Richard Koo's theory/book is impressive, great explanatory power.  I became aware of it thru this board - probably have you to thank JEast. Anyway, for what it's worth, I strongly second the recommendation to read Richard Koo's book(s) - the one I read is the "Holy Grail" book, which is a bit of an odd title, but it refers to a Ben Bernanke statement that an understanding of the causes of the Great Depression is the holy grail of economics.  There is (was) also an online audio lecture by Koo, link posted earlier, very probably available via search.


[added in edit]  Oh - and thanks Viking for the link to Irving Fisher's paper.  I'm printing it now.  Looks very interesting, good detail, goes beyond the capsule summary of ideas previously encountered.

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Another way of looking at it:


In todays environment, if you were one of the very few with surplus cash - & everybody was asking you for a loan; why wouldn't you be asking for a high rate of return because of the risk that you're taking on (credit, repayment, inflation, etc) ? And why would you not get it, when there is so much demand for your cash ?


If I want 5% for the risk & the borrower is only offering 1% - there are only two ways by which I'll lend;

1) I'm sure there will at least 4% deflation; & I can more or less make that happen by refusing to roll the loans as they come due. Or 2) I intend to seize the borrowers assets via a debt/equity swap at a distressed valuation that will earn me well above 4%.


Alternatively the borrower could short-circuit me & just print 4% more money as the loans mature, & there would be nothing that I could do about it. Hence the 'true' inflation rate for any given period should really be what I'd expect to get paid - less what the borrower is currently offering me.


If I re-lent to the same borrower, in the same currency, that 'true' inflation would never show up as the bond has effectively been rolled. But if I re-lent, in another currency, that inflation would suddenly go 'hyper' - as I now want both a HIGHER return for the rising risk AND a premium for the expected 'easing'.


Deadly game.







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