July 23, 2013

Options

Lacy Hunt and Van Hoisington kick off their second-quarter Review and Outlook with a contrarian view: The secular low in bond yields has yet to be recorded. And as usual, they have their reasons; but unlike most of the blabbermouth economic talking heads out there, they arent interested in endlessly parsing the fitful utterances of Ben Bernanke and friends. Rather, they zero in on the fundamental reasons why long-term Treasury yields have probably not hit their low. Those reasons fall, they say, into four categories: (a) diminished inflation pressures, (b) slowing GDP growth, (c) weakening consumer fundamentals, and (d) anti-growth monetary and fiscal policies.

Then Lacy and Van take us deep into the whys and wherefores of their thesis. Their reasoning and the evidence behind it make for compelling reading but you may want to read twice.

Hoisington Investment Management Company (www.Hoisingtonmgt.com ) is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $5 billion under management and is the sub-adviser of the Wasatch-Hoisington US Treasury Fund (WHOSX).

I write this note from Newport, Rhode Island. There is a reason that the rich and powerful built their summer mansions here a century ago. It is disarmingly beautiful. The weather gods have arranged a perfect day and evening, the waters are calm, and the sailboats are out in force. All is right with the world. The Defense Department Office of Net Assessment futures planning group I am with uses the facilities of the Naval War College here. we enjoy a charming hotel on Goat Island, surrounded by boats and tourists, in the evenings and experience the rather drastic contrast of a military facility beset by the rigors of sequestration during the day. Air conditioning is one of the casualties of Congressional inaction, it seems.

I am enjoyably assaulted by new ideas and issues each day, and often find myself very far afield from my usual intellectual haunts. We are tasked with developing outside the box future scenarios. Economics is just a small part. It is good to stretch the mind.

Have a great week, and read what Lacy writes carefully. Everybody is rushing to the other side of the bond boat, trying to catch a stiff breeze that could just turn on the sailors. Be careful out there.

Your feeling woefully but happily inadequate analyst,

John Mauldin, Editor

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