Hoisington Management

[Cigarbutt]

For those interested, simply have to fill an on-line form to receive the reports automatically.

 

http://www.hoisingtonmgt.com/cgi-bin/tmplMailer.cgi?formName=EconomicOverview

 

They certainly have an interesting perspective.

Looking at the table on page 6, they report a [glow=red,2,300]20 year [/glow]annualized return (net of fees) of 7,8% versus 7,0% for S&P 500.

I understand that the S&P return reported does not include dividends reinvested (?).

But still, I thought some said that government bonds (even long term ones) are not supposed to beat the market over long periods.

At least, that's what the conventional wisdom says.

It is just that sometimes long term can be very long.

[stahleyp]

These guys are looking like geniuses right now.

[Cigarbutt]

This is a "macro" thread of limited overall utility but will add a few potentially relevant comments.

 

-I understand Fairfax (I assume Mr. Bradstreet also) were holding them in high esteem and used their work as inputs for decisions related to the fixed income portfolio. In 2016, that changed. Given some reasonable assumptions, one can estimate that, if FFH had maintained their long duration exposure, they would report an additional (compared to what they accomplished with redeployed funds) unrealized gain somewhere around 2B.

 

-An absolutely fascinating aspect is that rates have recently pummelled before any significant actual coincident fundamental deterioration (at least as perceived by market participants). The recent move is all about a flight to perceived safety. One could only imagine what it would be like in the event of a real economic downturn. I think that's why it's possible that Hoisington reports (in their next Q1 letter) that they still hold their long duration "risk-free" portfolio.

 

-In a way, Hoisington is a one-trick pony as their opportunity set is only US government bonds. All they do is deal with duration. They're a one-trick pony who have done relatively very well over a long period but where will they switch funds when 30-yr rates go negative?

 

Edit:

The volatility has been unprecedented and remains, perhaps, not appreciated in significance because rates are so low. From Barron's: "U.S. 10-year Treasury yields rose by 31 basis points—nearly a third of a percentage point—to 0.81% on Tuesday. That was the biggest single-day increase since 2009 in the benchmark rate. The 30-year benchmark Treasury yield rose 36 basis points to 1.28%".

https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

[Cigarbutt]

Just skip if:

-you don't ever care about macro for any investments

-you think that the global economy was humming along fine before the outbreak

-you find that the long term monetary and fiscal experiment since the GFC is irrelevant or great (again)

-you expect a rapid "V"-shaped recovery and back to business as usual environment

 

Here's their latest review that, for some reason, may be their best, at least up to now.

https://hoisingtonmgt.com/pdf/HIM2020Q1NP.pdf

 

Some comments:

-They find that the MMT threshold has not been reached, yet.

-They conclude that continuing on that slippery slope and going through the true MMT threshold will be globally detrimental.

-They've been wrong on timing before but have been roughly right in the direction, for a very long time.

-At this point, they expect a painful deflationary recession and negative risk-free rates..

 

For disclosure, I'm out of long term US treasuries because of changing odds and possible non-linear changes but wonder how to deal with the transition.

Their performance numbers are food for though.

https://wasatchglobal.com/wasatch-hoisington-us-treasury-fund/

 

The WSJ recently had a nice complementary piece:

https://www.wsj.com/articles/coronavirus-crisis-legacy-mountains-of-debt-11586447687

if difficulty with access, summary: How to move from a Great to a Leveraged Society.

 

Recently, there was thread on corporate leverage and I learned a lot from thepupil. There's one graph that still needs further explanation:

Use Fred data and plot: Nonfinancial Corporate Business; Debt Securities and Loans; Liability, Level/Nonfinancial Corporate Business; Earnings Before Interest and Tax (FSIs), Flow*1000

Is the corporate sector ready for higher business borrowing interest rates?

 

Lately, I've looked at Japan capital flows and they are taking advantage (?) of the international Fed USD swap lines. I think they will be the first domino to fall. The bug will find its windshield.

https://www.bloomberg.com/news/articles/2020-04-13/how-the-boj-s-massive-market-operations-make-and-break-investors?srnd=markets-vp

[Spekulatius]

^ What the BOJ is doing is Nuts. It feels like a snake trying to eat it’s own tail. Other bugs are Italy, Greece(again) Spain, Brazil and perhaps other emerging markets, perhaps even Saudi Arabia (regime change ).

[Jurgis]

...

Their performance numbers are food for though.

https://wasatchglobal.com/wasatch-hoisington-us-treasury-fund/

 

 

I skipped everything as you requested. Just looked at the performance numbers. Aren't these just what you get if you expect low/zero/negative rates and you sit in the longest-end of treasury curve?

 

This clearly has worked wonders for last 20-30 years. But will it really work going forward? (Of course, people wondered that for the last 20-30 years lol).

[petec]

I’d love to know why they think it will take 5-7 years to get back to the 2019 output gap. Key prediction and no reasoning given.

 

Entirely useless for investing, but fascinating.

[Cigarbutt]

...

Just looked at the performance numbers. Aren't these just what you get if you expect low/zero/negative rates and you sit in the longest-end of treasury curve?

...

Yes. When people discuss the sit on your a$$ strategy described by Mr. Munger, people get that the idea revolves around selective decisions and focus on the never sell decision aspect. However, Mr. Munger also described that one has to be ready to act decisively with a prepared mind. Outside of index investing, it's a tough act to follow (to various degrees of differentiation) and individual positioning is what makes a market. :) You can call this the fifty shades of grey of investing.

I’d love to know why they think it will take 5-7 years to get back to the 2019 output gap. Key prediction and no reasoning given.

Entirely useless for investing, but fascinating.

I would say you're entirely correct 95 to 99% of the times which makes the timing issue challenging. I'd like to remind you (f i understand correctly) that investing in FFH after 2010 involved a thesis in large part resting on the possibility of a 100-year event.

This time is always different in a way and we (most of us anyways) entirely and always feel that the present is unusual and special to some degree but, on the topic of investing, if one decides that this is part of the unknowables, the present financial system environment is characterized an extreme level of unusual forces. One could say that we're going through the greatest monetary experiment of all times. If the goal is to sleep well, it may be best to make abstraction of that.

[Viking]

Cigar, thanks for doing the leg work on their recent work. I am reading up on deflation and came across the Podcast linked below (recorded just a week ago) The kid asks good questions; best of all he just lets Lacy Hunt (from Hoisington) talk. Very educational whether you think deflation is coming or not. Skip the first 4 minutes if you are in a hurry :-) It is long (45 minutes) and full of economics stuff... so you have been warned :-)

 

I now understand why it is rational for someone to want to own a 30 year US treasury bond!

 

- how can they have a 30 year perspective (being invested primarily in 30 year treasuries)? Answer: their investment process has a 3 to 5 year time horizon.

 

- Vance Crowe Podcast: Lacy Hunt (April 18, 2020)

-

 

PS: Cigar, can you update the the title to just Hoisington Management? For future...

[petec]

...

Just looked at the performance numbers. Aren't these just what you get if you expect low/zero/negative rates and you sit in the longest-end of treasury curve?

...

Yes. When people discuss the sit on your a$$ strategy described by Mr. Munger, people get that the idea revolves around selective decisions and focus on the never sell decision aspect. However, Mr. Munger also described that one has to be ready to act decisively with a prepared mind. Outside of index investing, it's a tough act to follow (to various degrees of differentiation) and individual positioning is what makes a market. :) You can call this the fifty shades of grey of investing.

I’d love to know why they think it will take 5-7 years to get back to the 2019 output gap. Key prediction and no reasoning given.

Entirely useless for investing, but fascinating.

I would say you're entirely correct 95 to 99% of the times which makes the timing issue challenging. I'd like to remind you (f i understand correctly) that investing in FFH after 2010 involved a thesis in large part resting on the possibility of a 100-year event.

This time is always different in a way and we (most of us anyways) entirely and always feel that the present is unusual and special to some degree but, on the topic of investing, if one decides that this is part of the unknowables, the present financial system environment is characterized an extreme level of unusual forces. One could say that we're going through the greatest monetary experiment of all times. If the goal is to sleep well, it may be best to make abstraction of that.

 

It’s precisely the Fairfax history that leads me to my view. I bought into it at the time, read widely around the topic, and was wrong. The lesson I learned is that lots of risks exist most of the time, but nobody I know has the skills to predict macro outcomes with any consistency, and I certainly don’t, so I think the best I can do is be reasonably aware of the macro risks and not stand too directly in front of them. Hence, more or less all reading on this is useless to me. But interesting!

[thepupil]

 

I now understand why it is rational for someone to want to own a 30 year US treasury bond!

 

 

30 year! way too short term for my taste.  ;D

 

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/going-looooooooong-with-world-class-university-debt/msg404545/#msg404545

[KJP]

Cigar, thanks for doing the leg work on their recent work. I am reading up on deflation and came across the Podcast linked below (recorded just a week ago) The kid asks good questions; best of all he just lets Lacy Hunt (from Hoisington) talk. Very educational whether you think deflation is coming or not. Skip the first 4 minutes if you are in a hurry :-) It is long (45 minutes) and full of economics stuff... so you have been warned :-)

 

I now understand why it is rational for someone to want to own a 30 year US treasury bond!

 

- how can they have a 30 year perspective (being invested primarily in 30 year treasuries)? Answer: their investment process has a 3 to 5 year time horizon.

 

- Vance Crowe Podcast: Lacy Hunt (April 18, 2020)

-

 

PS: Cigar, can you update the the title to just Hoisington Management? For future...

 

I listened to the podcast.  Quite grim.  Is anyone aware of a macroeconomic history of the post-WWII era written by someone who shares Hunt's macroeconomic views?

[Viking]

Cigar, thanks for doing the leg work on their recent work. I am reading up on deflation and came across the Podcast linked below (recorded just a week ago) The kid asks good questions; best of all he just lets Lacy Hunt (from Hoisington) talk. Very educational whether you think deflation is coming or not. Skip the first 4 minutes if you are in a hurry :-) It is long (45 minutes) and full of economics stuff... so you have been warned :-)

 

I now understand why it is rational for someone to want to own a 30 year US treasury bond!

 

- how can they have a 30 year perspective (being invested primarily in 30 year treasuries)? Answer: their investment process has a 3 to 5 year time horizon.

 

- Vance Crowe Podcast: Lacy Hunt (April 18, 2020)

-

 

PS: Cigar, can you update the the title to just Hoisington Management? For future...

 

I listened to the podcast.  Quite grim.  Is anyone aware of a macroeconomic history of the post-WWII era written by someone who shares Hunt's macroeconomic views?

 

What i liked the most is Hoisington/Hunt provides a framework to understand what is going on in the economy today. Especially all the debt. They feel the next logical step is mild deflation (-1 or -2%).

 

Consensus ‘wisdom’ is with interest rates so low it is rational for companies (and people) to take on a bunch of debt. Hoisington has the opposite view: debt is very bad in a deflationary environment as the real interest rate will be going up. At the same time company earnings and personal income will be falling. Once the deflation cycle gets started it is very difficult to reverse.

 

Oil prices this low will feed what is already a deflationary environment.

Population growth in US is slowing (lowers economic growth).

My guess is a strong US$ is also deflationary (this is my opinion).

Japan is stuck in mild deflation. Looks like southern Europe might be following.

 

As total debt % to GDP grows, the benefit of more debt (to grow GDP) diminishes. More debt today reduces future consumption.

 

Hoisington also provides a framework to understand what the Fed is doing and what activities might be deflationary and what future activities might be inflationary.

[Cigarbutt]

If you want to spend (waste?) time on this, Mr. Hunt sometimes refers to papers published by Carmen M. Reinhart and Kenneth S. Rogoff.

This book (which was criticized for some statistical errors that did not change the materiality of conclusions) is an unusually light read for such an arid topic:

https://www.amazon.com/This-Time-Different-Centuries-Financial-ebook/dp/B004EYT932/ref=sr_1_1?dchild=1&keywords=this+time+is+different&qid=1587956469&sr=8-1

The book came out in 2009 (!) and then they elaborated on the debt overhang topic, a topic dear to Mr. Hunt's heart:

https://delong.typepad.com/w18015.pdf

 

I guess you could say Mr. Lacy Hunt is a debt-pessimist and he has referred to an essay written by David Hume in 1752 titled Of Public Credit. There are also debt-realists. Mr. Alexander Hamilton, one of your Federalist founding father was a great example of that. It seems that our own rb on this board is also a member of that group. But the 1944 Bretton Woods Agreement (with the Nixon Amendment) provided for the debt-optimists to dominate and it seems not a lot of people realize that the Agreement contained sunset provisions.

[petec]

Once the deflation cycle gets started it is very difficult to reverse.

 

Oh, it's very easy to reverse! It's just that the political will doesn't usually exist to deposit $1m of newly printed money in the bank account of every citizen (or subject. I am British after all :) )

 

Just about to listen to the podcast.

[petec]

V good interview. Will probably rewatch.

 

 

 

 

 

[thowed]

Japan is stuck in mild deflation.

 

I'm no expert on this subject, but find it very interesting for portfolio asset allocation, so please forgive a perhaps naive question.

 

Is mild deflation much worse than mild inflation?

 

I ask as some people have suggested that Japan's livelihood does not seem to have suffered especially from mild deflation.

 

So I am wondering if we are so afraid of deflation because of the 30s experience that it is like a 'System 1' thing - any mention of the subject makes us recoil.

 

I suppose my instinct is that anything 'mild' is generally not a problem.  Where the problem begins is if something cannot be controlled - and I know the fear of inflation is that once started properly, it is very hard to control.  So perhaps the same is the case for deflation.

 

Anyway, I welcome any thoughts, and will try to get to the interview.

 

(n.b. I know that Japan has other problematic issues e.g. the enormous debt overhang.  I also recall how the 'obvious thing' about debt in Japan has tripped people up so much, coining the term, the 'widowmaker trade' ).

[petec]

I think the problem may lie in the compounding. Mild inflation, compounded, reduces debts. Mild deflation, compounded, increases them (all else equal).

[Cigarbutt]

Japan is stuck in mild deflation.

I'm no expert on this subject, but find it very interesting for portfolio asset allocation, so please forgive a perhaps naive question.

Is mild deflation much worse than mild inflation?

I ask as some people have suggested that Japan's livelihood does not seem to have suffered especially from mild deflation.

So I am wondering if we are so afraid of deflation because of the 30s experience that it is like a 'System 1' thing - any mention of the subject makes us recoil.

I suppose my instinct is that anything 'mild' is generally not a problem.  Where the problem begins is if something cannot be controlled - and I know the fear of inflation is that once started properly, it is very hard to control.  So perhaps the same is the case for deflation.

Anyway, I welcome any thoughts, and will try to get to the interview.

(n.b. I know that Japan has other problematic issues e.g. the enormous debt overhang.  I also recall how the 'obvious thing' about debt in Japan has tripped people up so much, coining the term, the 'widowmaker trade' ).

https://www.bloomberg.com/news/articles/2020-04-27/boj-ramps-up-stimulus-with-pledge-for-unlimited-bond-buying?srnd=markets-vp

If I'd sit in the room where they make their announcements, I'd stand up and yell: "This is absurd, the Emperor has no clothes" but i'm just a guy whose main job this AM is to open the door for the cats to come in or leave.

IMO, they have been flying blind for a while now but it looks more and more like a kamikaze operation. Somebody is bound to notice eventually and mild may become an irrelevant word.

One thing that may be useful from the interview is the part about tipping points and potential non-linear changes.

i wanted to remain silent here but you said "welcome any thoughts" so..

[SHDL]

- Vance Crowe Podcast: Lacy Hunt (April 18, 2020)

-

 

Good interview. I agree with a lot of what he said, but not everything.

 

The biggest disagreement I have is that I think the Fed will do absolutely anything to avoid a deflation trap. In fact with the latest round of interventions they are hinting how determined they are. Those interventions are not just another round of QE (which isn’t necessarily inflation-inducing for reasons correctly discussed in the interview), they are a step toward some real money printing. This really complicates the picture because although we are certain to have a demand-side driven recession, which is likely deflationary (as discussed in the interview), we are also going to have the Fed trying to fight off the deflationary forces with every gun they have. The supply side disruptions (which are inflationary) are also another relevant factor to keep in mind.

 

Anyway my expectation is that the Fed will in the end get what it wants on the inflation front, namely mild inflation. I would not make a gutsy macro bet on deflation for this reason.

[SHDL]

Japan is stuck in mild deflation.

 

I'm no expert on this subject, but find it very interesting for portfolio asset allocation, so please forgive a perhaps naive question.

 

Is mild deflation much worse than mild inflation?

 

I ask as some people have suggested that Japan's livelihood does not seem to have suffered especially from mild deflation.

 

So I am wondering if we are so afraid of deflation because of the 30s experience that it is like a 'System 1' thing - any mention of the subject makes us recoil.

 

I suppose my instinct is that anything 'mild' is generally not a problem.  Where the problem begins is if something cannot be controlled - and I know the fear of inflation is that once started properly, it is very hard to control.  So perhaps the same is the case for deflation.

 

Anyway, I welcome any thoughts, and will try to get to the interview.

 

(n.b. I know that Japan has other problematic issues e.g. the enormous debt overhang.  I also recall how the 'obvious thing' about debt in Japan has tripped people up so much, coining the term, the 'widowmaker trade' ).

 

I think that depends on how “mild” we are talking about. If it’s +0.1% vs -0.1% inflation I don’t think it matters much. But say +3% vs -3% inflation is a bigger deal. The basic theory is that because nominal short term rates can’t go (much) below zero, if we have 3% deflation the Fed is unable to bring real rates below 3%. Whereas if we have 3% inflation they can get to a -3% real rate by bringing the nominal rate down to zero. So that is a 6% difference in real rates, which should be meaningful for at least some investment/spending decisions.

 

On Japan, it is true that their economy hasn’t really collapsed or anything. But they’ve had abysmally slow growth for quite some time now. The tricky thing is they are only one data point and so no one can really tell if deflation is the true culprit or if it’s something else. I actually think it’s something else but that doesn’t really matter ... what matters more is that the Fed and other central banks are obviously terrified of their situation and are bending over backwards to avoid it (all the negative side effects be damned).

 

[wabuffo]

The biggest disagreement I have is that I think the Fed will do absolutely anything to avoid a deflation trap. In fact with the latest round of interventions they are hinting how determined they are. Those interventions are not just another round of QE (which isn’t necessarily inflation-inducing for reasons correctly discussed in the interview), they are a step toward some real money printing.

 

In terms of "money printing", I always think in terms of this short-hand rule about US monetary operations:

1) US Treasury spends - creates a new reserve in the private sector banking system (money printing)* 

2) US Treasury issues debt - swaps a reserve in the private sector banking system for an interesting earning asset. (asset swap)

3) Fed does a repo (or lends) - swaps a private sector interesting earning asset (collateral) for a reserve in the private sector banking system or vice versa (asset swap).

 

I think its pretty clear that money printing comes from the US Treasury (and not the Fed).  The Fed is lending against collateral. It may sometimes weaken the collateral it is lending against, but it is still lending (swapping assets).  So I would argue the Fed is not doing any money-printing.  It helps me to think about every Fed/US Treasury transaction with the private sector from a T-account (debit/credit) point of view.

 

And bank reserves are not money creation.  They are chequing accounts at the Fed for federally-chartered banks.  Reserve balances are there to clear payments between the banks.  They can only circulate between the Fed and the banks.  The size of reserves are a policy decision by the Fed and its regulators. 

 

Almost every new program that the Fed has announced is a lending program vs some collateral.  The US Treasury, on the other hand, has postponed April Federal tax receipts (April is a big intake month for tax receipts) and is spending pretty aggressively (ie, sending direct deposits and cheques to all Americans, etc).  Don't focus on the Fed - focus on the US Treasury as it creates new deposits in the US banking system out of thin air this month.

 

The key metric to watch IMHO is always US Treasury spending (net of tax receipts and other collections) as a % of GDP.  We really only run the risk of USD devaluation when we ramp up to 10% or above.  We are heading there now - though it will be a cumulative effect over the next few months into the summer.

 

*[of course, this spend is net of tax receipts - but the US runs a perpetual annual deficit except for '98-01]

 

wabuffo

[SHDL]

wabuffo,

 

Thanks for the commentary. I actually have a question that you or someone else may be able to help me answer. As I understand these new lending programs are funded by a loan from the Fed and something like a 10% equity layer provided by the Treasury. So ok, so far no “money printing,” but what if the losses exceed 10% (which might happen if things get bad enough)? Does the Treasury then somehow compensate the Fed for their losses? But if so, the “10%” number is kind of meaningless right? Or does the Treasury do nothing and let the Fed absorb the loss above 10%? If so, would you not say that that is essentially helicopter money, given that what happened at the end of the day was the Fed gave cash to a (non-bank) private sector entity and got nothing in return?

[TwoCitiesCapital]

- Vance Crowe Podcast: Lacy Hunt (April 18, 2020)

-

 

Good interview. I agree with a lot of what he said, but not everything.

 

The biggest disagreement I have is that I think the Fed will do absolutely anything to avoid a deflation trap. In fact with the latest round of interventions they are hinting how determined they are. Those interventions are not just another round of QE (which isn’t necessarily inflation-inducing for reasons correctly discussed in the interview), they are a step toward some real money printing. This really complicates the picture because although we are certain to have a demand-side driven recession, which is likely deflationary (as discussed in the interview), we are also going to have the Fed trying to fight off the deflationary forces with every gun they have. The supply side disruptions (which are inflationary) are also another relevant factor to keep in mind.

 

Anyway my expectation is that the Fed will in the end get what it wants on the inflation front, namely mild inflation. I would not make a gutsy macro bet on deflation for this reason.

 

It was my understanding was his point is they're not allowed to create inflation.

 

His point seemed like it was along the lines of liquidity =\= sustainable inflation AND Treasury spending isn't inflationary in the long term because it's funded by unproductive debt. Debt is inflationary on issuance, but deflationary upon service/repayment.

 

Seemed to me his whole point was that the only way the Fed can engineer lasting inflation in this environment is to directly monetize the debt. Print money and pay off the Treasury's obligations which removes the unproductive debt.

 

I think this is probably the RIGHT way to look at long-term and sustainable inflation.

 

But obviously in the short-term the liquidity has to go somewhere and can create temporary inflation depending on where it sloshes to.

 

 

[wabuffo]

But if so, the “10%” number is kind of meaningless right

 

Yep - meaningless.  The Fed is not supposed to lend to anything but the very best collateral (Treasuries) since it must never become insolvent.  If you look at its H.4.1 weekly balance sheet you can see it has only a tiny sliver of "equity capital".  $63B of capital supports $6.6T of assets so even a 1% loss allowance makes it insolvent.

 

But in this crisis, it is being asked to water down the collateral against which it will lend.  The SPV structure is just a political structure to allow it to do this while appearing to prevent losses to itself.  Losses will be borne by the US Treasury probably via its General Acct at the Fed.  I would imagine the US Treasury would just issue cash-management bills to the Fed or write down its Treasury acct balance to cover any losses.  But its small potatoes vs all of the deficit spending the US Treasury is doing to do this year.

 

wabuffo