MAR 15, 2018
Lacy Hunt, chief economist at Hoisington Investment Management, believes that economics is a science, similarly bound by the laws of cause and effect as are the other sciences. He is also humble enough to admit that while we are far from a comprehensive understanding of how it works, we’re making progress, and certain fundamentals are clear.
The Debt Situation Is Terrible
In 2007, global debt was 276% of global GDP. Today, global debt is 327% of global GDP.
In 2007, a dollar in debt generated 37 cents in GDP growth. In 2017, a dollar in debt created only 31 cents in GDP. Money supply and bank credit are collapsing.
Meanwhile, money velocity is at its lowest rate since 1949.
Adjusting GDP for Vehicle Sales
Between 600,000 and 700,000 cars were destroyed and had to be replaced in the aftermath of US hurricane disasters. This event appears in the economic data as a rise in GDP for the fourth quarter.
However, if we look at GDP minus vehicle sales, the rate of growth drops vastly. What this phenomenon did was to pull future auto sales into the present. And it adds very little value to the economy.
The Yield Curve Matters
The spread between long-term treasuries and the 3-month bill, which has been falling for over 90 months. If we get further rate hikes this year—as the Fed suggests—the spread will approach zero and could invert.
“Whether or not it actually inverts is not important. What’s important is that similar conditions have preceded six of the last seven recessions.”
ORIGINAL SOURCE: Lacy Hunt: These Conditions Preceded the Last 7 Recessions by Patrick Watson at Mauldin Economics on 3/14/18