John Mauldin – Hoisington Investment Management – Quarterly Review and Outlook, First Quarter 2014

In today’s Outside the Box, Lacy Hunt and Van Hoisington of Hoisington Investment have the temerity to point out that since the Great Recession officially ended in 2009, the Federal Open Market Committee (FOMC) has been consistently overoptimistic in its projections of US growth. They simply expected QE to be more stimulative than it has been, to the tune of about 6% over the past four years – a total of about $1 trillion that never materialized.

Given that dismal track record, our authors ask why we should believe the Fed’s prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015 – particularly with QE being tapered into nonexistence.

A big part of the reason the Fed has been so steadily wrong, say Lacy and Van, is its overreliance on the so-called “wealth effect,” which posits that an increase in consumer wealth – through higher stock prices or home values, for instance – will lead to increased consumer spending.

The wealth effect has been both a justification for quantitative easing and a root cause of consistent overly optimistic growth expectations by the FOMC. The research cited below suggests that the concept of a wealth effect is in fact deeply flawed. It is unfortunate that the FOMC has relied on this flawed concept to experiment with over $3 trillion in asset purchases and continues to use it as the basis for what we believe are overly optimistic growth expectations.

The effect isn’t completely absent, say the authors, but their research suggests that it may five to ten times weaker than the Fed assumes. Go figure.

Hoisington Investment Management Company ( 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).

It is been a busy day for me here in Dallas. Besides nonstop meetings and conversations and my usual reading, I had the privilege of going to the Dallas branch of the Federal Reserve and watching President Richard Fisher make loans to a group of budding entrepreneurs to build lemonade stands. It is part of a fabulous organization called Lemonade Day. The basic concept is to enable young children to learn about entrepreneurship and capitalism by helping them launch a lemonade stand. Youth who register are taught 14 lessons from their entrepreneurial workbook, with either a parent, teacher, youth organization leader, or other adult mentor supervising. At the conclusions of the lessons, they are prepared to open their first business… a lemonade stand. Local businesses and banks volunteer to empower these kids by making them a $50 loan and helping them set up their business. By the time they come to talk with the “banker, ” they have a business plan and a set of goals as to what they will do with them profits they make. Watching these kids respond to adults asking them about their plans brings joy to your heart.

On May 4, in some 35 cities across the country, 200,000 young people will be building lemonade stands and trying to turn a profit. If you drive by a lemonade stand, stop and support America’s future entrepreneurs. If you are in one of those 35 cities (click here to find out), make a point to find a few lemonade stands and support America’s future. And if you don’t have a lemonade stand in your city, consider following in the footsteps of local heroes (and my good friends) Reid Walker and Robert Alpert, who decided to launch Lemonade Day here in Dallas. This should be a spring ritual in every city in the country.

Buoyed by the kids and their enthusiasm, I then went to dinner with Richard Fisher and Woody Brock and a few other associates of Ray Hunt, who hosted us for a fabulous and thought-provoking session, talking economics, geopolitics, and even a little politics. There was an interesting mix of pessimism and optimism in the room about the future of our country, but there was not a person who was not concerned with the direction in which we are headed. Gerald Turner, the president of SMU, talked to us about how fiscally conservative and socially liberal his students are. That kind of mirrors my own children. The world is changing faster, both technologically and demographically, than many of us in the Boomer generation are comfortable with. But we’d better get used to it.

It’s been a tumultuous last few days, and tomorrow morning I have to leave early for San Francisco to do a video shoot with my partners at Altegris, before going right back to the airport and flying home to speak to a local group of investment advisers and brokers brought together by Peak Capital Management. It is late and time to hit the send button, because the alarm clock will go off early. Have a great week

Your wondering where all the time goes analyst,
John Mauldin, Editor
Outside the Box
[email protected]

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Hoisington Investment Management – Quarterly Review and Outlook, First Quarter 2014

Optimism at the FOMC

The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States since the last recession ended in 2009. If their annual forecasts had been realized over the past four years, then at the end of 2013 the U.S. economy should have been approximately $1 trillion, or 6%, larger. The preponderance of research suggests that the FOMC has been incorrect in its presumption of the effectiveness of quantitative easing (QE) on boosting economic growth. This faulty track record calls into question their latest prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015.

A major reason for the FOMC’s overly optimistic forecast for economic growth and its incorrect view of the effectiveness of quantitative easing is the reliance on the so-called “wealth effect”, described as a change in consumer wealth which results in a change in consumer spending. In an opinion column for The Washington Post on November 5, 2010, then FOMC chairman Ben Bernanke wrote, “…higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” Former FOMC chairman Alan Greenspan in a CNBC interview on Feb. 15, 2013 said, “The stock market is the key player in the game of economic growth.” This year, in the January 20 issue of Time Magazine, the current FOMC chair, Janet Yellen said, “And part of the [economic stimulus] comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.”

FOMC leaders may feel justified in taking such a position based upon the FRB/US, a large- scale econometric model. In part of this model, employed by the

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