Forecasting the Economic Storm
Dr. Lacy Hunt's Dire Predictions for a Hard Landing in 2024 and Beyond - Article #29
In this 12 min article, The X Project will answer these questions:
I. Why this article now?
II. Who is Dr. Lacy Hunt?
III. Where is his perspective coming from?
IV. What is the top takeaway from his perspective?
V. What is another top takeaway?
VI. What is a third takeaway?
VII. What is a fourth takeaway?
VIII. What is a fifth takeaway?
IX. What does The X Project Guy have to say?
X. Why should you care?
I. Why this article now?
In an ever-evolving economic landscape, staying ahead of the curve is crucial for investors, policymakers, and the public. Dr. Lacy Hunt, a revered economist with over five decades of experience, recently shared his insights in various interviews and his quarterly newsletter, offering a unique perspective on the current and future state of the economy. His analyses, deeply rooted in historical patterns and economic theories, provide valuable takeaways for anyone looking to understand the complexities of today's financial world. As we navigate uncertain economic waters, Dr. Hunt's outlook serves as a compass, guiding us through the fog of market speculations and economic predictions.
II. Who is Dr. Lacy Hunt?
As Dr. Lacy Hunt is beginning his 54th year in his illustrious career, this will be one of the longest biographies that The X Project publishes. According to (an abridged version of his bio on) Grant’s Interest Rate Observer, Dr. Lacy H. Hunt, an internationally known economist, is Executive Vice President and Chief Economist of Hoisington Investment Management Company (HIMCO), a firm that manages $6.12 billion for pension funds, endowments, insurance companies and others.
Lacy Hunt is the author of two books, and numerous articles in leading magazines, periodicals and scholarly journals. Included among the publishers of his articles are. Barron’s, The Wall Street Journal, The New York Times, The Christian Science Monitor, the Journal of Finance, the Financial Analysts Journal and the Journal of Portfolio Management. The Board of Governors of the Federal Reserve System and the Dallas Federal Reserve Bank both published his research.
Previously, Lacy was Chief U.S. Economist for the HSBC Group, one of the world’s largest banks, Executive Vice President and Chief Economist at Fidelity Bank and Vice President for Monetary Economics at Chase Econometrics Associates, Inc. Lacy considers himself fortunate that he had the opportunity of working for two firms led by great bankers: David Rockefeller (Chase) and Sir William Purvis (HSBC).
A native of Texas, Dr. Hunt has served as Senior Economist for the Federal Reserve Bank of Dallas. While at the Dallas Fed, he served on the Federal Reserve System Committees: Financial Analysis and International Economics. He successfully completed the training program at the Federal Reserve Bank of New York. When he entered the Fed, William McChesney Martin was grappling with a severe inflation and when he left Author Burns was also trying to contain rampant price increases. At the Fidelity Bank of Philadelphia he had the responsibility for managing the Trust Department’s Comingled Fixed Income Fund in the 1970s and early 1980s. This fund produced one of the highest returns during this inflationary era.
He earned his BA from Sewanee: The University of the South (1964), his MBA from the Wharton School of the University of Pennsylvania (1966), and his Ph.D. in Economics from the Fox School of Business and Management of Temple University (1969). He received an honorary Doctor of Civil Laws from Sewanee (2013). Dr. Hunt served on the Board of Trustees of Temple University from 1987 to 2010 and is now an honorary life trustee.
He received the Abramson Award from the National Association for Business Economics for “outstanding contributions in the field of business economics.” He is a life member of the American Finance Association. He was a member of the Economic Advisory Board of the American Bankers Association and Chairman of the Economic Advisory Board of the Pennsylvania Bankers Association. He served on the Monetary and Fiscal Policy Affairs Committee of the National Chamber of Commerce. He was a member of The Money Marketeers of New York University.
III. Where is his perspective coming from?
Dr. Hunt publishes a “Quarterly Review and Outlook” at Hoisington Investment Management, and the one for the Fourth Quarter of 2023 can be found here.
Additionally, Dr. Hunt has done the following interviews on YouTube:
The Impending Recession With Dr. Lacy Hunt – 10/31/23 (76,324 views)
Lacy Hunt Says US Heading for 'Hard Landing' – 11/8/23 (110,661 views)
Economic Outlook Sector by Sector Review with Dr Lacy Hunt – 1/12/24 (17,870 views)
IV. What is the top takeaway from his perspective?
The Impact of Negative Net National Saving
A particularly alarming aspect of Dr. Hunt's analysis is the emphasis on negative net national saving. As per the chart above, 2023 was only the eighth year since 1929 with negative net national savings - four occurred during the Great Depression (1931-1934), and the other three occurred more recently in the aftermath of the Great Financial Crisis (2008-2010).
This scenario, where federal budget deficits surpass private and foreign savings, severely constrains the economy's ability to grow. It limits the resources available for capital investment, which is essential for improving living standards. Dr. Hunt warns that persistent negative net national saving will exacerbate income and wealth divides, further stifling economic growth.
V. What is another top takeaway?
Challenges in the Housing and Real Estate Sectors
Dr. Hunt forecasts significant weaknesses in specific sectors, notably big-ticket consumer items and real estate. He anticipates a recovery in the single-family housing market as mortgage rates decline. However, he warns that this recovery might be slow and offset by weaknesses in other sectors, particularly by considerable weaknesses in the multifamily and commercial real estate sectors.
He predicts considerable weakness in multifamily construction in 2024 due to significant overbuilding, decreasing rents, and increasing delinquency rates. This is attributed to the overabundance of apartment buildings and the financial pressure on multifamily property owners.
Dr. Hunt expresses concern about the commercial real estate sector, particularly office spaces. He notes an oversupply of office spaces, leading to a long-term weak market in this sector. This is exacerbated by changing work patterns post-COVID and a general decrease in demand for office spaces.
The refinancing difficulties faced by multi-family and commercial properties financed at low-interest rates during 2020 and 2021 indicate increased foreclosures and financial strain in the real estate market and banking sector.
VI. What is a third takeaway?
Corporate America's Refinancing Challenges
Dr. Lacy Hunt highlights significant refinancing challenges for Corporate America, primarily due to the substantial rise in interest rates since the last major borrowing cycle. Many businesses now face the daunting task of refinancing their debts at significantly higher rates. This situation is worsened by the deterioration in the credit quality of many borrowers. This complex scenario suggests a challenging period ahead for corporate finance, potentially impacting the overall financial stability and growth prospects of numerous companies in the United States.
VII. What is a fourth takeaway?
The Declining Velocity of Money
Dr. Lacy Hunt expressed concerns about the declining velocity of money in conjunction with a decreasing money supply. The velocity of money is a fundamental concept in economics that measures the rate at which money is exchanged in an economy. It's defined as the frequency with which a unit of money is spent on new goods and services within a specific time period. He argues that the current monetary contraction, coupled with a potential decline in the velocity of money, will result in lower inflation rates but also hinder economic growth.
Dr. Lacy Hunt believes that the velocity of money will decline due to two main factors: the marginal revenue product of debt and the loan-to-deposit ratio at banks. He suggests that the marginal revenue product of debt will decrease, meaning the economic output generated from new debt will diminish. This reduction in productivity from additional borrowing can slow down the circulation of money. Additionally, a decrease in bank lending activity, as indicated by a lower loan-to-deposit ratio, signifies less money being circulated in the economy, further contributing to the declining velocity of money.
This shift to a declining velocity of money impacts bank lending practices and investment strategies, creating a more challenging environment for stimulating economic recovery. This situation can lead to a mismatch between the availability of funds and the needs of the economy.
VIII. What is a fifth takeaway?
The Inevitability of a Hard Landing
Dr. Hunt dispels any notion of a soft landing, predicting an inevitable hard landing for the economy. His analysis points to the historical precedence of inflation leading to recessions fueled by excessive monetary and fiscal policies. The current situation, marked by a significant monetary contraction, mirrors these historical patterns. Although gradually reversing inflation, the Federal Reserve's ongoing tightening of policies creates a stringent financial environment, leading to a downturn in 2024 and beyond.
In fact, Dr. Hunt details that our economy is already “Behaving Like a Recession:
Over the past year, inflation, real GDI, hours worked of all non-agricultural employees, national saving, delinquencies, foreclosures and bankruptcies portrayed a recessionary environment even though real GDP and payroll employment continued to rise. Key indicators, derived mainly from industry sources rather than the government statistical mill, exhibited characteristics of a hard landing. New vehicle sales, new home and existing home sales, respectively, were 15%, 43% and 42% below their peak levels of the past five years.
Prescient cyclical indicators point to an expanding list of recessionary conditions. Not only did the long running inversion of the yield curve persist through the fourth quarter, but it also became even steeper. A prolonged drop in the index of leading economic indicators was extended. The high multiplier manufacturing sector moved further below its cyclical peak reached last October and the deep drop in world trade volume has never happened without a global recession since the series originated in 1992.”
IX. What does The X Project Guy have to say?
Hard landing, soft landing, or no landing is perhaps the greatest macro debate of the past few months, with the deflation, continued disinflation, or inflation reigniting debate coming in a close second. Focusing on the direction of the economy, a broad consensus is forming around a soft landing or no landing narrative. Whenever I see a broad consensus, I naturally think of Bob Farrell’s rule #9: “When all the experts and forecasts agree - something else is going to happen.”
The reality is no one really knows what is going to happen. I have my opinions and thoughts about what I think will happen, as do most people, but unfortunately, the world does not always conform. Therefore, I usually prepare for all possible or probable outcomes.
In this article, I have outlined the bearish case for the economy as articulated by Dr. Lacy Hunt, which seems to have become the minority view, although he is not alone. David Rosenberg is the other widely followed and highly respectable economist who shares the hard-landing view.
The opposing view for the bullish case for the economy is based on continued large fiscal deficit spending by the federal government, continued disinflation, lower energy costs, (false?) perceptions of strong employment and a strong consumer, a Fed pivot to lower interest rates, and U.S. policymakers providing ample liquidity to support asset prices (and therefore tax receipts).
In the final section, I will discuss why you should care about this outcome and, more importantly, what you could do about it. However, The X Project now requires you to be a paid subscriber to view the final section. In a few articles, the paywall will move up within the article so that only paid subscribers will see the last two sections, or rather, free subscribers will only see the first eight sections. I will be moving the paywall up every few weeks, so ultimately, free subscribers will only see the first four or five sections of each article. Please consider a paid subscription.
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