Yesterday during lunch I had the good fortune to hear Michael Cox, Former Chief Economist of the Dallas Fed and currently Director, O’Neil Center for Global Markets and Freedom at Southern Methodist University. Mr. Cox had a few very interesting comments.
The most outstanding point he made in my mind was that inflation WILL arrive within a year and will range in the 4-5% zone. While hard to believe, Mr. Cox is an excellent economist and his comments rhyme with our thoughts on possible higher interest rates, BUT, he believes inflation, and therefore higher interest rates, are coming sooner than we thought. If inflation moves to his target level within one year, that would mean interest rates will begin rising soon, in expectation of coming inflation. This would lend merit to our Auguest 13th, 2009 Coiled spring post (A Coiled Spring Being Held Down…Careful !) but would be at a faster pace and with more velocity.
His analogy was simple to understand and very animated. Mr. Cox believes the stimulus dollars initially handed out to various industries, especially the banks, are being held on to, in fear, currently. He believes that in short order these funds will be released into our economy and result in promptly higher inflation. By the way, inflation at 4-5% is not too terrible, but coming from where we are now, at almost zero, many adjustments in the fixed income arena will need to be made if Mr. Cox’ theory is correct. Time will tell if Mr. Cox is correct.
Other interesting thoughts were a slower growth economy long term, due to our current debt burden and deleveraging. From our July 11th, 2009 post Second Quarter 2009 Performance Report Cover Letter “Due to the much publicized “deleveraging”, or lowering of loans, liabilities, and debt, slower growth in the near future is our expectation.” Obviously we agree with Mr. Cox on this point.
Lastly Mr. Cox believes there will be a hand off of the growth batton to emerging, and overseas partners. See our August 17th, 2009 post An Interesting Weekend of Sports and How it Relates to World Capital Markets for a similar view.
I was once told comically by a noted economist that good memories of future predictions are an economist’ worst enemy.
We have Mr. Cox’s thoughts down on paper, so to speak, time will tell if he is correct, you can certainly expect us to review these thoughts in the future !