John Hussman: Fed easing drives speculative investing

Asset manager John P. Hussman is more than a little skeptical about whether the economic recovery has any real legs. In fact, using various data points, he is predicting “a likely minefield of economic disappointments” in the coming weeks.

The following post contains excerpts from the weekly commentary by John P. Hussman, president of the Hussman Trust. To read the full commentary, click here.

In his latest weekly market commentary, asset manager John P. Hussman, president of the Hussman Trust, says the Fed is like an “indulgent parent to a spoiled child” insofar as how the agency deals with Wall Street. In Hussman’s view, another round of easing from the Fed (in the wake of a disappointing jobs report) is a predictable next step, “perhaps following a market plunge of 25% or more.”

Hussman—in case it wasn’t obvious—is not a fan of quantitative easing: “QE has had no durable economic benefits…and does little but to repeatedly lay fresh wallpaper over the rotting edifice that is the global banking system,” he writes. Furthermore, Hussman says that the main effect QE has been to “drive investors into speculative investments by starving them of safer yields.”

Given this backdrop, it is not surprising that Hussman is more than a little skeptical about whether the economic recovery has any real legs. In fact, using various data points, he is predicting “a likely minefield of economic disappointments” in the coming weeks.

Hussman also takes time to respond to an article that appeared in The New York Times over the weekend in which he was labeled a “perma-bear”—a label to which he does not object. The problem, Hussman says, is that too many investors are in comparison overly bullish and are not recognizing the myriad of problems still plaguing the economy. He writes:

I also periodically get the “perma-bear” label with respect to my views on the financial markets. While I do believe that stocks have been generally overvalued since the late-1990’s (a view that is supported by the predictably dismal overall total returns on stocks since that time), I do think that some observers misclassify the 2009-early 2010 period as being a reflection of our standard investment strategy instead of what it was – a period when we suspended risk taking until we were confident that we had adequately stress-tested our methods against Depression-era data. That may seem like a distinction without a difference, but the difference is that for most periods since 2000, our present investment methods would do very little differently than we actually did in practice (though there are of course a few moderate differences due to various refinements and ongoing research). The 2009-early 2010 period is distinct in that it is not at all indicative of the hedge position that can be expected of our strategy in future market cycles, even under identical conditions and evidence. The fact that we removed about 70% of our hedges in 2002 (when our projection for 10-year S&P 500 total returns was not much more compelling than what it is today), should be some evidence of that.

Financial markets fluctuate, and prospective returns change. We will undoubtedly have ample opportunities to accept financial risk in expectation of reasonable returns, and if history is any guide, those opportunities will emerge well before our economic problems are behind us. What concerns me here is the refusal of investors to even recognize those problems; the army of hostile syndromes we observe in both financial and economic data; the blind faith that simply changing the mix of Treasury debt and bank reserves can produce growth and put a floor under speculative assets; the near-complete denial of ongoing debt strains; and heavily bullish sentiment that Investors Intelligence correctly notes is now in “territory associated with market tops.”