John Hussman can sound a bit like a broken record after a while, making reading each week a bit tiresome. But that’s only because the insanity of markets and policies can remain… well, insane, a lot longer than you can remain solvent. So, despite the repetition of message, most all he’s been warning us about for the last few years seems to be coming to fruition. Hence, this week’s comments are worth a look.
A few highlights:
“Despite short-term interest rates being only a whisper above zero, we increasingly hear assertions that “financial conditions have tightened.” Now, understand that the reason they’ve “tightened” is that low-grade borrowers were able to issue a mountain of sketchy debt to yield-seeking speculators in recent years, encouraged by the Federal Reserve’s deranged program of quantitative easing, and that debt is beginning to be recognized as such. As default risk emerges and investors become more risk-averse, low-grade credit has weakened markedly. The correct conclusion to draw is that the consequences of misguided policies are predictably coming home to roost. But in the labyrinth of theoretically appealing but factually baseless notions that fill the minds of contemporary central bankers, the immediate temptation is to consider a return to the same misguided policies that got us here in the first place, just more aggressively.”
“…A historically-informed perspective is useful here, lest one mistakenly draws the impression that untethered monetary easing is the cure rather than the disease. The fact is that the benefits of years of quantitative easing, as well as the potential costs of the December rate hike, both pale in comparison to the damage that the Fed has effectively baked in the cake through years of financial distortion.”
“…what we should fear is not the slight impact of recent policy normalizations, but the violent, delayed, yet inevitable consequences of years of speculative distortions that are already fully baked in the cake. What we should fear are the Fed’s repeated and deranged attempts to achieve weak effects on the real economy, at the cost of speculative distortions that exact ten times the damage when they unwind. What we should fear is more of the same Fed recklessness that encouraged a yield-seeking bubble in mortgage debt, enabling a housing bubble that collapsed to create the worst economic crisis since the Great Depression. What we should fear is Fed policy that has encouraged a yield-seeking bubble in equities, debt-financed stock repurchases, and covenant-lite junk debt; that has carried capitalization-weighted valuations to the second greatest extreme in history other than the 2000 peak, and median equity valuations to the highest level ever recorded. That’s exactly what the Fed has done in recent years, and the cost of that unwinding is still ahead.”