Hussman: The Fed Has Built a 2-Legged Stool
Tuesday, 22 Apr 2014 10:02 AM
By John Morgan
The Federal Reserve is resting the fate of the U.S. economy on a two-legged stool by focusing only on jobs and inflation, while financial excesses are left unchecked, according to Fed perma-critic and mutual fund manager John Hussman.
In his weekly market commentary, the founder of the eponymous Hussman Funds predicted the Fed has baked unavoidable consequences into the cake of massive monetary stimulus that will prevent its employment and inflation goals from being met.
"Make no mistake. The Federal Reserve's policy of quantitative easing has starved investors of all sources of safe return, provoking them to reach for yield in more speculative assets, including equities, leveraged loans, covenant-lite debt and other securities," he wrote.
"Having stomped on the pedal for years, all of these asset classes are valued at levels that are strenuously elevated from a historical perspective, and as a result, offer strikingly poor prospective returns for long-term investors."
Hussman noted also the 2000-02 stock market decline wiped out every shred of S&P 500 total return, "in excess of Treasury bill returns, all the way back to May 1996," and the 2007-09 decline eliminated "every bit of the market's excess return all the way back to June 1995."
There is no economic law that says the current bull market must likewise end in a dreadful plunge, he acknowledged.
"On the other hand, I have no doubt at all that having driven equity valuations to present levels, investors will be starved of total return — from current prices — for at least a decade (assuming valuations never move below historical norms), and possibly much longer (in the event that valuations do indeed move below historical norms 15 or 20 years from today)."
According to Hussman, it is too late in the current bull market for the Fed to unwind the policies that led to "malinvestment" and extreme valuations, but there may still be a way to manage the downside for the broader economy.
"Oversight – particularly in leveraged equity, leveraged loans, and covenant-lite lending — should be far higher on the [public] agenda than promoting further overvaluation and speculation, in the hope that some small benefit will trickle down to the masses," he said.
Michael Feroli, JPMorgan Chase's chief economist, believes the Fed is faced with an "impossible trinity," Bloomberg Businessweek reported.
In an essay, Feroli predicted that three things cannot possibly co-exist in the Fed — transparency, collegiality and clarity. While the Fed is striving to achieve all three, he says that will soon be demonstrated impractical because the Fed members do not agree on how to control inflation and asset bubbles.
In a guest column for Forbes titled "The Bizarro World of the Federal Reserve," contributor Mark Hendrickson questioned why the Fed has been so intent on achieving a higher level of inflation to spark the economy.
"I guess it's because I've always thought that the purpose of a central bank is to defend the soundness of its country's currencies, not to depreciate it. How quaint and naive of me," Hendrickson wrote.
Read Latest Breaking News from Newsmax.com http://www.moneynews.com/StreetTalk/Hussman-Federal-Reserve-inflation-employment/2014/04/21/id/566773#ixzz2zeoTSY9v
Poster Comment:
Will Bizarro #1 please step forward. ;)