A spirited discussion is happening on METAR between those who respect the opinions of John Hussman and those who despise Hussman because his hedge fund’s results have been poor relative to simply investing in a low-cost stock index fund since the 2008 financial crisis.
https://www.hussmanfunds.com/category/comment/
John Hussman takes a historical approach to investing. He collects decades of data from the pre-2008 time when the asset markets were free of massive interference by the Federal Reserve. Hussman believes that the Fed’s actions are wrong and possibly illegal. By fighting the Fed, Hussman has lost…at least for now. Hussman keeps looking back to the value of the markets in the many decades before 2008.
After 2008, the cost (interest rate) of the most fundamental unit of capitalism, the dollar, was no longer controlled by the market, but by the FOMC (Federal Open Market Committee), an unelected group of quasi-government, quasi-private bankers, most with academic backgrounds. This is documented in the book, “The Lords of Easy Money,” by Christopher Leonard, which I’m reading now.
https://fred.stlouisfed.org/series/FEDFUNDS
Only Thomas Hoenig, president of the Federal Reserve regional bank in Kansas City, dissented with Fed ZIRP policy, warning of eventual dire consequences.
https://www.politico.com/news/magazine/2021/12/28/inflation-…
I would take it a step further and say that the Fed has been interfering by suppressing the fed funds rate since the recovery from the dot-com bubble burst in 2001. That suppression (with other novel developments such as sub-prime mortgages and securitization of debts) led to the housing bubble and 2008 financial crisis. After 2008, the Fed began to suppress interest rates at longer durations than the overnight fed funds rate, using Quantitative Easing (QE). The Fed’s purchases of debt ballooned to a significant fraction of GDP. After 2020, the ballooning increased massively to a startling degree.
https://fred.stlouisfed.org/series/WALCL
The Fed’s largesse went to the banks, which invested in bonds, stocks and real estate. This led to the most massive asset bubble in U.S. history. Nobody who owns assets complains about asset price inflation. (The way everyone complains about consumer price inflation.) Investors who own appreciating assets feel richer and congratulate themselves on their cleverness. But it’s all due to the Fed.
The Fed giveth and the Fed can taketh away.
https://www.wsj.com/articles/the-lords-of-money-pose-massive…
**The Lords of Money Pose Massive Threats to Markets**
**When central banks unexpectedly go into full reverse, watch out**
**By James Mackintosh, The Wall Street Journal, June 19, 2022**
**...**
**The troubles of the three central banks [Fed, ECB, Japan] mean investors should prepare for the sort of low-probability, high-threat risks that lead to extreme shifts in prices. When central banks unexpectedly go into full reverse, watch out. Let’s go through the risks.**
**Inflation is a lagging indicator of recession. Inflation typically peaks as a recession starts, or later. The Fed failed to stem inflation because it spent too long looking to the past, as part of its policy of being “data driven,” and so kept rates too low for too long. By sticking to the data-driven mantra, it risks repeating the mistake in the opposite direction, raising the chance that it causes the next recession and has to do a 180. Since the markets have barely begun to price in a recession and so a fall in earnings, that would hurt.**
**On Wednesday, Fed Chairman Jerome Powell went even further, saying he wouldn’t “declare victory” over inflation until inflation has been falling for months. Since inflation typically peaks right at the start of a recession or after it has begun, this makes it hard for the Fed to stop tightening [even though the tightening may worsen the recession]....** [end quote]
As “The Lords of Money,” the Fed has a huge amount of power. But monetary stimulus only has power over demand – indirectly through consumers and businesses that need to borrow. Monetary stimulus can’t directly juice or restrict consumer spending the way fiscal programs like 2020-2021 CARES Act helicopter money directly to households (or conversely, raised taxes) does.
The Fed can only influence the demand side of the supply-demand inflation equilibrium. The Fed can’t influence supply. They can’t build factories (though they can loan money that may eventually lead to higher production. They can’t loosen the kinks in supply chains. They can’t produce oil out of thin air during an embargo the way they can conjure fiat dollars out of thin air. They can’t control pandemics.
Hubris is overweening pride that offends the gods and brings divine punishment.
Can the Fed control the markets and the business cycle and inflation indefinitely with their super-power of creating free fiat money and loaning it to high-risk speculators? While at the same time punishing small conservative investors by suppressing the return from safe investments like bank savings accounts? While trying to control consumer price inflation using the blunt cudgel of monetary policy although the inflation was sparked by fiscal policy?
This seems like hubris to me.
Fed Chair Jerome Powell has announced that he wants the fed funds rate to be brought to “neutral,” a level that will neither stimulate nor slow the economy. That is a huge change from their past 20 years of stimulative policy. A fed funds rate above the inflation rate is a negative REAL rate which is inherently stimulative.
The answer to whether John Hussman or syke6 are correct depends on whether the Fed returns to their historical (pre-2001) past policies of a neutral fed funds rate for the long term AND whether we look at asset values through the entire cycle including the future minimum, not only at the peak.
As my wise Grandma said, “Is it all on paper?” There’s no point having a high-growth stock (or crypto or whatever) portfolio if the value is all on paper and evaporates when the bubble bursts – as has happened many times before. In that case, John Hussman (or conservative investors who avoid risky speculation) will have the last laugh.
https://www.wsj.com/articles/recession-probability-soars-as-…
**Recession Probability Soars as Inflation Worsens**
**Economists see interest-rate increases raising likelihood of recession to 44% in coming 12 months**
The Control Panel continues to be ugly. Stock indexes and internals are falling.
The Fear & Greed Index is in Extreme Fear. The trade is risk-off as stocks and junk bonds are falling faster than Treasury prices (which are also falling as yields rise). The CAPE is falling rapidly but still almost double the historic median. Stock market margin debt is dropping but still near a record.
The Treasury prices actually rose a little this week due to flight-to-safety buying, along with the USD. Financial Stress is very low.
Economically sensitive commodities (oil, natgas, copper) are falling, a sign of impending recession.
The Index of Coincident Indicators is still rising but the Leading Economic Indicators is beginning to fall.
It’s pretty clear that the Fed won’t be able to quell inflation without causing a recession.
Will Jerome Powell maintain a stern front like the marble forehead of Zeus? Or will he cave and cut rates again when the recession starts and the markets join their wails of distress with the working population’s?
Only then will we find out whether John Hussman or syke6 wins the argument. We won’t know for months to come, maybe over a year.
The METAR for next week is gloomy. The trend is down for months to come as we are entering the winter season.
Wendy
https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…
https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…
https://stockcharts.com/freecharts/candleglance.html?$SPX,$U…
https://www.cnn.com/markets/fear-and-greed
https://stockcharts.com/freecharts/yieldcurve.php
https://www.conference-board.org/topics/us-leading-indicator…
