Tags: Hussman | aspirin | femur | Fed

Hussman: Fed Using Aspirin to Treat a Broken Bone

Monday, 24 Dec 2012 08:41 AM

The Federal Reserve is acting like a physician who does not know how or is unwilling to treat a patient with a broken femur, says fund manager John Hussman.

“Being both unable and unwilling to restructure the broken bone, he announces that he will keep shoving aspirin down the patient’s throat until the bone heals,” Hussman writes in a note to investors.

The bone might eventually heal enough on its own to allow the patient to hobble out of bed, even though there is no relationship between the injury and the treatment, notes Hussman.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

“But by then, the patient will need to be treated for liver failure,” he writes.

“What’s even more bizarre is that everybody quietly knows this, but as he shoves another handful of aspirin down the patient’s throat, nobody proposes restructuring the broken bone, and they instead stand around helplessly saying ‘well, ya gotta do somethin' don’t ya?’”

The fundamentals of the economy and the low valuations that cause long-term, sustained secular bull markets will remain.

“We will most likely experience a number of cyclical bull-bear markets before that point, and I would expect extended opportunities to accept market risk during those cycles,” he says.

“The best opportunities generally arrive at the point where significantly reduced valuations (often but not always to levels that would be considered ‘undervalued’) are followed by an early firming of market action. We observe no such opportunity at present.”

The Fed announced earlier this month that it would beef up its third round of quantitative easing by adding an additional $45 billion in asset purchases from banks, namely U.S. government debt, bringing total liquidity injections to $85 billion a month, with the aim of keeping borrowing costs low to spur investing and hiring.

The Fed also said interest rates will stay low until the unemployment rate drops to 6.5 percent from its current level of 7.7 percent, provided inflation rates don’t climb above 2.5 percent.

The Fed’s repeated moves to loosen already extraordinarily loose monetary policies reflect a willingness on the part of monetary authorities to tolerate mounting inflationary pressures in exchange for job creation and more robust recovery, said Peter Warburton, director of Economic Perspectives, a U.K.-based consultancy.

“I think on a number of levels I am much more inclined to the view that inflation has a lot of upside potential,” Warburton told Newsmax TV in an exclusive interview.

“The deflationary risk, certainly as measured in the bond market, has receded all the way through, but hasn’t stopped the Fed from acting, so it’s suggesting that the body language now is to be more tolerant of inflation.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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