Tags: Hussman | Fed | Market | Instability | us | economy | rates

Hussman: Fed Causing Market Instability

Wednesday, 27 Apr 2011 08:20 AM

In his latest note to investors, economist and fund manager John Hussman says the Federal Reserve's extreme position is hurting financial markets.

Hussman says that, by replacing an enormous quantity of interest-bearing assets with non-interest bearing money, quantitative easing has created profound distortions in asset prices, where Treasury bills now yield less than 5 basis points annually.

“Risk assets" such as stocks and commodities, on the other hand, have been driven to prices high enough that their “likely future returns now compete perfectly (on a time-horizon and risk-adjusted basis) with the zero expected returns on cash.”

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Ben Bernanke
(Getty photo)
Hussman is betting that government bond rates will jump if the economy stays strong, but if it doesn't, and corporate default risk grows, then Treasury demand will hold up.

"The Federal Reserve has created an unprecedented monetary position that creates an extremely unstable equilibrium for the financial markets," Hussman writes in a note to investors.

"The one thing that will save the Fed from any need to shift its portfolio over the near term would be that sort of increase in credit risk, because it would essentially increase the demand for default-free securities while also muting any near-term inflation pressures."

James Grant, editor of Grant’s Interest Rate Observer, says in his latest edition that, in addition to its congressionally directed dual mandate — stable prices and full employment — the Bernanke Fed has unilaterally added a third.

“It has undertaken to make the markets rise,” says Grant. The chairman himself has more than once taken credit for the post-2008 bull market …. could he therefore stand idly by in the face of a new bear market?”


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In his latest note to investors, economist and fund manager John Hussman says the Federal Reserve's extreme position is hurting financial markets. Hussman says that, by replacing an enormous quantity of interest-bearing assets with non-interest bearing money, quantitative...
Hussman,Fed,Market,Instability,us,economy,rates
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2011-20-27
Wednesday, 27 Apr 2011 08:20 AM
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