Tags: Hussman | Fed | Rates | Stocks

Hussman: Don’t Bank on Fed Rates to Save Stocks

By    |   Sunday, 09 June 2013 09:46 PM

Many investors cling to the belief that stocks will inevitably rise when the Federal Reserve is lowering interest rates. But the last two 50 percent stock market meltdowns actually occurred when the Federal Reserve was aggressively easing, according to stock market analyst John Hussman of Hussman Funds.

"It is superstition to believe that monetary easing is a panacea," said Hussman, a frequent Fed critic, in his latest client newsletter. "Investors who recognize (actually simply remember) this now are likely to fare better than those who are forced to relearn it later."

Hussman said investors have forgotten the 2001-02 market plunge, when the S&P 500 sank from over 1,300 to about 800, went "hand in hand with continuous and aggressive monetary easing."

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Likewise, in the 2008-09 market shock, when the S&P 500 fell from over 1,550 to about 650, persistent Fed easing did nothing to prevent a 55 percent drop in stock prices.

The point is "not that favorable monetary conditions are irrelevant," Hussman wrote. "The point is that they are not omnipotent..."

Hussman, who correctly forecast the 2008-09 recession, acknowledged that central bank action can sometimes help the economy, such as when it provides liquidity in the face of bank runs.

"But there is little evidence of a transmission mechanism whereby a greater supply of idle bank reserves promises to make a dent in the economy beyond occasional and short-lived cankicks."

According to Hussman, the recovery from the 2009 stock market lows was attributable not to rate cuts, but to the elimination of "mark-to-market" accounting that kept banks from insolvency, and the shift to outright guarantee of Fannie Mae and Freddie Mac debt by the U.S. Treasury.

"Needless to say, all of this will be summarily ignored by speculators who have been rewarded by the strategy of following the Fed in a mature, overvalued, overbought, over bullish, unfinished half-cycle that recently hit new highs," Hussman said.

"Advice from Kenny Rogers – you never count your money when you're sittin' at the table."

An Associated Press survey of economists released last week concluded the Fed has not inflated a stock market bubble by keeping rates ultra-low. Three-quarters of the economists said stocks are not overvalued and that the Fed’s policies have boosted equity prices.

The S&P 500, relative to expected corporate earnings, is only about half its level of late 1999, the AP reported. That was a few months before the dot-com frenzy overheated and punctured a stock-market bubble.

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"It is superstition to believe that monetary easing is a panacea," says John Hussman, a frequent Fed critic, in his latest client newsletter.
Sunday, 09 June 2013 09:46 PM
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