Tags: Hussman | Market | Ponzi | Fantasy

Economist Hussman: Market Embrace a Ponzi Fantasy

Friday, 14 May 2010 09:31 AM

Economist John Hussman says the market's myopic, willfully ignoring reality.

"Overall, it strikes me that the markets have wholeheartedly embraced the view that the recent downturn was nothing but a typical and purely transitory postwar wrinkle," Hussman writes in a note to investors.

"Yet income continues to deteriorate once government transfer payments are backed out, in stark comparison to other postwar recoveries."

Before last week's "flash crash," Hussman says the market climate for stocks was “overvalued, overbought, overbullish, rising-yield conditions that have historically been associated with poor outcomes.”

Investors, Hussman notes, have looked past the effects of temporary stimulus and opaque accounting, maybe on the Madoff-like thesis that neither sustainability nor accurate disclosure really matter as long as the numbers are good.

“There's also no denying that this thesis has worked beautifully, and we've missed out by questioning it,” Hussman says.

“I continue to believe that the market's enthusiasm may turn out badly, given the extent to which GDP gains have been induced by unparalleled deficit spending, and earnings gains have been predominated by financials enjoying suspended accounting transparency.”

Dean Curnutt, founder of options advisory and brokerage firm Macro Risk Advisors, is also wary of market enthusiasm because he sees a disconnect between the volatility index and mounting U.S. debt.

Curnutt says the volatility index (VIX) level is misleading because it doesn’t adequately reflect the risks posed by historically low interest rates, growing public debt and the consequences of unwinding government stimulus measures, as well as the possibility of contagion in financial markets from the debt crisis in Europe.

“These structural deficits can’t continue,” Curnutt tells Bloomberg.

“The alternative is very harsh medicine, spending less and battening down the hatches, which is not good for equity prices.”

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Economist John Hussman says the market's myopic, willfully ignoring reality. Overall, it strikes me that the markets have wholeheartedly embraced the view that the recent downturn was nothing but a typical and purely transitory postwar wrinkle, Hussman writes in a note...
Hussman,Market,Ponzi,Fantasy
287
2010-31-14
Friday, 14 May 2010 09:31 AM
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