“Misguided, Semi-Psychotic” Fed Policies Fueling “Bubble in Risky Assets”

“By creating enormous amounts of paper, and hoarding higher duration securities like Treasury securities, the Fed is trying to force investors into risky assets until the prospective returns on all competing assets are driven so low that investors and banks holding cash are willing to just sit on it. In short, the Fed has focused its efforts on creating a bubble in risky assets, on the misguided, semi-psychotic, and empirically disprovable notion that this will make people feel wealthier and get them to spend and borrow – despite the fact that their incomes can’t support it without massive government transfer payments.”

The above commentary is from the Hussman Funds’ latest Weekly Market Comment, entitled “A False Sense of Security.”

As is evident from the content, Dr. John Hussman is not a big fan of Ben Bernanke and his monetary policies.  In his piece, the long-time Fed critic and investor discussed his particularly dire outlook for the markets in light of “an unusually hostile set of indicator syndromes, most notably, an ‘overvalued, overbought, overbullish, rising-yields’ syndrome that has historically been unfavorable for stocks regardless of prevailing Fed policy or trend-following indicators.”

Other noteworthy items from Hussman included:

The upshot is that if investors are willing to believe (without the use of off-label hallucinogens) that current profit margins are the new normal, and will be sustained indefinitely, then Wall Street’s valuations based on current and forward earnings estimates can be taken at face value. This assumption of a permanently high plateau in profit margins is quietly embedded into every discussion of “forward earnings” here.

As a side note, analysts continue bemoan the “inexplicable” gap between the economic malaise of “Main Street” and the optimism of Wall Street. Compare the previous graph to the one below, which shows how the “Muppets” are doing (and people wonder why I’m cynical about corporate culture). An economy that is this far out of balance is one that is unlikely to avoid toppling over to some extent. Capitalism and free markets work, and America remains the most creative and innovative nation on the planet, but until policy makers and regulators wake up, it will be impossible to escape the long-term consequences of distorted markets, reckless bubble-seeking Fed Chairmen, repressively low interest rates that penalize saving and lower the bar for productive investment, a self-serving financial system, and bailouts that remove all consequences for misallocating capital that could otherwise create jobs and raise living standards.

Lastly, while the S&P 500 Index climbed to yet another multi-year high on Monday, Hussman noted that his firm’s “primary risk estimates are now in the worst 0.5% of what we observe in historical data.”  As a result, the evidence suggests that now is an especially risky time to be invested in the broader equity markets.

As for gold stocks, which Hussman has generally viewed as a safe haven asset class, his Strategic Total Return fund has a relatively small position at less than 5% of assets.

Source; http://www.goldalert.com/2012/03/misguided-semi-psychotic-fed-policies-fueling-bubble-in-risky-assets/