Fund manager John Hussman says a new recession — and a Greek debt default — are now “virtually certain”.
In his latest market commentary, Hussman says that the markets seem to be viewing the current situation as a replay of the 2010 correction, and are holding out hope that the Federal Reserve will launch another round of “monetary intervention”, as it did when growth slowed in 2010. That won’t help matters, however, he says. “While we have to allow for the possibility of a knee-jerk speculative response in the event of further Fed intervention, it is also much clearer now than it was in 2010 that quantitative easing does not work, and that even its marginal effects have reached the point of diminishing returns,” he writes. “To a large extent, the only basis for further Fed action here is superstition in the absence of either fact or theory.”
Hussman says another round of QE would fix a problem that doesn’t exist; there’s plenty of money in the system already, he says — the problem is that $1.6 trillion of it is “sitting idle” as excess reserves in the banking system. He also says that another option, increasing the maturity of the Fed’s portfolio to further drive down long-term interest rates, would have a similar non-impact. Companies aren’t investing right now not because interest rates aren’t low enough, he says. “Most of the reluctance to invest here is because there is already enormous slack capacity, and even for new products, there is generally great uncertainty as to whether there will be robust demand for the output,” he writes. “The Fed is kidding itself if it believes that a slight further reduction in long-term Treasury yields will matter in that calculus.”
In addition, Hussman disputes the “wealth effect” idea that the Fed has espoused — the notion that policies that lead to increased asset prices lead to people feeling wealthier and spending more, creating a “virtuous cycle” of spending and income. “It is well-established in decades of economic data that each 1% change in stock market value is associated with a transitory increase of only 0.03-0.05% in GDP,” he writes.
As for the market, Hussman says he and his team are right now “much more concerned about a major, abrupt break in the market than we are about missing a ‘fast, furious, prone-to-failure’ clearing rally”.