Hussman: Market Rally in Late Stages as High Risk Looms

Monday, 10 Sep 2012 10:09 AM

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The recent advances in the market signal it is in late stages and filled with high risk, says economist and fund manager John Hussman.

The current conditions of the market, including rich valuations, overbought trends, lopsided bullishness, heavy insider sales and lagging market internals, have been seen many times before, Hussman writes in a note to investors.

“The ultimate outcome has historically been spectacularly bad, but it still takes patience and discipline to stay on the sidelines during late-stage, high-risk advances,” says Hussman.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

“Of course, the present instance may turn out differently than every prior instance has — it’s just that we have no basis to expect that outcome.”

Hussman also observes that the Federal Reserve is contemplating a third round of quantitative easing, since a significant reduction in the Fed’s balance sheet is unlikely to be achieved at the current long-term interest rates.

“Unfortunately, they’re likely to do it anyway,” Hussman says.

“As hedge funds often discover, and JPMorgan recently learned, it is very easy to get into a position that later turns out to be nearly impossible to exit smoothly,” Hussman writes.

“While we don’t expect material inflationary pressures until the back-half of this decade, the Federal Reserve has increasingly placed itself into a position that will be nearly impossible to disgorge without enormous disruption,” he adds.

According to The Associated Press, world financial markets are steady as traders await further developments in Europe’s debt crisis and the Fed’s meeting this Wednesday and Thursday.

The European Central Bank announced a move last week to buy sovereign debt in secondary markets to lower borrowing costs in countries like Italy and Spain.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible


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