Hussman: Investors Turning Blind Eye to Looming Recession

Monday, 13 Aug 2012 09:08 AM

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Investors are so convinced the Federal Reserve will prop up the economy with monetary policy tools that they are failing to see an inbound global recession that all the stimulus in the world can’t halt, said economist and fund manager John Hussman.

In its most recent meeting, the Federal Open Market Committee said it “will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

One such policy tool the Fed uses, quantitative easing (QE), aims to push long-term interest rates down as low as possible, which makes stocks an attractive investment.

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

The Fed has already rolled out two rounds of QE since 2008, and talk that a QE3 is fast approaching has sent stocks prices climbing in anticipation.

However, a look at demand from businesses shows that fundamentally, the U.S. and even other major economies are headed for a downturn, said Hussman, head of Hussman Funds.

“Investors remain so addicted to the temporary high of monetary intervention that they continue to ignore very real downturn in global economic indicators, to an extent that we have not seen since the 2007-2009 recession. This is particularly evident in the deterioration of new orders and order backlogs, which are short-leading indicators of production, which in turn is a short-leading indicator of employment,” Hussman wrote in a letter to investors.

“Wall Street is scared to death of being out of the market when the perceived salvation of QE3 is announced, and at the same time is increasingly encouraged by negative economic data in the belief that this will accelerate delivery,” Hussman added, referring to a recent trend that sees stock prices rising when disappointing data hits the wire, as investors buy on the notion that bad news ups the chances of Fed intervention. 

“In short, investors are practically begging to be shot, mauled by dogs and diced by a Veg-O-Matic so they can get their next fix of painkillers.”

Eric Rosengren, president of the Federal Reserve Bank of Boston, said recently the time has come for the Fed to intervene.

According to its mandate, the Federal Reserve must work to best ensure price stability and optimal unemployment rates.

The U.S. economy picked up a net 163,000 nonfarm payrolls in July, more than expected, but lost 195,000 at the same time, according to the Bureau of Labor Statistics survey of households.

“For the last seven months we’ve been treading water. That’s different from what we expected at the beginning of the year,” Rosengren said, according to The New York Times. 

“I think it’s time to swim to shore.”

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


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