John Hussman: Don't Believe Fed Policy Is a Magic Solution

Tuesday, 29 Oct 2013 08:10 AM

By John Morgan

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The "Grand Superstition" of our time is that Federal Reserve policy ended the financial crisis and sent the stock market higher, and that unfounded belief is bound to be discredited by a dramatic financial downdraft, according to investment manager John Hussman, president of Hussman Funds.

In his weekly market commentary, Hussman said the financial crisis actually ended on March 16, 2009 — the very day the Financial Accounting Standards Board (FASB) bowed to Congressional pressure and abandoned mark-to-market accounting rules.

With the end of mark-to-market requirements, banks received "substantial discretion" in the values they assigned to their assets, Hussman explained.

Editor’s Note:
Seniors Scoop Up Unclaimed $20,500 Checks? (See If You Qualify)

Or, read another way, that was the day the FASB acted to let banks say their holdings were worth whatever the banks said they were, which just happened to be about the same time the current stock market rally began.

Hussman noted that the rate of monetary growth engineered by the Fed "has been breathtaking in recent years, relative to history."

He said the intent of quantitative easing is to force cash holders to "reach for yield in speculative assets they would otherwise not choose to hold."

Stock prices collapsed by half from 2000 to 2002 and again from 2007 to 2009 despite aggressive Fed monetary easing, Hussman noted.

He said his research shows that every 10 percent increase in the stock market is associated with a temporary increase in real GDP of only 0.3 percent to 0.5 percent and a temporary decrease in the jobless rate of only about 0.2 percent.

"In sum, the financial markets presently rest on a spectacular and exaggerated superstition about the power of Fed policy to impact the financial markets and the real economy. This superstition was born of crisis, and is likely to end in crisis," he wrote.

"Probably the most challenging aspect of quantitative easing is that, particularly since late 2011, overvalued, overbought, overbullish conditions usually associated with severe market losses have instead been associated with even more extreme speculation."

Hussman predicted investors soon enough will be looking back at the present market and ask themselves why they thought this time would be different.

Most investors believe the Fed will maintain its massive stimulus program for months to come, according to Reuters.

Economists agree, and expect the Fed will continue its monthly $85 billion bond-buying program until March 2014, Reuters said.

Editor’s Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See If You Qualify)

Related Stories:

MSN Money's Jim Jubak: Don't Fight the Fed, Buy Stocks

Jim Paulsen: End of QE Could Be a Tonic For Stocks

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