Tuesday, April 19, 2016

Permanently High Plateaus 
Have Poor Precedents
In his latest missive, John Hussman quotes Irving Fisher: "Stock prices have reached what looks like a permanently high plateau." .. & also Hyman Minsky: "Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits." .. Hussman continues to view the market distortion by the Federal Reserve to be a "reckless mistake" - "These policies have produced no benefit to the real economy (output, employment, industrial production) compared with what could have been predicted solely on the basis of non-monetary variables. But these policies have fueled the third financial bubble since 2000; they have elevated security valuations to the point where both stocks and bonds are now priced to produce negative expected real returns for investors on a 10-12 year horizon; they have facilitated heavy issuance of corporate debt with a preference for low-grade 'covenant lite' obligations; they have provoked speculative capital flows and 'carry trades' in international markets; and they have encouraged competing behavior by central banks across the globe - all from whence will emerge the next financial crisis. On its face, the Fed and other central banks are attempting to foster economic stability. But as the economist Hyman Minsky observed decades ago, attempts to produce such 'new eras' of economic stability tend instead to foster the escalation of speculation, debt issuance, and deteriorating loan quality. Those features, in turn, make the economy increasingly vulnerable to crisis." .. Hussman concludes: "Long periods of obscene overvaluation create an illusion of permanently high plateaus, but produce an inevitable harvest of poor long-term returns and wicked losses that complete those market cycles."
LINK HERE to the essay

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