Tuesday, May 24, 2016

Coming Federal Reserve-Induced Pension Bust
"The Fed Has Done Enormous Violence To The Public,
& To The Underlying Stability Of The Financal Markets"
"Based on the most reliable measures we identify (those having the strongest correlation with actual subsequent 10-12 year investment returns across history as well as in recent cycles), the expected return on a traditional portfolio mix is actually lower at present than at any point in history except the 1929 and 1937 market peaks. QE has effectively front-loaded realized past returns, while destroying the future return prospects of conventional portfolios, at least as measured from current valuations. As a result, the coming years are likely to see a major pension crisis across both corporations and municipalities because the illusory front-loading of returns has encouraged profound underfunding .. All of this is tied together: zero interest rate policy, speculative yield-seeking, pension underfunding, financial bubbles, malinvestment, crisis, and economic stagnation. The intentional distortions created by wholly experimental monetary policy carry a great deal of responsibility for these outcomes. The global financial economy has been pushed to such reckless speculative extremes that the ability of this house of cards to survive even a quarter point increase in short-term interest rates is a subject of serious and uninterrupted debate. The Fed has done enormous violence to the public, and to the underlying stability of the financial markets, not only by encouraging a reckless yield-seeking financial bubble as the response to a global financial crisis that resulted from the previous Fed-induced yield-seeking bubble; not only by driving the financial markets to the point where poor long-term returns and wicked interim losses are inevitable (the same dangers investors faced at the 2000 and 2007 peaks); but also by creating an environment where scarce savings have been increasingly diverted to speculative activities, and where pensions have been encouraged to underfund their liabilities in the belief that past realized returns are indicative of future outcomes."
- John Hussman
LINK HERE to the essay

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