Tuesday, June 07, 2016

Financial Repression Encourages
Too Much Speculation
Leaving Markets Vulnerable To Wicked Losses
"... extreme valuations, on historically reliable measures, suggest that investors have over-adapted to suppressed short-term interest rates. Sustained periods of low short-term interest rates encourage yield-seeking speculation, which amplifies concurrent market returns for a time, but leaves financial markets vulnerable to wicked losses ... Once extreme valuations are in place, the losses that follow have everything to do with that overvaluation, and nearly nothing to do with the behavior of interest rates. Indeed, the worst market losses across history have been associated with relatively low short-term interest rates during the collapse and the absence of any material hike in interest rates at all as the collapse unfolds. Investors have convinced themselves to tolerate historic valuation extremes, confident that stocks can’t fall unless interest rates rise. They’ve walked right into this setup because they don’t recognize it, and neither central bankers nor the investment profession appear interested in admitting the increasingly pressing risks that they themselves have been complicit in creating."
- John Hussman
LINK HERE to the essay

1 comment:

Anonymous said...

It's Official Ex BoE Mervyn King: Buy assets (gold) that gives you the best chance of surviving some big event.He believes long-term asset managers should adopt a pragmatic approach to investment;

“If we don’t quite know what the future holds, there is little point in getting carried away by very fancy mathematical calculations of optimal portfolios. Don’t rely on past data to be a good guide. Try to think through what mix of assets gives you the best chance of surviving some big event. That must mean including assets that are negatively correlated or uncorrelated in your portfolio,” he says.

“And I am very struck by the fact that over many many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. Obviously, there is no high running return, but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept. And I think that’s why even central banks have always had a role in their portfolios for gold,” he adds. In recent years, many central banks in Asia and South America have been increasing the amount of gold in their portfolios. King believes this is a sensible approach. “I can understand why they feel that some proportion of their portfolio needs to be in gold.”

King also sees a role for gold as a hedge against (hyper)inflation; http://www.thebigresetblog.com/index.php/ex-central-bank-president-mervyn-king-easiest-outcome-would-be-for-germany-to-leave-eu/ …