Tuesday, September 13, 2016

The Majority Of Investors 
Have Their Head In The Sand
"The recent speculative episode has even convinced investors that human nature itself has changed. Centuries of financial market behavior can easily verify that periodic cycles of greed and fear are an inherent part of market dynamics. Instead, investors have abandoned that lesson, believing that central banks have discovered the ability to do 'whatever it takes' to keep markets higher (without realizing that the effectiveness of easy money is entirely dependent on the absence of risk-aversion among investors) .. The thing that allows this is imagination. In every market cycle, imagination is what gives greed and fear their impetus. In a financial or economic crisis, imagination is what leads investors to question whether the economic system itself can survive. In a bubble, imagination is what leads investors to invent endless reasons why the carnival can continue indefinitely. For example, despite the fact that Japan’s real GDP has grown at just one-half of 1% annually over the past two decades, while the Nikkei stock index has taken an extraordinarily volatile trip to nowhere over that period, imagination leads investors to ask why the Federal Reserve won’t suddenly begin buying stocks, as the Bank of Japan and the Swiss National Bank have done. Well, one answer is that Sections 14 and 15 of the Federal Reserve Act prohibit it. Another is that even if the Fed could emulate the Bank of Japan, the Nikkei Index is still below where it was in 2000, 2007 and 2014 (not to mention 1986), so it’s not at all clear that such purchases exert any sustained effect on stock prices. In addition, one needs to examine the situation of each government to understand why certain central banks, and not others, have purchased equities in the first place."
- John Hussman
LINK HERE to the essay

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