The Hussman Report
...Singularity
From my perspective, an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place.
It is a bizarre notion that a credit crisis can be solved by bailing out lenders while doing nothing about the obligations on the borrower side. Think about it - what we have said to lenders is, here you have these homeowners who can't pay for their houses. Foreclose on them, sell the homes at half the price, and the public will make you whole (largely through Treasury bailouts to Fannie and Freddie, made necessary by Federal Reserve purchases of these securities).
Heck, if the public is going to be on the hook anyway, at least notice that at equivalent cost to the public, the mortgage could simply be written down to half its value, with the homeowner now able to pay the balance off and the lender getting the public handout to make up the difference. But of course, that would reward the homeowner. So instead, we simply make the lenders whole while people lose their homes and foreclosure investors flip the homes at a profit in return for providing liquidity at the auction. That way, the same amount of public funds can be spent through the back door without Congress even getting involved.
Memo to Ben Bernanke - throwing money out of helicopters isn't monetary policy. It's fiscal policy. How is this not clear?
The proper way to deal with a major debt crisis - indeed, the only way nations have ever successfully dealt with major debt crises - is through debt-equity swaps, restructuring and writedowns. There are numerous ways to achieve this with mortgages. My preference would be swaps of principal for pooled property appreciation rights (administered, but not subsidized by the Treasury). In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable.
Market Climate
As noted above, the Market Climate for stocks last week was characterized by an overvalued, overbought, overbullish, rising-yields conformation that has historically been unusually hostile to stocks. The Market Climate in bonds likewise shifted last week, to a condition of unfavorable yield levels and upward yield pressures. The Strategic Growth Fund and Strategic International Equity Fund are tightly hedged. Strategic Growth holds a staggered strike position where our put strikes are generally quite close to the existing level of the market, and Strategic International Equity has less than 10% of unhedged market exposure, though only a portion of the Fund's currency risk is hedged (currency fluctuations typically represent only a fraction of the total variance of international equity investments). Strategic Total Return presently carries a duration of less than 1 year, with about 1% of assets in precious metals shares, 2% in utility shares, and 1% in foreign currencies.
...It bears repeating that $850 billion of QE2 ($600 billion, plus $250 billion funded by bailed-out Fannie Mae and Freddie Mac securities) will not even absorb the new issuance of U.S. Treasury securities over the coming year. That means, in turn, that holders of existing Treasury securities will, in equilibrium, have to continue holding Treasury securities. The only effect of QE2 will be to change the maturity profile - not the overall quantity - of Treasury debt held by the public. At the same time, it will create an enormous overhang of what will effectively be "new issuance" of Treasuries at some future point if/when the Fed reverses its position. Long-term Treasury investors tend to be more forward looking than long-term stock market investors because the stream of payments is known perfectly. It's doubtful, aside from brief rounds of hot potato and musical chairs, that these investors will be moved in any persistent way by the Fed's manipulation.
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