- John Hussman – the outright investor and former professor who has long predicted a stock collapse – believes that investors are making a huge mistake by blindly trusting the Federal Reserve's ability to stop the markets.
- He notes that the outcome of the Fed's actions depends heavily on investor psychology and sentiment. According to his own measure, these remain negative.
- Hussman is skeptical of the legendary investor Stanley Druckermiller's ability to support the Fed over the long term.
- Hussman claims a two-thirds market crash due to the highs it reached in February, which is a decrease of around 50% from today's level.
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One can say with certainty that the Federal Reserve has thrown almost everything except the sink on the market to combat the effects of the corona virus.
The Fed has been doing the following since mid-March:
All of these impulses have led to an insatiable expansion of the Fed's balance sheet.
Below is a snapshot of the Federal Reserve's balance sheet. After briefly dropping below $ 4 trillion in 2019, it exploded to nearly $ 7 trillion today. And it is generally expected to keep climbing.
Source: Federal Reserve System Board of Governors (USA)
Market participants appear to have found comfort in the Fed's unprecedented response to the virus S&P 500 trades around 35% higher than on March 23.
John Hussman, the former economics professor who is now president of the Hussman Investment Trust, thinks that the enthusiasm will soon lead to heartache.
"I believe the Federal Reserve has performed an amygdalotomy on the investing public by aggressively intervening in the financial markets at valuation levels that are far from normal historical norms," he said recently Customer notice.
He continued: "The Fed has promoted poorly adjusted confidence in the existence of risk. This excessive trust of investors is itself a threat to their survival."
For Hussman, undisguised confidence in the Fed is wrong. According to his methodology, the mood and psychology of investors is crucial – and if they become negative, all the momentum in the world is not enough to support the stocks.
Below is Hussman's proprietary measure of market internals (red line) – a measure he uses to identify sentiment – that is contrasted with the S & P 500's total return (blue line). Internals remain negative to this day.
"Investors should be careful to avoid the misunderstanding that simple money always supports the market," he said. "The fact is that market results depend on whether investor psychology tends to speculate or risk aversion."
He added, "Simple money 'only works to support prices when investor psychology tends to speculate."
Using the following graphic, Hussman shows how monetary policy (tightening / easing) reacts when the internals of the market are cheap and unfavorable. The conclusion he comes to is that accommodative monetary policy will not make much of a difference in the market if internals remain negative, as the orange line shows.
"Despite the fact that the Fed eased all the way down during the 2000-2002 and 2007-2009 collapse, investors have come to believe that the Fed's easing will always support stock prices," he said. "This is the wrong lesson, and retraining investors is probably unbearable."
Hussman is not alone in his assessment of the Fed's ability to serve as a panacea. Stanley Druckermiller, the legendary investor and former chief strategist of George Soros, recently stated: "The consensus out there seems to be: & # 39; don't worry, the Fed has your back. & # 39;"
"There is only one problem with this: Our analysis says that it is not true," Druckermiller added.
Given the deterioration in Hussman's proprietary market internals, what he believes to be "heavily overvalued" stocks, and a Federal Reserve that cannot provide a viable remedy, he expects the market to lose 50% of its value today.
"In this context, it should be recalled that market lows related to US recessions generally occurred at valuations that were around 40% of those prevailing today – and sometimes even less," he said. "In terms of the current downturn, I expect the S & P 500 will most likely lose around two-thirds of its value when this cycle is complete, measured against the February 2020 highs."
Hussman has made repeated headlines for the uninitiated by forecasting a stock market decline of more than 60% and a decade of negative equity returns. And since the stock market has largely continued to grow, it has continued its calls unflinchingly.
Before you dismiss Hussman as a wobbly permanent bear, however, you should consider his track record, which he broke down in his last blog post. Here are the arguments he makes:
- In March 2000, forecasted that tech stocks would drop 83%, the tech-heavy Nasdaq 100 index lost "incredibly precise" 83% over a period from 2000 to 2002
- For 2000, it was predicted that the S & P 500 would likely generate negative overall returns over the next ten years
- In April 2007, the S & P 500 was predicted to lose 40%, then lost 55% in the subsequent collapse from 2007 to 2009
The more evidence Hussman reveals about unsustainable stock market conditions, the more concerned investors should be. Sure, there may still be returns in this market cycle, but when does the increasing risk of a crash become too unbearable?