We’ve been admittedly quiet on the blogging front. While we enjoy sharing thoughts with our readers, our first priority is to our investors and unfortunately, there is only so much time in a day. I have a tremendous amount of respect for the many great thinkers able to provide detailed analysis on a regular basis. But I can’t help but wonder how they do it. With so many interesting developments in the world today, our posts are put on the back burner while we dedicate our time to research and analysis. We also try to limit our ramblings to material developments or important issues worth noting rather than a random schedule of publication or daily downloads.
As such, we think investors should think twice before extrapolating this QE-induced 12% melt-up in domestic stock prices much further into the future. As we warned in our most recent letter to investors:
Albert Einstein’s classic definition of Insanity is doing the same thing over and over again and expecting different results. As we see it, releveraging an already overleveraged economy is not a path to sustainable growth. It may temporarily ignite animal spirits and lift valuations of the most liquid assets, but is unlikely to have any lasting impact on stimulating aggregate demand. But what do we know? Perhaps our attempt to print and borrow our way to prosperity will turn out to be successful. Anything’s possible. But such “success” would be the equivalent of an addict’s last high, before facing the reality of unresolved structural problems ultimately resulting in a greater crash down the road. As stewards of your capital, we’d rather endure the temporary frustration of lost opportunity than suffer a permanent loss of capital.
John Hussman offered up similar concerns in his weekly commentary this morning:
Over the past two years, the Fed has emptied what has largely turned out to be a chamber of blanks. Its remaining credibility lies in the belief by the public that Bernanke still has a live round left to fire. Once the Fed engages in QE, a failure of appreciable improvement in U.S. employment and economic activity would result in a substantial loss of public confidence. The Fed would be wise to save whatever ammunition it has left for a crisis point when the U.S. public is in dire need of confidence . . . “The current enthusiasm about QE seems much like the enthusiasm of a 10-year-old child about to launch over a plywood ramp on a bicycle. Once the wheels are airborne, it will be a bit too late to ask “now what?”
We highly encourage friends to take a few moments to read the full piece which can be summed up in two words: Reduce Risk. Dr. Hussman has the rare ability to translate complex macroeconomic variables into simple “cause and effect” relationships, that even our current administration can understand. This is exactly the type of thinking that policy makers so sadly lack today. When I read the following paragraphs, I can’t help but wonder why our elected officials fail repeatedly to Get It.
Better policy options are available on the fiscal menu. Historically, international credit crises have invariably been followed by multi-year periods of deleveraging, but measures can be taken to smooth the adjustment. The key is to focus on the economic constraints that are binding. Presently, these relate to high private debt burdens, uncertainty about income, weak aggregate demand, and the reluctance by U.S. businesses to launch new projects. Appropriate fiscal responses include extending unemployment benefits, ensuring multi-year predictability of tax policy, expanding productive forms of spending such as public infrastructure, supporting public research activity through mechanisms such as the National Institute of Health, increasing administrative efforts to restructure debt through write-downs and debt-equity swaps, abandoning policies that protect reckless lenders from taking losses, and expanding incentives and tax credits for private capital investment, research and development.
Meanwhile, the best course for the Federal Reserve is to identify specific constraints within the U.S. banking system that create barriers to sound lending, and to formulate specific policies to relieve those constraints. Throwing a trillion U.S. dollars against the wall to see what sticks is not sound monetary policy. By pursuing a policy that relaxes constraints that are not even binding, depresses the U.S. dollar, threatens to destabilize international economic activity, encourages a “boom-bust” cycle, provokes commodity hoarding, and pops off the Fed’s last round of ammunition absent an immediate crisis, the Fed threatens to damage not only the U.S. economy, but its own credibility.
John – if you are listening, you have our vote for Fed Governor, Treasurer, Economic Advisor, etc. Admittedly, your shareholders would be at a loss. But we have no doubt that your insights would provide Washington with the tools to generate a Greater Gain. Something to think about . . .
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