Hussman Weekly Market Comment: Brief Holiday Update
Given current household leverage from mortgage and consumer debt, coupled with the inability to access mortgage equity withdrawals (that largely fed spending increases during the most recent economic expansion), my concern continues to be that unemployment will behave as a leading indicator rather than a lagging one. During typical economic downturns, there is always some feedback from employment losses to credit losses, but that effect has been more contained because debt burdens have not been nearly as high, and homeowners have not been saddled with negative home equity. The dynamic of this downturn is different, so investors should be slow to accept the “employment is a lagging indicator” argument under present conditions.
On the inflation front, I continue to believe that any persistent inflation pressure is most probably several years out. The primary inflation risk is not simply that the Treasury and Federal Reserve have dramatically expanded the volume of government liabilities. To the extent that these agencies have taken assets in – commercial mortgage securities or preferred stock of banks – these transactions could theoretically be reversed without leaving a persistent increase of government liabilities in their wake. The real problem is that avoiding inflation here requires that these transactions can be undone, and that will prove impossible if mortgage defaults do not actually stop. There is no reason to believe that they will, particularly given the enormous overhang of second-wave mortgage resets that will begin later this year. So the real problem is not just that we've issued more government liabilities, but that the assets that we've taken in return will turn out to be worth less than the liabilities we created. The difference, of course, will represent pure money creation, and that's what will feed inflationary pressures over time.
- Hussman Weekly Market Comment: Deflationary Boom?
The defining feature of the present market and economic environment is incompatibility, juxtaposing weakness in emerging markets, materials, and inflation-protected securities with strength in equities and the U.S. dollar, a spike in interest rates, and...
- Hussman Weekly Market Comment: House On Ice
On the surface, the U.S. economy is gradually recovering. Based on mean reversion to potential GDP (which generally occurs over a 4-year horizon absent an intervening recession), we would expect GDP growth over the coming 4-year period to average 3.8%,...
- Hussman Weekly Market Comment: The Recognition Window
Over the course of the market cycle, one of the primary areas of risk for stocks (and conversely, one of the best periods for Treasury bonds) is typically the "recognition window" where economic activity begins to deviate from the upward trend that is...
- Hussman Weekly Market Comment: Credit Crises Generally Require Multi-year Adjustments
There are some good graphs and quotes from Ken Rogoff and Carmen Reinhart’s book in the latest Hussman piece linked below. Some things in this piece reminded me of something Howard Marks wrote in his memo entitled The Long View: “In my opinion, there...
- Wsj: First, Let's Stabilize Home Prices - By R. Glenn Hubbard And Chris Mayer
We are in a vicious cycle: falling housing values cause losses on securities, which reduce bank capital, thereby tightening lending and causing house prices to fall further. The cycle has spread beyond housing, but housing is the place to fix it. Housing...