John Hussman: A Trifecta of Reckless Central Bankers

by: John Hussman

Excerpt from the Hussman Funds' Weekly Market Comment (12/6/10):

I continue to view Bernanke's apparent objective for QE2 - to create a "wealth effect" by encouraging speculation in risk assets - to be dangerously misguided. Historically, the elasticity of GDP to changes in the stock market is on the order of 0.03 to 0.05, and is transitory at that. In plain English, this means that even large changes in the value of the stock market do not translate well into changes in GDP. This is because consumers correctly consume on the basis of what they see as their "permanent income," and are well aware that changes in volatile assets tend to be transitory when they are not accompanied by growth in real output and incomes. Bernanke is not thinking as an economist in this regard. He is thinking like a witch doctor calling on animal spirits (ooh, eee, ooh-aah-aah, ting, tang, walla-walla bing-bang).

With regard to Sunday's "60 Minutes" piece, I sometimes enjoy seeing Barbara Walters do a celebrity puff piece, but I expected more from a show on investigative journalism. Proper questions might have included, "Chairman Bernanke, how do you justify the fact that all of Bear Stearns' bondholders stand to get 100% of their money, plus interest, while at the same time, the Fed still holds $30 billion dollars worth of Bear Stearns' questionable MBS junk in an off-balance sheet shell company called Maiden Lane, which you justify by appealing Section 13-3 of the Federal Reserve Act, despite that this section deals explicitly with "discounting" - which everywhere else within the meaning of the Act allows nothing but a short-term check-cashing function, in nearly every case for paper of less than 90 days in maturity?" Nothing about Fannie or Freddie, or the fact that Treasury yields have increased since QE2 was announced.

Meanwhile, Alan Greenspan appeared on CNBC on Friday, and said with a straight face (I believe he has no other kind) that the "equity risk premium" on stocks was higher than it has been in 50 years. Evidently, this remark reflects the standard "Fed model" idea that the forward operating earnings yield on stocks can be usefully compared with the yield on 10-year Treasuries in order to estimate the attractiveness of stocks.

With all due respect, Mr. Greenspan - no less reckless than he was during the dot-com and housing bubbles - is out of his gourd.


Finally, last week, Jean Claude Trichet, the head of the European Central Bank, provided early indications that the ECB would be stepping up its buying peripheral government debt issued by Ireland, Greece, Portugal and Spain. Of course, the ECB prefers to "sterilize" these interventions, so it can be expected to sell the debt of stronger members such as Germany. Accordingly, yields dropped on the debt of credit-strained European countries, while German yields pushed to fresh yearly highs.

It doesn't take much thought to recognize that, like Bernanke's actions, the actions of the ECB are ultimately likely to represent not monetary policy but fiscal policy. When you buy the debt of countries that have a high likelihood of defaulting on this debt, or will avoid default only by the creation of currency that could have been issued to finance fiscal expenditures, it follows that you are engaging in fiscal policy without the authorization of elected governments.