John Hussman: A Misleading Liquidity Injection

Excerpt from the Hussman Funds' Weekly Market Comment on the U.S. market:

In the ongoing saga of misleading and largely illusory "liquidity provision" by central banks, I should note that on Monday, the ECB will have to enter a large "liquidity absorbing" transaction of about 150 billion euros, in order to roll over the expiring one. That action will predictably garner little press, but the maturity the ECB chooses will be important anyway. That's because on Friday January 4, the huge 16-day 350 billion EUR refinancing from December 19 expires. This ensures that the media will (misleadingly) report a huge apparent "injection" of liquidity by the ECB on Friday. The question is how huge.

If the ECB rolls over its 150 billion euro "liquidity absorbing" transaction on Monday with another action that expires on January 4, the "liquidity providing" rollover on Friday will only need to amount to 200 billion EUR... Unfortunately, that's already enough to create some misleading headlines. But if the expiration on Monday's "absorbing" transaction goes beyond Friday January 4, the new rollover will have to offset that too, so Friday's apparent, but mistakenly interpreted, "injection" will be about 350 billion EUR... In short, it's quite possible that investors will be treated to another round of misinterpreted "news" of a massive ECB "liquidity injection" on Friday... Hopefully, they'll catch on to this sideshow before long.

...

As for the Fed, a few of the short-term repos the Fed provided for holiday liquidity will expire on Thursday. Until then, the extra $10 billion or so of repos in the system may put a bit of pressure on the Fed Funds rate, holding it below the target of 4.25% for a few days ... The most likely day for any apparent "liquidity injection" will be that same day (Jan 3) due to the expiring repos.

And when is the start date for the recession?

If the December figure [for total non-farm employment] comes in below about 138,539,000 (a gain of 72,000 jobs, net of any revisions), that would represent year-over-year employment growth of less than 1%, which is about the level where prior recessions have started. Anything less than 138,663,000 (which is nearly certain) would represent 6-month growth less than 0.5%, which is also a slowing that is typically seen as the economy tips into recession. As for the unemployment rate, the start-date of a recession frequently coincides with the point where the rate moves about 0.4% above its 12-month trough. That trough was 4.4% in March, so a move from the current 4.7% to even 4.8% would be consistent with an economy rolling over.

Comments

[JohnnyBitchdog]

Do you really think that forecasting misleading headlines is good use of your time ? Let's assume that the misleading headlines appear. So what ?

It seems to me that much of the mainstream media reporting is inaccurate or untimely, and even if reported accurately I doubt that so-called investors are able to digest it.

What possible harm could come from these misleading headlines ? Ya, they might annoy you, but do you really think headlines move the market ?

Personally, I doubt it, and you should focus on forecasting things that matter.....

regards,

Johnny B.

[calvino]

John, good writing. No doubt the stock pushers are hungry for any news that will let them unload their merchandise. Lehman is already spinning their optimistic version of the jobs numbers of 90,000 to be a triumph over recessionary fears. I read that and could only respond with an involuntary 'huh?'. Not recession yet, just recessionary fears - as if the economy is doing fine, but we are going to talk ourselves into a recession through the power of negative suggestion. The thread gets thinner, but the action at the end of the trading day said as much. No troubles though, the booming middle classes in the emergent and triumphant markets will pick up the slack - and bring oil to $150 a barrel and corn to 8 and wheat to 15. Money is now a commodity and fungible itself. Mish posits the deflationary thesis, and I have a difference of opinion there as long as CRM is trading at 700 and Bidu at 200 times earnings, we are not there yet. Still, I see the deflationary thesis as it extracts the wealth of the working middle class in the form of dollar and real estate depreciation. I would like to invite you and Mish and Peter Schiff for a dinner where we could sharpen our respective positions through meaningful debate. I know that my club would be happy to host the event.