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I am an independent investor writing at Scott's Investments ( My site is dedicated to discussing and publicly tracking historically successful investments strategies and sharing free investment resources. I emphasize empirical, historical, and quantitative... More
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  • Hussman on Reform and the Current Market 0 comments
    Jun 22, 2009 11:54 PM

    From his 6/22 Market Commentary, John Hussman remains a staunch skeptic regarding our current market and economy:

    I remain concerned about the poor level of price-volume sponsorship we've observed, about the massive second-wave of adjustable rate resets that will begin later this year, and about the clear structural headwinds posed by a deleveraging economy (historically, economic expansions are paced by lively growth in debt-financed gross domestic investment, which is going to be hard to come by). In recent weeks, however, we've seen some new concerns – a fairly subtle deterioration in measures of risk aversion that were already tenuous, which prompted us close the 1-2% position in index calls that we've been using as an “anti-hedge” since March.

    What we're seeing focuses not on short-term “green shoots” stuff, but on longer-term concerns that investors appear to be grappling with – concerns that have to do with the longer-term potential for economic growth, and nagging concerns about the sustainability and effects of the massive fiscal deficits we are running to defend bank bondholders (we are emphatically not defending bank customers here – there is an enormous cushion of bondholder capital in the financial system. Even the failure of the largest banks in the country would not pose a single dollar of loss to depositors).


    Hussman also gives us some proposals for how to avoid financial meltdowns in the future:

    As a side note, in observing the proposals for changing the regulatory structure of the financial markets, it strikes me that the idea that some banks are “too big to fail” is a dangerous and misguided premise. The best way to defend ourselves from further crises like we've observed over the past year is to a) give regulatory authorities with a clear and unbiased stake in customer protection – ideally the FDIC – authority to force the government receivership of insolvent bank holding companies and non-bank financial institutions, with no option to perform bailouts at public expense. This receivership authority should emphatically not be under the discretion of officials at the Treasury or the Fed, who are prone to instead use public funds for for private benefit, and who hop into bed with bank executives more eagerly than a five-dollar gigolo; b) eliminate the use of “cross-covenants” that allow the default of subordinated debt to trigger the default of senior debt – this would allow the receivership of an institution to properly wipe out both the equity and a portion of the subordinated debt, without resulting in a blanket default of all of the institution's other debt obligations; c) similarly, restrict the use of credit default swaps to senior debt, and then only for bona-fide hedging purposes. The upshot of these changes would be to make equity and subordinated debt work in practice as they ought to work – as capital buffers that are truly capable of absorbing extraordinary losses of a financial institution without provoking endless domino effects in the event that an institution goes into receivership.

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