John Hussman: Don't Blame Bernanke

by: John Hussman

Excerpt from fund manager John Hussman’s weekly essay on the US market:

Investors are now pairing Ben Bernanke with the market's recent weakness as if they are legitimate cause and effect. Don't blame Bernanke. Make no mistake – the recent pullback has little to do with the Federal Reserve except that it creates enough of an excuse for the inevitable to happen. Are we actually to believe that the economy is so precariously perched on pins and needles that one single quarter-point move too-many in the Fed Funds rate means the difference between a continued economic “boom” and an economy driven to its knees? And if the economy is in fact that vulnerable, shouldn't investors be selling stocks anyway based on the prospective risks?

Look. Probable market weakness has been baked into the cake for months – resulting from a combination of unfavorable valuations, weakening internals, and speculation in low quality stocks. Nor does the historically insignificant wiggle that we've seen in the past few weeks do much to resolve those issues. That doesn't mean that stocks should or must decline in the immediate future, but it does mean that the problems for the market (being, as it is, still priced to deliver disappointingly low long-term returns) remain yet be resolved. (There's that “yet” word again)[...]

So it's important to recognize that the economy just isn't that sensitive to little moves in a short-term, Fed controlled interest rate on bank reserves that back an insignificant portion of total lending activity (see Why the Fed is Irrelevant). The economy may very well be in for trouble (credit spreads are just starting to widen, consumer confidence spreads show sudden weakness in future versus present conditions, aggregate weekly hours are stalling, etc.), but though Bernanke may be used as an excuse, he really isn't going to be the cause, regardless of what the Fed does next.

About this article:

Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here