“Economist and fund manager John Hussman likens our underlying economy to a hot potato.
“The period since 2010 has been largely characterized by a fragile underlying global economy coupled with a persistently overvalued stock market,” Hussman writes in a note to investors. “As unsatisfactory as it may be, the market is presently in an extended game of hot potato.”
Hussman notes that each time underlying credit strains emerge, demand backs off as consumers and businesses become averse to spending. Then, each time central banks launch some massive new intervention, there is a jolt of pent-up demand that is interpreted as sustainable growth.
“This was the result when the Fed launched QE2, and we’re seeing a replay as the ECB provides enormous loans to banks in return for ‘collateral’ in the form of newly-created, unlisted bonds that European banks have simply issued to themselves,” says Hussman.
Even with zero economic concerns, Hussman says the expected return-and-risk estimates for the stock market here are very unfavorable.
“This is because we presently observe a number of historically hostile syndromes that are almost uniquely associated with losses — not always immediately, but almost always large enough to make any intervening gains purely temporary. The stock market may very well enjoy a further advance from here,” he says.
“The likelihood of those gains being durable, however, is quite small.”
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