John Hussman — the outspoken investor and former professor who’s long forecasted a stock collapse — thinks investors are making a tremendous error by putting blind faith in the Federal Reserve’s ability to backstop markets.
He notes that the outcome of the Fed’s actions are heavily reliant on investor psychology and sentiment. According to his proprietary measure, those remain negative.
Hussman is joined in his skepticism over the Fed’s ability to prop up stocks in the long term by legendary investor Stanley Druckenmiller.
Hussman calls for a two-thirds market crash from the highs carved out in February, which implies about a 50% drawdown from today’s levels.
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It’s safe to say that the Federal Reserve has thrown just about everything but the kitchen sink at the market in order to combat the fallout from the coronavirus.
Here’s what the Fed has been up to since mid-March:
Cut interest rates to zero
Announced unlimited quantitative easing
Started purchasing corporate bonds
Announced an initiative to buy state and local bonds
All of that stimulus has resulted in a voracious expansion of the Fed’s balance sheet.
Below is a snapshot of the Federal Reserve’s balance sheet. After briefly dipping below $4 trillion in 2019, it’s exploded to almost $7 trillion today. And it’s widely expected to keep climbing.
Market participants seem to have found solace in the Fed’s unprecedented response to the virus, as the S&P 500 trades about 35% higher than it’s low carved out on March 23.
John Hussman, the former economics professor who is now president of the Hussman Investment Trust, thinks that enthusiasm will soon turn to heartbreak.
“In my view, by aggressively intervening in the financial markets, at valuation levels that are still nowhere near run-of-the-mill historical norms, the Federal Reserve has performed an amygdalotomy on the investing public,” he said in a recent client note.
He continued: “The Fed has encouraged a maladaptive confidence that risk does not exist. This overconfidence of investors is itself a threat to their survival.”
To Hussman, unabashed reliance on the Fed is misguided. By his methodology, investor sentiment and psychology is key — and if those turn negative, all the stimulus in the world won’t be enough to prop up stocks.
Below is Hussman’s proprietary measure of market internals (red line) — a gauge he uses to discern sentiment …read more
Source:: Business Insider