Monday, June 13, 2011

John Hussman - Internal Injuries

And John Hussman sheds some more light about what goes on with markets and the economy here.

Some interesting excerpts:

A few notes on the banking sector. My view continues to be that the massive interventions of recent years have essentially kicked the can down the road, encouraging a writing-up of assets that are still not performing. The same basic view applies to European interventions to buy time for countries like Greece and Portugal. The problem is that while we have bought time, at great expense, our policy makers continue to waste that time by failing to prepare the markets adequately for debt restructuring. 
After significant price weakness, the banks advanced late Friday when CNBC suggested - without any identified source - that the additional capital buffer for major banks might end up being closer to 2-2.5%. A lower capital cushion would put the allowable leverage ratio at about 11 in periods of rapid credit growth and as high as 15 otherwise. Undoubtedly, part of the pressure to ease the requirements is due to the fact that bank stocks have been declining. It's ironic that the proposals most likely to boost bank stocks are those that would make the banking system more systemically vulnerable and more likely to require government bailouts.
From an economic standpoint, the last several weeks have generated more damage than may be readily apparent. Credit spreads are now wider than they were 6 months ago, the ISM Purchasing Managers Index is below 54, total non-farm payroll growth is far below 1.3% over the past year, and the spread between 10-year Treasury yields and 3-month T-bill yields is less than 3.1%. If the S&P 500 was to fall by about 2% further, it would also be lower than it was 6 months ago. The reason I note these particular measures is that they combine to form the "Aunt Minnie" that I noted in our November 2007 comment "Expecting A Recession" - a combination of indicators that has always and only been observed prior to or fairly early into post-war U.S. recessions.

Notably that particular composite did not signal recession risk in the summer of 2010. Based on the historical tendency of the ECRI weekly leading index (WLI) to deteriorate in advance of the ISM indices with a lead-time of several weeks, my double-dip concerns in 2010 were driven by the clear plunge in the WLI. But the ISM figures never dropped to 54 or below, and in any case, the Fed's initiation of QE2 provoked a burst of enthusiasm and pent-up demand sufficient to buy some time. The problem now is that we have bought the time and wasted it, because policy makers have done nothing to either facilitate or reduce the impact of necessary debt restructuring.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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