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John Hussman: Bubble, Crash, Bubble, Crash, Bubble...

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November 08, 2010 – Comments (7)

John Hussman of www.hussmanfunds.com puts out a Weekly Market Comment (which I highly encourage you to read every week). Per usual, this is another good article.

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Bubble, Crash, Bubble, Crash, Bubble...
November 8, 2010
John P. Hussman, Ph.D.


[excerpt]

"Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

Federal Reserve Chairman Ben Bernanke, Washington Post 11/4/2010

Last week, the Federal Reserve confirmed its intention to engage in a second round of "quantitative easing" - purchasing about $600 billion of U.S. Treasury debt over the coming months, in addition to about $250 billion that it already planned to purchase to replace various Fannie Mae and Freddie Mac securities as they mature.

While the announcement of QE2 itself was met with a rather mixed market reaction on Wednesday, the markets launched into a speculative rampage in response to an Op-Ed piece by Bernanke that was published Thursday morning in the Washington Post. In it, Bernanke suggested that QE2 would help the economy essentially by propping up the stock market, corporate bonds, and other types of risky securities, resulting in a "virtuous circle" of economic activity. Conspicuously absent was any suggestion that the banking system was even an object of the Fed's policy at all. Indeed, Bernanke observed "Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits."

Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke's case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant remarks ever made by a central banker.

Let's do the math.

7 Comments – Post Your Own

#1) On November 08, 2010 at 2:40 AM, DarthMaul09 (29.89) wrote:

Peter Schiff made a comment on a recent video blog that QE2 might have been done primarily to keep bond investors comfortable in their questionable investments in US government bonds.  Although QE2 would result in a short-term rise of the commodity and equity markets at the expense of the US dollar, the real reason to start buying longer-term bonds now is that it would be expected for him to buy longer-term bonds later as part of his original QE2 plan, which would keep the bond market pacified. 

If he had not started buying these bonds now and later the bond market had a failed auction due to a lack of foreign (China & others) buyers, the Fed’s desperate attempt to buy bonds at that time would not reassure the bond market and the great American bond bubble would burst. 

The implication is that QE2 is not just a second bailout of the bond market but continuous stream of Fed money entering the bond market resulting in a further weakening of the US dollar and inflation.  His only hope is that by some miracle the US economy recovers or the other world fiat currencies show enough weakness to keep some floor underneath the US dollar index. 

The end game is still uncertain, but the near-term rise in commodities and precious metals appears safer than any other investment going forward.  SLW reports its third quarter results on Monday and its stock rise will likely be noticed, adding more fuel to the rising commodity and mining sectors.

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#2) On November 08, 2010 at 10:36 AM, outoffocus (23.59) wrote:

Ok can we officially say it now? Can we? Ok I'm gonna say it.  WE'RE IN STAGFLATION.

Anybody out there listening?

In other news:

DarthMaul, I think SLW's increased earnings are already priced in. The stock's price has only darn near doubled since the last earnings report.  Also, I've found that earnings announcements have little effect on precious metal miner stock prices, unless the earnings disappoint. 

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#3) On November 08, 2010 at 2:45 PM, binve (< 20) wrote:

DarthMaul09,

Thanks man!

outoffocus ,

>>Ok can we officially say it now? Can we? Ok I'm gonna say it.  WE'RE IN STAGFLATION

I am a singer in your choir :).

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#4) On November 08, 2010 at 3:38 PM, topsecret10 (22.02) wrote:

 Exactly what I have been saying for months....    TS 

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#5) On November 08, 2010 at 9:24 PM, russiangambit (29.49) wrote:

#2 - completely agree, we are in stagflation and we are stuck. No more short term fixes for us. We have to take long term medicine.

We have to cut taxes on the middle class to let them breathe easier. We must level playing for small companies and multinationals by lowering corporate tax . And to balance the budget with all we need to cut defense big time. This is the only place where we can make a big cut. Other people disagree , they consider defense  sacred cow. But to me is less sacred than taking care of old people.

As for QE2, it is another bank bailout, Plus it lowers the dollar which again helps multinationals.

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#6) On November 08, 2010 at 11:19 PM, kstarich (30.62) wrote:

Binve

Russian

I think this is really a bank bailout too.  It will be obvious after G-20.  The Fed is absolutely caught up in a secret business deal with Goldman and other US banks in the Greek mess.  Someone is going to renege on that business deal falls apart at G-20....a major let down for the banks.

This is going to be a major smack for the Fed 

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#7) On November 09, 2010 at 7:53 AM, binve (< 20) wrote:

topsecret10 ,

yep, same here

russiangambit ,

exactly man.

kstarich,

That wouldn't surprise me one bit. thanks!..

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