The Federal Reserve may have curbed quantitative easing (QE) at last, but the fact that it is still suppressing interest rates means to John Hussman that his "Exit Rule for Bubbles" still applies.
Hussman, the outspoken Fed critic who correctly called the 2008 stock meltdown, continues to see mounting problems on the economic horizon now.
His Exit Rule for Bubbles says of overpriced financial markets that "you only get out in time if you panic before everyone else does," but the problem is that "you also have to decide whether to look like an idiot before the crash or an idiot after it,"
he writes in his latest market commentary for his Hussman Funds mutual fund family.
Hussman argues the latest global stock market rally amounts to a short squeeze caused by the Bank of Japan's latest monetary manipulation that caused a collapse in the yen, a surge in the dollar and likely put off an inevitable sharp downturn in U.S. stocks.
He says it will ultimately make no difference the U.S. central bank ended its QE program last week, since members of the Federal Open Market Committee still "appear to believe that below-equilibrium short-term interest rates are somehow supportive to the economy. It doesn't seem to even cross their minds to examine the historical evidence that no such relationship exists in the data."
According to Hussman, "depressed real interest rates are symptomatic of a dearth of productive investment opportunities.
"As the central bank creates more money and interest rates move lower, people don't suddenly go out and consume goods and services, they simply reach for yield in more and more speculative assets such as mortgage debt, and junk debt, and equities."
The result is great for Wall Street, probably does not do much for Main Street, in Hussman's opinion.
"Consumers don't consume just because their assets have taken a different form. Businesses don't invest just because their assets have taken a different form. The only activities that are stimulated by zero interest rates are those where interest rates are the primary cost of doing business: financial transactions."
The New York Post dubbed QE as "Washington's cruise to nowhere," and said all of the government asset buying simply laid more debt on the little guy while helping the wealthiest Americans become even more wealthy.
"Our economy certainly would have recovered on its own, probably better and sooner without all of the artificial intervention, thank you," the Post said. "Oh, and definitely without the $4 trillion of our own Treasury's sovereign debt now sitting at the Fed."