The widening gulf between Wall Street and Main Street, in which one prospers while the other slowly withers, can be laid precisely at the feet of the Federal Reserve, according to perma-bear
fund manager John Hussman.
Hussman, founder of the eponymous Hussman Funds mutual fund family and a frequent central bank critic, says in his latest market commentary that years of suppressing interest rates by the Fed has produced an economy in which financial transactions are the major source of growth.
"So what we now have is a financial sector amped up on more than 4 trillion tablets of amphetamine, and a real economic sector that remains at year-to-year growth rates that have historically marked the border between expansion and recession," he writes.
Editor’s Note: New Warning - Stocks on Verge of Major Collapse
According to Hussman, the view is widely shared in America that "something in the economy is not right despite exuberant financial markets" and an official jobless rate that is now lower than at its recession highs.
"Meanwhile, transfer payments like welfare and unemployment compensation allow many households to maintain consumption despite being out of those jobs, and given the ability of households to take on debt, even if they are actually living paycheck to paycheck, the produced goods get purchased, companies make a profit, government runs a deficit, the Fed keeps interest rates low, which allows all the debt to be serviced, and everyone is pleasantly, if unsustainably, happy," he explains.
"That's particularly true as long as nobody asks how the debt will be repaid, which is certainly what Fed policy encourages."
Hussman notes that it is clear that hiking the monetary base relative to nominal GDP will predictably and reliably lower short-term interest rates — something the Fed has done in spades for years now.
But he argues the Fed's assumption that suppressed short-term interest rates coupled with quantitative easing (QE) are somehow good for economic growth and job creation is a bogus one.
"Rather, QE primarily encourages speculation, leveraged finance, and other forms of financial 'engineering' where interest represents the primary expense. The objective of these activities is not job creation, but leveraging the 'spread' between the return on one financial asset and the interest that one must pay to acquire it with borrowed money."
When the current asset bubbles finally pop, investors who manage to escape disaster will do so through the eye of a needle, he predicts.
"The issue is not whether the U.S. economy does or does not need 'life support,'" Hussman concludes. "The issue is that QE is not life support in the first place."
Many Wall Street portfolio managers are confident stocks will continue to perform well in coming months and that the Fed will not raise rates unexpectedly,
The Wall Street Journal reports.
But some detect warning signs in falling bond yields around the globe.
Jeff Knight, global head of investment solutions at Columbia Management, which manages $363 billion, believes declining global rates are a red flag for economic weakness. He tells The Journal he has been reducing international stockholdings since July and is ready to do the same with U.S. shares if markets get volatile.
"It's very tricky," he notes. "We think discretion is the better part of valor."
Editor’s Note: New Warning - Stocks on Verge of Major Collapse