'..Investor preferences toward risk distinguish the expanding phase of a bubble from its inevitable crash..''The financial markets are establishing an extreme that we expect investors will remember for the remainder of history, joining other memorable peers that include 1906, 1929, 1937, 1966, 1972, 2000 and 2007. The failure to recognize this moment as historic is largely because investors have been urged to believe things that aren’t true, have never been true, and can be demonstrated to be untrue across a century of history. The broad market has been in an extended distribution process for nearly a year (during which the NYSE Composite has gone nowhere) yet every marginal high or brief market burst seems infinitely important from a short-sighted perspective. Like other major peaks throughout history, we expect that these minor details will be forgotten within the sheer scope of what follows. And like other historical extremes, the beliefs that enable them are widely embraced as common knowledge, though there is always, always, some wrinkle that makes “this time” seem different. That is why history only rhymes. But in its broad refrain, this time is not different.
The central fallacy operating here is the notion that monetary easing provides a kind of mechanical and concrete support to the financial markets, when in fact the primary driver of financial markets in recent years has been pure speculative risk-seeking. While risk-seeking is
encouraged by monetary easing, it is not a reliable outcome. Once speculative valuation extremes have been in place, persistent monetary easing has certainly not prevented severe market losses in prior cycles.
Investor preferences toward risk distinguish the expanding phase of a bubble from its inevitable crash, and these are most directly measured through the behavior of market internals, not through the behavior of monetary authorities.
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..Our greatest successes have been when our investment outlook was aligned with valuations and market internals, and our greatest disappointments have been when it was not. Both factors are unfavorable at present, and our outlook is aligned accordingly.'
- John P. Hussman,
All Their Eggs in Janet's Basket, June 22, 2015
Context ' “Monetary policy… after all, is extremely important” – is an understatement.' - Doug NolandA warning from the Bank for International Settlements'..frantic pounding on the central bank panic button that invites tit-for-tat retaliation around the world..''..in today’s world debts don’t settle – they just keeps expanding and expanding..''..these irresponsible attitudes..' - '..an unprecedented period of unsound global money and Credit.'