What if the Fed throws a QE3 and nobody comes? That is the ominous question portfolio manager John Hussman asks in his latest letter to Hussman Funds shareholders, and his answer will not encourage traders looking to the Fed for portfolio salvation.
Hussman’s letter, published Monday, follows a week of negative economic data accompanied by easing moves by the ECB, Bank of England and the People’s Bank of China that failed to inspire investors.
The former business school professor-turned-money manager characteristically parsed the data to show that it is both worse than it perhaps seems on initial inspection. Of Friday’s job report, for example, Hussman (left) says the “internals” were “more dismal than the headline number” of 8.2%.
Most of the employment gains in the June employment figures benefited, surprisingly, the 16-19 age cohort and workers over the age of 55, masking a “plunge” in the key demographic of 25-54-year-old workers. Also, those counted as employed included “277,000 workers shifted to the classification ‘part-time for economic reasons: slack work or business conditions.’”
While Hussman, who believes we are already in the midst of an “unfolding global recession,” believes the June jobs report “may be looked on longingly within a few months,” the main point of his letter is to show that the Federal Reserve has a markedly declining ability to stem market losses.
Hussman marshals evidence from a study by Nautilus Capital to show that each new effort by central banks to inject liquidity into the financial system has less and less impact as time progresses. The pattern, for the Fed, ECB and Bank of England, is captured by stock market bar charts that in general rise to lower and lower peaks following central bank easing.
And the reason for this is that quantitative easing is meant to drive interest rates down to encourage some investors into risky investments. But, “if interest rates are low already, and risky assets are already priced to achieve weak long-term returns (we estimate that the S&P 500 is likely to achieve total returns of less than 4.8% over the coming decade), there is not nearly as much room for QE to produce a speculative run,” Hussman wites.
Eventually, investors become “indifferent between continuing to hold that cash versus holding some other security.” Consequently, quantitative easing can barely lift markets beyond the decline that preceded and prompted it, Hussman adds.