Wednesday, May 30, 2012

At the Top of His Game



Dr. John's weekly comment is among his best.


"The Reality of the Situation" [excerpts]:


"Remember that these bouts of QE, LTRO operations, and other interventions have essentially had their effect by squeezing interest rates to levels that are so low that investors feel forced to seek higher risk securities in a search for yield. What Bernanke views as a 'wealth effect' is simply the richer valuation of existing cash flows that goes hand in hand with lower prospective returns in the future. This is not wealth creation, but simply a distortion of the time profile of returns that now leaves investors facing dismal future prospects for investment returns. The economic impact of QE has been restricted to short bursts of pent-up demand, but little more....

We'll finally get some economic traction when global leaders have the sense to take bloated, mismanaged banks into receivership, mark down the assets to their actual value, restructure the repayment terms with homeowners and other borrowers, haircut the liabilities enough to make the resulting entities solvent, and then return them to the private market under a regulatory structure that splits traditional lending from securities trading. That prospect is getting closer....

With respect to Eurobonds, investors should understand that what is really being proposed is a system where all European countries share the collective credit risk of European member countries, allowing each country to issue debt on that collective credit standing, but leaving the more fiscally responsible ones - Germany and a handful of other European states - actually obligated to make good on the debt. This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue 'Warrenbonds.'"


John Hussman's complete commentary for this week is here.


No comments: