John Hussman writes:
“…barring a surprise early-conclusion to QE2, there are two important issues for the market as we look ahead to gradual changes in Fed policy. First, what happens when QE2 is complete? From our standpoint, it is incontrovertible that the primary factor behind the market’s recent advance has been speculation based on the belief, explicitly encouraged by Bernanke, that the Fed would provide a backstop for risk-taking. Investors clearly took Bernanke at his word. But without yet another round of QE, not to mention the potential for an unwinding of existing QE, a decline in speculative enthusiasm will likely have the identical effect as an increase in risk aversion. Second, how likely is it that economic growth will be successfully “handed off” to the private sector as fiscal policy tightens and monetary policy becomes less aggressive? It is clear that the economy is enjoying some surface economic progress – the most notable being a gradual drop in new claims for unemployment. But the real fiscal “cliff” for states and municipalities doesn’t hit until about mid-year, which is the same time that QE2 comes off. What we’re observing at present is decidedly still fiscal- and monetary-induced growth. It is not enough that the data have improved gradually. The real question is whether it would have, or will, improve without that stimulus. My intent is not to argue strongly that the economy cannot continue to expand as fiscal and monetary stimulus comes off, but instead to at least ask why this should be expected as a foregone conclusion. On the basis of leading indices of economic activity, we observe more indications of economic slowing worldwide than we observe growth. Moreover, strong periods of employment growth have historically been preceded by high, not low, real interest rates. This is far from a perfect relationship, but it is clear that historically, high real interest rates are far more indicative of strong demand for credit, new investment, and new employment than low real interest rates are.”
I don’t know of a way to bet with Fed actions other than trend following, but I do find analysis like Hussman’s interesting from a pure economic and political perspective. Rational.
