Dr. Hussman presents the concept of confidence and survival in his latest post. He goes on to quote the great investor Druckenmiller’s assessment of the Fed’s interventions on our markets today. The point is the Fed took away retail investor’s ability to survive what is coming sooner or later.
Excerpts from Dr. Hussman’s Amygdalotomy: Surviving the Intentional Demolition of Warning Signs
In a wide range of animals, including humans, the ability to detect, observe, and immediately respond to the fear of other members is essential to survival. When a herd of gazelle run from a lion, it’s not because most of the gazelle have even seen the lion, but rather because they respond in sequence to the fear signals provided by nearby members. Some animals even respond to the behavior of other species. That essential survival response is mediated by a part of the brain called the amygdala.
In my view, by aggressively intervening in the financial markets, at valuation levels that are still nowhere near run-of-the-mill historical norms, the Federal Reserve has performed an amygdalotomy on the investing public. The Fed has encouraged a maladaptive confidence that risk does not exist. This overconfidence of investors is itself a threat to their survival.
As Stanley Druckenmiller recently argued, much of the risk that the U.S. economy presently faces is itself the result of years of misguided Federal Reserve policy:
“Corporations overborrowed and overleveraged going into this. Corporations took their borrowing from $6 trillion to $10 trillion. In my opinion, this was all the result of free money, despite many, many opportunities to normalize from 2012 to 2020.
“The Fed is there to solve a liquidity problem, but is not in any way capable of solving a solvency problem. You have companies like airlines that because of the free money I talked about, they spent 97% of their free cash flow on corporate buybacks. It was common all over corporate America – financial engineering.
“Yes, it wasn’t their fault that coronavirus happened, but I’ve actually been saying for years, none of these companies are going to be able to survive in a recession, given the borrowing they’re doing, and it’s reckless.”
What the Fed has done in the last couple of months was to flood liquidity (printed money) on the markets which merely levitates prices for awhile. Solvency is another story. The wealth that was extracted by CEOs and Private Equity across our economy made companies vulnerable to the slightest recession. Companies with weak balance sheets prior to 2020 should be restructured.
Most retail investors have not experienced stocks and corporate bonds being wiped out in a restructuring. It will come as a shock to many. The reason a few mega companies are pulling the SP500 higher is a defensive move away from this restructuring risk.
My anger today is not just at the wealth extraction but the Fed’s covering up of market signals and the constant conditioning of retail investors to buy-the-dip along with the wall street industries’ mantra to retail investors to BUY and HOLD while they do the opposite.
Retail investors do not have time to read the Fed’s Stability Report or read between the lines as insiders do. So it might be a good time to review my take on the latest Federal Reserve’s Financial Stability Report that just came out.
TSP & Vanguard Smart Investor serving serious and reluctant investors and warning retail investors
Yes, you should be nervous today