Hussman on QE

By now you should probably just take it for granted that I recommend reading Hussman’s weekly market commentary.  His most recent commentary is no exception, so go read it.  I especially like his description of quantitative easing:

Meanwhile, all that quantitative easing does, will do, and is capable of doing, is to create the maximum amount of discomfort for the holder of [that cash] at each point in time, in the hope that the burden of zero interest will be sufficient to provoke the holder to exchange that hot potato, which goes on to scald someone else’s hands.


Undoubtedly, the eagerness of investors to aggressively buy every dip has been driven by the confidence that quantitative easing supports those actions. Still, I doubt that investors have seriously considered the fact that each round of QE has had successively smaller effects, nor that they have asked themselves exactly the mechanism by which QE “works.”

The reason QE “works” – though with weaker and weaker effects each round, is simple. QE creates an ocean of zero-interest money that must be held by someone at each point in time, and is intended to create as much discomfort as possible for each successive someone. That discomfort drives yield-seeking behavior, and ultimately produces precisely the sort of bubble that is now evident. Having successfully produced that result, investors might want to ask themselves who will relieve them of their positions once they decide to take their profits. Looking around them, and seeing a multitude of investors faced with exactly the same problem, they are unlikely to find the answer in fixed-income retirees and “permabears” except at much lower prices. This is a conversation that investors might want to have with themselves now instead of later. Again, this is not to imply any assurance of an oncoming crash in this instance – maybe the rabbit’s foot will work a while longer – but is instead to note that the conditions that have preceded other major market losses are already well in place.


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