Excellent piece from John Hussman this week. Read The coming Fed-induced pension bust: “We strongly encourage investors to continue to save in a disciplined way, but nothing forces investors to allocate these funds to speculative asset classes.” Unbiased, informed, commonsense, risk-management insights–so very rare and so valuable. Here’s some highlights:
“All of this is tied together: zero interest rate policy, speculative yield-seeking, pension underfunding, financial bubbles, malinvestment, crisis, and economic stagnation. The intentional distortions created by wholly experimental monetary policy carry a great deal of responsibility for these outcomes. The global financial economy has been pushed to such reckless speculative extremes that the ability of this house of cards to survive even a quarter point increase in short-term interest rates is a subject of serious and uninterrupted debate.
The Fed has done enormous violence to the public, and to the underlying stability of the financial markets, not only by encouraging a reckless yield-seeking financial bubble as the response to a global financial crisis that resulted from the previous Fed-induced yield-seeking bubble; not only by driving the financial markets to the point where poor long-term returns and wicked interim losses are inevitable (the same dangers investors faced at the 2000 and 2007 peaks); but also by creating an environment where scarce savings have been increasingly diverted to speculative activities, and where pensions have been encouraged to underfund their liabilities in the belief that past realized returns are indicative of future outcomes.
Despite the dismal 10-12 year prospects for conventional portfolios, we strongly encourage investors to continue to save in a disciplined way, but nothing forces investors to allocate these funds to speculative asset classes.
…The tide will turn, as it always has in complete market cycles across history, and as investors discovered during the market collapses of 2000-2002 and 2007-2009. The erasure of realized past returns will restore reasonable prospects for future investment, as other retreats have done. Meanwhile, keep saving, reach for umbrellas, fasten your seat belt, and brace for the consequences and eventual opportunities that the current recklessness will bring.”
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