John Hussman: The Fed Didn't Bail Out Anyone

John Hussman has a good write-up talking about recent liquidity injections into the market. Contrary some people's opinion, the Federal Reserve did not bail out anyone. All they provided was very-short-term loans that need to be repaid. Good analysis of the situation by John Hussman.

Here is his view on the present market:

I noted a few weeks ago that increasing volatility at 5-10 minute intervals tends to be a precursor to significant market weakness. Indeed, a variety of systems, both in the physical world, and in networks, display a “signature” prior to chaotic instability, similar to how tremors precede earthquakes. These signatures are sometimes measured in terms of very arcane features, but in the stock market, you can observe it prior to other historical panics and crashes as a combination of surging trading volume coupled with rising volatility at increasingly short frequencies (so that the time dimension “collapses,” and you begin to observe fluctuations in 10-minute, 1-hour and 1-day periods that would normally take several days, weeks, or even months).

It is of some concern that we are seeing this sort of behavior here, but this does not mean that a crash or further panic should be expected. There are certainly some positive factors, or at least factors that investors believe are positive. For example, Treasury yields are falling (albeit because Treasuries are being sought as safe havens), and stocks look cheap to investors who believe in misleading measures like forward operating earnings, and aren't aware that the historical norms they are applying are actually based on trailing net earnings and normal profit margins. While I believe that these perceived “positives” are largely empty arguments in terms of valuation, we have to allow for the fact that enough investors believe them to potentially act on them.

So, he thinks there may be some signs of a change in market direction but we cannot be sure and we shouldn't expect it.