HUSSMAN: ‘The Kraken Is About To Break Loose’
Apr. 30, 2012
John Hussman’s latest weekly note contains his usual bearishness, and arguments that the stock market is overvalued.
But credit to him for titling the note ‘Release The Kraken’, the line from the movie Clash of Titans, which has also spawned an internet meme.
My impression is that the Kraken is about to break loose, as valuations are rich and dependent on permanently high profit margins, speculators appear “all in” based on depressed bearish sentiment, mutual fund managers have whittled their cash holdings to nearly zero and have taken on unusually high beta risk, Europe is already in recession, and we are seeing a broad deterioration in U.S. economic data, as coincident evidence catches up with what we’ve persistently observed in the leading evidence in recent months.
Once upon a time, the stability of European government debt, the solvency of the European banking system, the prospects for the euro, and the speculative elements of the financial markets were all fairly distinct aspects of the financial landscape. Unfortunately, as the result of bailouts, monetary interventions, accounting changes, watered-down capital standards, and other kick-the-can strategies, all of these issues have become glued together, as the whole world has gulped down the elixir sold from the wagon of Ben Bernanke’s Traveling Medicine Show. In response to strains in the European banking system due to risky sovereign debt holdings, the ECB made loans to those banks in return for “collateral” in the form of newly issued, unregistered bank debt, and the banks used much of the proceeds to take even larger positions in sovereign debt, against which no capital needs to be held. So rather than “fixing” the problem, the ECB simply bound the problems of the European banking system more tightly to its own balance sheet, and to the fiscal strains of European governments. Nobody cares right now – I get it. But understand that this is likely to end badly, particularly given that government debt typically grows sharply during recessions.