John Hussman: The Importance of Understanding the Tenuous Equilibria of the Markets
At the Wine Country Conference in Sonoma, California two weeks ago, John Hussman gave a presentation on the importance of equilibrium in today's markets.
Many of the conference attendees were at the conference specifically to hear John speak, as he so rarely makes public appearances like this (his Hussman foundation made the event, which raised funds for the Les Turner ALS Research Foundation, possible). And John did not disappoint.
John spoke on the various types of equilibria in today's financial markets. There are many different types, and it's through the understanding of which ones we're faced with that we can begin to accurately predict the most probable outcomes. Because these outcomes themselves (including the "endgame" outcome) are each a type of equilibrium — likely much more stable ones than that of today's markets.
(If this seems a little wonky, just watch John's example using chairs to demonstrate fragile, unstable and stable equilibria at 7m:22s, and all will be clear)
John dispels several popular but erroneous market myths along the way, including the concepts of "buyers outnumbering sellers" or "money moving into/out of a secondary market".
His punch-line is that our financial markets actually have a natural equilibrium state that is far removed from where they are today. But interfering monetary policy (e.g. QE) and delusional fiscal policy have pulled the system away from its authentic state, to the point now where the forces to correct are placing growing strain on the status quo. As the system seeks to return to where it should naturally be, the yields that the Fed is so desperately trying to engineer are going to become less in size and number.
Investors need to realize that much of the "growth" the Fed is trying to return to was manufactured and unnatural. We are returning to a lower-growth environment, whether we want to or not.
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