Sunday, July 12, 2015

Hussman Reads Prechter Too

From this week's Hussman,

Don’t make the mistake of getting the relationship between monetary interventions and the risk-preferences of investors backwards. Monetary easing and other interventions can be very effective when they occur against a backdrop of risk-seeking investor preferences, but history shows that they regularly fail when they occur against a backdrop of risk-aversion among investors. The best measure of investor risk preferences is the uniformity or divergence of market internals across a broad range of risk-sensitive securities. Prechter describes the prevailing psychology of investors with the term “socioeconomic orientation,” and his observations on this, I think, are exactly correct:

“People keep asking, ‘What effect will the next central-bank plan have on the stock market’s behavior?’ This is the wrong question. The socioeconomic orientation turns the question around: ‘What effect will the next stock market move have on the central bank’s behavior?’ Just study [the chart above] and you can see that the authorities are not pushing the stock market around; the stock market is pushing the authorities around. Sadly, when markets push authorities around, authorities push people around. All it does is make things worse.”

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