Green Shoots Over Thin Ice

Another voice to the chorus. John P. Hussman writes:

Thus far, we've got a strong rally off the recent trough, with uninspiring sponsorship but good breadth, reasonable but not strikingly attractive valuations, and an overhang of increasingly distressed mortgage and non-residential debt that looks like Armageddon Part II in the offing, because we are doing nothing to restructure it. In my view, the recent advance looks not like a garden of “green shoots,” but very much like a short-squeeze off of an oversold trough. It would be convenient if such bounces could be predicted in advance, but as we observed last year, the market can become very persistently oversold during bear markets, and even an “oversold” decline can go much deeper until the oversold condition is abruptly cleared.

Fundamentally, my view is that the U.S. economy is on very thin ice, and that by focusing on the bailout of corporate bondholders rather than the restructuring of debt, we are courting the risk of a far deeper downturn. Last year, I didn't think it was conceivable that policy-makers would attempt to address this problem by making lenders whole with public funds. This is an ethical abomination, putting the public in the position of absorbing the losses that should properly be borne by those who provided capital to these institutions. It is not sustainable. What it does it place the public in the position of losing first, but it will not, and cannot prevent the ultimate failure of the debt – for the simple reason that without restructuring, the debt can't be serviced.