My concern is for individuals who will need the money within a small number of years and yet are invested as if they are long-term investors, not in adherence to a specific discipline, but simply because the market was, until recently, advancing. Too many people got their life plans derailed when the tech bubble crashed, and when the credit crisis hit. If a major market loss would derail your life plans, you're taking too much risk here. That said, I have no intent to cheerlead for the bears. In our most defensive stance, the Hussman Funds may be fully hedged, but we do not take net short positions and we don't "bet" on the market to decline.
Over the short and intermediate-term, credit crises are invariably deflationary, because they prompt a frantic demand for default-free government paper, which raises its value relative to goods and services (another phrase for deflation). So despite the huge increase in government obligations during these periods, you generally don't see inflationary pressures in the early years because that supply is eagerly absorbed. Short-term interest rates are pressed near zero, and monetary velocity tends to collapse. Commodities are usually hard hit as well, so investors who are concerned about inflation risk or are chasing gold here may have the long-term story right, but they probably have it too early to weather the interim volatility comfortably.
Over the long-term, massive increases in government liabilities do have inflationary impact. This imposes a real burden, not simply a paper one. If the holder of government currency can command a certain stock of real goods and services, and then the government debases that currency so that it can command a lesser stock of real output, then it is undeniable that the difference in real value has been implicitly transferred to the government to finance its spending. While I do expect that TIPS, commodity exposure and precious metals will be important inflation hedges in the years ahead, investors chasing these assets here may have a difficult road. It is best to accumulate such assets when they are in liquidation, not when they are being chased on the basis of overly simplistic theories of inflation.
Policy Implications
Apart from encouraging investors to review their risk exposures, my other hope is to encourage a more constructive policy response than we observed last year. To-date, our policy makers have placed bondholders ahead of ordinary citizens, largely out of fear of disastrous consequences predicted by precisely those who stood to benefit most from government largesse. We have directed massive and ultimately real (not simply "paper") resources of the public to ensure that holde rs of bank debt, financial debt, and GSE debt get back 100 cents on the dollar plus interest.
With regard to "stimulus" plans, my difficulty with last year's policies is not so much an aversion to government spending as it is a rebuke of the notion that government spending is by its nature stimulative or beneficial to the economy. The issue is how this real value is used. Is it used to advance socially useful outcomes which private individuals, through some failure of coordination, could not achieve? Or is it used to defend bondholders, industries, and institutions with which the policymakers are most closely aligned?
The Keynesian view is that government spending is simply a monolithic letter "G." Keynes cared little about the productivity or lack thereof to which public resources were devoted, even writing " If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again... there need be no more unemployment." The only difference between Keynes and Tim Geithner is evidently that Geithner prefers to place the bottles a bit closer to Wall Street.
