It's no secret that John Hussman is not just a fan of the Federal Reserve.
The former economics professor and the famous market bar have shared election terms on the central bank on several occasions before.
His main argument is that Fed's monetary easing has created unsustainable market conditions. By lowering interest rates to near zero, the central bank made it possible for companies – even those with dubious credit profiles – to have easy access to debt financing.
Hussman – currently president of Hussman Investment Trust – says the final result has been a "yield-looking carnival of speculation" that has pushed valuations to their "most offensive extremes in history."
All of this helps explain why Hussman is skeptical of the ongoing stock market rally ̵
Hussman warns that this is not the right mentality to adopt. At the center of that argument is so-called market internals, which are a series of indicators that take the overall pulse of the stock landscape.
According to Hussman, these international nations have been "ragged and divergent" in recent months, as volatility has caused chaos on stocks. And that again means that the market will react in a completely different way to the type of Fed stimulus that normally supports it.
"Even a shift to Fed relief usually has no benefit for stocks, except for a short-term crackdown, unless market alternatives indicate that investors are prone to speculation," Hussman said. "It has very little effect in periods when investors are prone to risk aversion."
The table below shows how strong monetary policy has been as a market driver during periods when market internally was either favorable or unfavorable.
As you can see – as indicated by the yellow line and highlighted by the red boxes – monetary relief was relatively ineffective during periods just before the last two financial crises.
You may think that this is not so big of a deal. After all, almost the 10-year bull market has resisted many other negative headwinds in recent years.
But Hussman says it's a pretty important development and that investors would be unwise to ignore these conditions. In fact, the environment is now reminiscent of the Hussman of periods before the last two disastrous stocks.
"The gradual withdrawal of Federal Reserve statements against a simpler political stance is similar to what we observed in January 2001 and again in January 2008, both at the beginning of what would enter a serious bear market collapse," Hussman said. .
Hussman & # 39; s track record
For the uninitiated, Hussman has repeatedly made headlines by anticipating a stock market swing of over 60% and forecasting a whole decade of negative return on equity. And since the stock market has continued to lose most, he continues with his conversations, untouched.
But before rejecting Hussman as a wonky perma bear, consider his track record, which he breaks down in his latest blog post. Here are the arguments he puts out:
- Assuming in March 2000 that the technical shares would deep 83%, the technological heavy Nasdaq 100 index lost an "unlikely precise" 83% over a period from 2000 to 2002
- Assuming in 2000 that S & P 500 would probably see negative total return over the following decade, as it did
- Assuming in April 2007 that S & P 500 could lose 40%, it lost 55% in the subsequent breakdown from 2007 to 2009  Finally, the more evidence Hussman unearths around the stock market's unsustainable conditions, the more worried investors should get. Yes, there may still be returns to be realized in this market cycle, but at what point is the risk of a crash becoming unbearable?
It's a question investors need to answer themselves. And one that Hussman obviously wants to investigate in the meantime.