Growing risk of recession as central banks lose credibility

John Hussman wrote in his latest article that the US economy is close to a recession.

"On Friday, the Bureau of Labor Statistics reported that non-farm payrolls for September grew by 142,000, versus a consensus that expected over 200,000 new jobs," he wrote. "At the same time, August job growth was revised lower from 173,000 to 136,000 jobs. All of this is very much in line with the deterioration that we’ve observed for months in leading measures of economic activity."

"With a clear breakdown in market internals, and leading economic measures deteriorating, we should be aware of the growing potential for a recession," he opined.

Hussman also said that while investors might view weaker economic prospects as a good thing because of the likelihood that the Federal Reserve will refrain from raising interest rates or even initiate another round of quantitative easing, he warned: "An about-face by the Fed driven by economic weakness would more likely – after a brief celebration – contribute to panic that the Fed had lost credibility and control. We believe the Fed already has neither."

Indeed, a Bloomberg article suggested that not just the Fed but the world's central banks are losing credibility.

"Even after hundreds of interest-rate cuts and trillions of dollars in quantitative easing, the bond market’s outlook for inflation worldwide is approaching lows last seen during the financial crisis," the article said.

“There’s a lack of faith in monetary policy -- you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money -- and still inflation is lower,” Lee Ferridge, the head of macro strategy for North America at State Street Corp, was quoted as saying. “It leads to a risk-off environment.”