John Hussman’s report this week, Estimating Market Losses at a Speculative Extreme, has an interesting chart on Median price-to revenue ratios over time. Let’s dive in.
I added the dashed blue line for ease in comparison to the dot-com bubble peak. Here are some snips from Hussman.
“One of the things that you may have noticed is that our downside targets for the market don’t simply slide up in parallel with the market. Most analysts have an ingrained ‘15% correction’ mentality, such that no matter how high prices advance, the probable maximum downside risk is just 15% or so (and that would be considered bad). Factually speaking, however, that’s not the way it works… The inconvenient fact is that valuation ultimately matters. That has led to the rather peculiar risk projections that have appeared in this letter in recent months. Trend uniformity helps to postpone that reality, but in the end, there it is… Over time, price/revenue ratios come back into line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). The plunge may be muted to about 65% given several years of revenue growth. If you understand values and market history, you know we’re not joking.”
That’s not from today. It’s what Hussman wrote on March 7, 2000.
Hussman notes “The S&P 500 followed by losing half of its value by October 2002, while the tech-heavy Nasdaq 100 lost an oddly precise 83%.”
In regards to today, and of the chart posted above, Hussman has this to say, emphasis his:
The distinction between today and the 2000 peak is in the breadth of overvaluation across individual stocks. Back in 2000, the most extreme speculation was centered on a fraction of all stocks, largely representing technology, and accounting for a large proportion of the total market capitalization of the S&P 500 Index.
At the March 2000 bubble peak, an understanding of market history (including the outcomes of prior speculative episodes) enabled my seemingly preposterous but accurate estimate that large-cap technology stocks faced potential losses of approximately -83% over the completion of the market cycle.
At the 2007 market peak, by contrast, stocks were generally overvalued enough to indicate prospective losses of about -55% for all but the very lowest price/revenue decile. That risk was realized in the form of widespread and indiscriminate losses across all sectors during the market collapse that followed, even though financial stocks were hardest hit.
In my view (supported by a century of market cycles across history), investors are vastly underestimating the prospects for market losses over the completion of this cycle, are overestimating the availability of “safe” stocks or sectors that might avoid the damage, and are overestimating both the likelihood and the need for some recognizable “catalyst” to emerge before severe market losses unfold. We presently estimate median losses of about -63% in S&P 500 component stocks over the completion of the current market cycle. There is not a single decile of stocks for which we expect market losses of less than about -54% over the completion of the current market cycle, and we estimate that the richest deciles could lose about -67% to -69% of their market capitalization. As in 2000 and 2007, investors are mistaking a wildly reckless world for a permanently changed one, and their re-education in the concept that valuations matter is likely to be predictably brutal.
Placing the Blame
Hussman accurately places the blame on central banks as well as investors who believe the central bank is in control.
Central banks possess no concealed, mysterious knowledge that is somehow obscure to mortals. If anything, one might question whether some FOMC governors have ever carefully examined historical data at all, given that many of their propositions can be refuted by even the most basic scatterplot
One thing should be clear: policy makers have not become “smarter.” What they have become, with each bubble-crash cycle, is more reckless and arrogant in their willingness to extend speculative financial conditions by encouraging yield-seeking, compressing prospective future investment returns, amplifying the destructive consequences that inevitably result, and ironically, using those same consequences to justify fresh intervention.
Error Admission
Hussman admitted his errors, as have I. Neither of us anticipated:
- The jaw-dropping lengths of central bank recklessness in this half-cycle
- The ability of yield-seeking speculation to defer the implications of even the most extreme “overvalued, overbought, overbullish” conditions
- The importance of prioritizing the uniformity of market internals in a zero-interest rate environment
THE Choice
Investors have the same choice today as they have had at every point in time over the past few years.
Sorry guys, FOMO and the TINA excuse (there is no alternative) do not work.
Meanwhile, those who embraced the bubble are mocking those who didn’t. That is a contrarian warning. Alan Greenspan provides another.
In a Bubblicious Debate, Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble.
Be very concerned when Greenspan spots bubbles that do not exist while touting those that don’t.
Mike “Mish” Shedlock
“sorry boys – just no way” – we are still no where near historical highs – https://www.armstrongeconomics.com/armstrongeconomics101/training-tools/us-share-market-broad-overvaluation-index-one-of-the-best-leading-indicators-we-have-ever-created/.
How can we be in a bubble when the majority of retail has still not jumped back in. Those that continue to look at stocks as a reflection of the economy will continue to be befuddled, just as the anti-Trump crowd cannot figure out how Trump won.
Your assumption that the bubble can only be driven by retail investors. The bubble is driven by central banks and company stock share buy backs. Its different this time, just not the endpoint.
Precisely
Armstrong is no god – No one is
Armstrong would be the first to discourage anyone from thinking he was God. Just because someone can set aside their beliefs and biases and let the data do the talking does not make them God.
It’s politicians and CB’s that want people to think they are Gods.
Armstrong believes his computer is God. He claims its infallibility due to how it only predicts based upon inputted facts…. just like climate change promoters do. What ever happened to his 2015 major turn?
I trust his graphs about as much as all the others.
He’s a con-artist and a criminal.
Global investment swamps CB’S and stock buy backs. The majority must always be wrong and the majority still can’t understand why stocks keep rising when the real economy sucks wind.
You’re wrong. Record stock buybacks and corporate debt are meaningless, just like every other negative metric out there. Our future depends upon nothing more than (willingly) blind faith that things are only going to get better and better and that eventually we will all live luxurious lives doing absolutely no productive work of any kind, living off of the taxation of robots and third world slave labor….. and their owners.
God bless their owners…..and ours.
Exactly. What is different this time is the central banksters’ determination and intervention of a magnitude never seen before… verbal and monetary intervention, BoJ, SNB buying equity etc. Let us get some quiet from the central banksters (no need to even raise rates) and then we would know where we stand. Everytime it looks like a CRASH, the Dudley, Bullard, Draghi, Kuroda, Carney come out of the woodwork. It looks to me 2008 Lehman has simply changed the way the central banksters operate and they are not going to allow it to fall if they can. Thus, the market simply depends on how long the central banksters can hold it up. I do not know how long that will be but they have done well till now. That they will not be able to hold it up for ever is a given.
The bigger problem is the longer the growth, needed to remove support, is elusive the longer the need for intervention and bigger the problem if the growth does not come about (I don’t think it will). Probably this will be called “The Great Unraveling” in the history books of the future.
I think the little-discussed “Plunge Protection Team” at the Fed and Treasury has something to do with this. What was supposed to be for “emergency use only” is now routine. Alarmingly this does not appear to ever come up in the hearings before the Congress–though you have to wonder what they talk about privately.
The absence of retail is the sign of a major secular change in investment behavior. Retail is leading the trend.
Once again, a great chart to look at. Clearly it’s time to play defense. but don’t short just yet.
I have some very experienced friends that have gotten burned big time trying to short in the last year. I wouldn’t do it with the algos buying dips. Have been swing trading now and then for a couple of years with some success, but dropped out a few months ago… got too risky. I keep up with “the word on the street” now instead. When you get in and wait for a stock to go up 1% as your planned exit point, I am playing with too much risk. Some are good at it but not me. 5% is my limit.
So, do you think it’s wise to fight the Fed at this juncture? Way I see it, the stakes are now so high, the Potent Directors are capable of unimaginable actions, in an effort to “Do whatever it takes” to maintain power.
https://tradingeconomics.com/venezuela/stock-market
I’m not sure how to translate investment in Venezuelan shares back to real prices, but the impression seems to be that it is a way of retaining some value as opposed to cash devaluation. That is to say just a way to lose less, even if you sell at peak.
?
I don’t understand what the problem is. The market broke in 2000 and at the end of 2007. It will break again at sometime in the future, Hussman or not. When it does, just get out and go and go to cash or short. Accept that you will be late and you will not catch the top. What you want to do is preserve most of the profits you have made since 2009. There will always be another bull market in the future.
Hussman’s analysis is fine, but of course he has to live with his decisions, which are reflected in his mutual fund performance. Unfortunately.
You may be underestimating the damage our next “market break” does on society.
Many layers to this onion. If we are to believe that economics is just about money, you might be right, but I believe economics is the study of humanity, how to predict it and manipulate it, and those doing so are doing it for cause. They are building an economic “nuke” that will either be unleashed upon the world or more likely used as a deterrent….TBTF….a NK style threat that will be used to control society…..democratically, as we will all “vote” to save ourselves regardless of cost to liberty or future generations. We already have.
Bob Prechter’s Elliot Wave methods indicate that when this market breaks, it will correct a lot more than 83%…..That is not surprising when you consider the fraudulent accounting used to prop up current earnings and the fact that the Dow, adjusted for PPI, not government inflation numbers, peaked decades ago.
Does anybody else remember the press conference Rumsfeld had the day before 9/11? The missing trillions? OK there is a “de-bunk” network where you can read all about how this is all explainable. But…the same thing happened last year, this time the whole media establishment ran stories decrying “sloppy” practices (thefiscaltimes) or “accounting gaffes” (CNN). Independent economic writer Catherine Austin Fitts has said it’s simply fraudulent finance and observes one thing Comey and Mueller have in common is neither one investigated this missing Pentagon money. (BTW her Solari.com site is good and if you search for “Dunwalke.com” you can find a most revealing analysis of what happened in investment banking since the “good old days” of financial stability.)
Fear of missing out
http://www.bakadesuyo.com/wp-content/uploads/2016/06/fomo.jpg
ROMO
Choose diversified global multi assets, all things in moderation, don’t invest money you need. The value of your investment can and probably will fall as well as rise.
Time in, not timing. In the end we’re all dead.
I agree with you and Hussman Mish, also Stephanie Pomboy for most of the same reasons and more. There are quite a few arrogant people around who have made a whole lot of money in the tech stocks with leverage and keep buying the dips saying they’ll know when to leave the party before everybody gets totally drunk and starts throwing up! I say what if something horrific happens and the market can’t open? Ask that question to one of these guys they’ll laugh in your face. If forced to answer they say at that point the Fed would crank up the printing press adding liquidity to the market doing whatever it takes. Really!? Do central bankers really have that much power? But I say what if there are no buyers, no bids? My most arrogant friend would say that would a be a fabulous buying opportunity. The Plunge Protection Team will save the day once again. We’ll see.
I forgot to mention that in a truly catastrophic situation the Fed itself would become the market, the buyer of last resort. More needs to be said about fear and greed, how it all plays out in the dynamic of human emotion.
Any analysis that starts with graphs of past data, imo, is meaningless today. The CB were not involved in the past as overtly as they are this time around. CB now own the outcome of this rally. They authored this story. To expect mean reversion to take over now seems like a Deux-ex-machina approach. Why would any CB fall on their own dagger now, especially when they are all coordinating with one another?
The only way any of the doomsday predictions will come to fruition is if one of the CBs goes rogue, may be. What are the motivations for any of the central banks to go rogue? I don’t see any at all.
The idea is that any event that is structurally unstable enough will blow through the CB bots as the it’s are not set to correct for such an adjustment. If NK goes badly or Trump is impeached or EU breaks or China corrects etc then there will be chaos and it has been too quiet too long to go smoothly – people are soft like the markets.
While the market is now playing to central banksters’ music, I doubt that it can play for ever. How and when it will break is the real question. Can it be a decade from now, may be, may be not. Will Dow be 40000? May be, may be not. The bigger issue is what would be the size of the collapse if and when it breaks, which it will. Demographics, attitude, amount of debt all are going to be BIG DRAG on growth without which it is going to unravel even despite the central banksters heroic efforts. Can you imagine what could be the magnitude of collapse then? Mind-boggling.
Bottom line: Fish on central banksters put while constantly keeping an eye on the exit. Also salt away some fishes now and then…
Still of the opinion there will be a wobble following by another leg-up followed by a major breakdown late 2018 – 2020 type timeframe that will be a big credit clearing event form which to start again. 2019 looks ripe, entering a very dangerous period.
Reblogged this on World4Justice : NOW! Lobby Forum..
“As in 2000 and 2007, investors are mistaking a wildly reckless world for a permanently changed one…”
In a cycle, there is nothing permanent.
I have a question for everyone here….How can anyone have any hope whatsoever in this world with this continuing racket of financial manipulation?
Please tell me because after years of this nonsense, I see absolutely nothing improving and am running on fumes, darn close to empty……
Thank you.
But wait Leuthold Group’s Jim Paulsen said to CNBC on Friday. “The kick is we can do all of this without aggravating inflation and interest rates. If that’s going to continue, I think the bull market could continue to forever.”
Forever? Now that is forecasting!
FYI
German Election: Could A Banking Crisis Take Merkel Down?
http://legalinsurrection.com/2017/08/german-election-could-a-banking-crisis-take-merkel-down/
What make this time different is that central banks are buying equites outright. They will never sell their stocks. They will only buy more when the price does go down.
The BOJ now owns 70% of Japan’s major market index. The Swiss Central Bank is the largest owner of Apple stock. The markets have been monetized.
CBs are not just encouraging risk. They have become the major risk takers, thus eliminating all risk. They print their own money and therefore have zero sunk cost.
This can go on forever. They will never let the market go down because that would be the end of everything. The market is the only barometer they care about and only measure of their “success” that is positive.
Hussman’s historical comparisons in this context are therefore meaningless. Money mangers like Elliot Singer have noted that all risk has been removed from the market.
No one knows how and when this grand experiment will end, but it will not be because of extreme valuations.
It’s all a type of corporate welfare instigated worldwide by central banks through collusion. We have soooo much individual and corporate welfare these days that free markets do not function correctly. When will sanity and free markets return? As long as the buyers of last resort with unlimited funds will pay any price to keep an uptrend in effect, the uptrend will continue, but that’s not how free markets are supposed to function.