John Hussman’s presents a message no one wants to hear because nearly everyone is too busy believing for the third time in 17 years that “It’s different this time”.
Last week Hussman wrote about Valuations, Sufficient Statistics, and Breathtaking Risks. This week it’s more of the same with his post Behind the Potemkin Village.
The markets are so overvalued now that Hussman expects a 60% decline from here.
There’s an apocryphal story that in 1787, during the journey of Empress Catherine II to Crimea, Prince Grigory Potemkin, the governor of the region, erected fabricated villages along the Dnieper River, which would be disassembled after she passed by, and rebuilt again downstream overnight.
When one examines the collapses of the tech bubble and the housing bubble, it’s evident that one of the central elements of those collapses was the gradual recognition by investors that the overvalued pieces of paper they were holding were actually little Potemkin Villages; temporarily glorious and impressive on the surface, but backed by much less than investors had imagined was there. What sort of “catalyst” is needed for a Potemkin Village or a Ponzi scheme to disappoint? Only the gradual or sudden discovery of the reality behind it: the recognition that there is no “there” there.
Market returns don’t just emerge from nowhere. They are driven by the sum of three factors: growth in fundamentals, income from cash distributions, and changes in valuations (the ratio of prices to fundamentals). For example, the 10% annual total return of the S&P 500 since 1960 also derives from growth in S&P 500 revenues averaging 5.7% annually since the 2000 peak, dividend income averaging about 3.0% annually, and a much steeper increase in the S&P 500 price/revenue ratio contributing 1.3% annually (taking the current price/revenue multiple to the same level observed at the 2000 market peak).
Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%.
Here are the facts: over the past several decades, due to a combination of demographic factors and persistently slowing productivity growth, the core drivers of real U.S. GDP growth have declined toward just 1% annually, with a likely decline below that level in the coming 10-12 years. Indeed, in the absence of any recession, U.S. nonfarm productivity growth has averaged just 0.8% annually since 2010 and 0.6% over the past 5 years, while the U.S. Bureau of Labor Statistics estimates labor force growth of just 0.3% annually in the coming years (which would be matched by similar growth in employment only if the unemployment rate does not rise from the current level of 4.3%). Add 0.6% to 0.3%, and the baseline expectation for real GDP growth is just 0.9%. Nominal growth is likely to be similarly weak.
While S&P 500 earnings growth has slightly outpaced revenue growth over the past two decades because of rising profit margins, recent record profit margins have now stagnated and have begun to retreat, resulting in the likelihood that earnings growth will match (at best) or even lag, overall economic growth in the years ahead. At the same time, the valuation measures we find most reliably correlated with actual subsequent S&P 500 total returns now average between 150-170% above historical norms that they have approached or breached by the completion of every market cycle in history. For a review of the historical reliability of these measures and popular alternatives, see the table in Exhaustion Gaps and the Fear of Missing Out
Let’s be clear. It has taken the third financial bubble in 17 years to bring the total return of the S&P 500 since the 2000 peak to just 4.8% annually, all of which we expect to be wiped out over the completion of the current market cycle. Even if investors are lucky, and valuations reach yet another bubble extreme 10-12 years from today, the annual total return of the S&P 500 between now and then is likely to be even lower than the 4.8% return since 2000, because the underlying economic drivers have deteriorated further. In my view, it’s substantially more probable that investors 10-12 years from now will find the S&P 500 Index at a lower level than it is today, with the average portfolio struggling to get back to zero from deeply negative interim losses.
What If?
It’s very difficult to present a fresh look each week on the same topic. I salute Hussman for his ability to do just that.
Even if he is only half-right on the duration and strength of the decline, public union pension plans in states like Illinois will be broke.
State of Denial and Hubris
In his article, Hussman present a total of seven charts to make a compelling case.
Most people ignore Hussman because they don’t like his message. Certainly, it’s not the message Wall Street wants you to hear. Importantly, Wall Street can repeat its message way more than those in the Hussman camp.
Some know full well the stock market is in a bubble but they expect they will get out on time. A few might manage. In aggregate, it’s impossible.
“Don’t Worry There is No Bubble”
Many of my readers think the “Fed won’t allow another major stock market decline”. But if the Fed could prevent bubbles from popping why did we have two crashes already?
That’s the message Wall Street wants people to believe. It’s also the message people want to believe.
I don’t know when this bubble will burst, nor does anyone else. But the bigger the bubble the louder the pop.
Related Article
Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
Mike “Mish” Shedlock
It is quite possible that we get 0 returns in 12 years as Hussman says. But how can we be sure that it will be a giant V where there is a 60% decline? What if it is a series of small (10-15%) up or down years that effectively cancel out one another during the next 12 years? So we get to the same place (0% return from today’s levels) but by a very different route.
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Not that I am saying that I agree in any way with Hussman, nor would I rule out the possibility of the market doing as you say, but there is definitely truth in the saying “markets go up like an escalator and down like an elevator.” When markets go down, they really do have a tendency to completely shite themselves.
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Yes, during the course of the year you could have sharp declines of 15-20 percent that can take place over the matter of a few weeks. The reversal process might take longer – maybe several to many weeks. But all this would be in the context of a year where the overall market is up/down only 10 percent or so.
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No one knows, anything is possible, but for now it wants to go up.
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Best comment on thread.
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I would say the one key difference between now and then is the World Central Banks in unison have openly embraced creating asset inflation through varies mechanism. The global equity markets ceased having any semblance of free-open markets in roughly 2009. They simple can’t let it correct now, or the whole system collapses.
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Yup. Exactly my thought
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The biggest bubble in existence is the belief in central banks. People who think that QE has actually improved the economy will be in for a shock when stock buybacks can no longer fool the herd.
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Noone more sentient than the average dishrag, believes QE has “improved the economy.” That wasn’t even it’s purpose.
What it did, was steal from those who had fewer “assets,” and hand the loot to those who had more. That way the former would get even more desperate, and the latter could hire ever more of them to do their dishes, clip their toenails and give them BJs. While paying them wages so low that CPI goods demand remained subdued enough that the the Fed could meet it’s dual mandate of low make-believe-measure inflation, and “full” employment. Per the Fed’s scorecard, it has worked so far…..
People still believing in central banks, just believe there are still some more blood to squeeze from the ever drier stone that is an ever more impoverished populace. And that the populace has been properly conditioned and dumbed down, so that they won’t do anything meaningful about it. Instead happily handing their daughters over to banksters (and Weiners) for BJ duty, ever do grateful that Massa in Washington has created so many new jobs for girls like her. Just so long as Massa tweets something mean about someone from time to time.
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What about Crypto Currency. Bitcoin is already on high price, inflated at parabolic level.
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Correct. Which brings into play the oft-derided claim that no manipulation of the Gold price takes place. I don’t believe it does but you can see quite clearly why it might.
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What is different this time is that Central Banks are directly buying private equity and corporate bonds for their own account. The ECB is currently buying 90% of the corporate bonds issued in Europe. The Bank of Japan now owns 75% the shares of Japan’s major market EFTs. God only knows what China’s Central Bank owns. The Swiss Central Bank is now the largest owner of Apple shares. The stock and bond markets of the developed world have been monetized and their companies nationalized by Central Bank purchases. These Banks will never sell their stocks or bonds and will only buy more using fiat money.
In light of this situation, fundamentals don’t matter anymore. Sadly, Hussman still thinks they do and it has cost him and his clients lots of money.
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“They simple can’t let it correct now, or the whole system collapses.” I think you said it all, without realizing it. “or the whole system collapses” is not likely today but within five years I’d give it a 50% probability. There are no sign posts at the Event Horizon.
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Mish, please find out what you can on this: is goldmoney gold, and secondarily goldmoney cash-on-hand, subject to seizure and bail-in if certain banks are in need of bailout? If so, which banks?
In other words, if the stock market (or Australian liar loan packages) collapses, is goldmoney as bad as overvalued stocks, or worse?
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There is no relation between GoldMoney and Australian Liar Loans.
Goldmoney is 100% gold, not loans. There is no threat of seizure. GoldMoney does not lend gold, it stores gold.
Mish
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The flaw in Hussman’s logic, and the rest of the linear thinkers is they assume the same metrics apply today as in the past. They criticize those that say it’s different this time, when the reality says it is different, especially where people place their confidence. When was the last time the govt bond bubble popped? Where else does he think global capital is going to park? It has nothing to do with valuations when the return of capital is the goal.
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We all like to think that somehow it is all different now, but there is no real change from even millenia ago. It will go down, the only thing that technology has done is moved the date of the reckoning.
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All you can do is diversify around the pie chart and tilt towards what is considered better value and away from the overvalued – and balance 1, 2, 3 or 4 times p.a.
Part of the pie should be Gold.
What else can you do?
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Correct. It is always govt that abuses their power. Thus, capital flows from public to private.
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Everyone KNOWS it is a fraud. They always have known it with EVERY ponzi scheme, every fraud, every pyramid. They don’t CARE. The assumption is always that they will get out before it falls, or that they can pump a little more life into the bubble….all of it premised on glorious growth that no one thinks is real. Tulips….really?
Look at the markets today and you will see only the most pitiful analysis claiming prices are premised upon value or fundamentals. Most don’t even try, they simply fall back on the game, BTFD or whatever they have. We all KNOW there has NEVER been a better time to BUY, and we also know that once we start selling in an attempt to remove our profits, we are likely going to start a stampede for the door that will trample everyone to death. People are NOT unaware. They ALL have one eye on that door….just watching for ANYONE headed that way.
It can’t crash. It would be simple suicide. It won’t be allowed to crash….can’t if no one is allowed to sell or is simply afraid to do so. Bet you a billion if someone like Buffett tried to exit the market he would be in jail before dawn, charged with crashing the market….and then they would simply “reset” it to yesterday’s tape, and start over. There are no rules.
So the markets remain. No place but up to go if there is any decision or thinking left to do. Down is death…for everyone, and they know it. We are way up that ladder now and no one dare look down.
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Why do you say EVERYONE. I think you are way off on almost everything you say.
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Simply ask them? Confidence in our government and markets are way low, and that is for a reason. It doesn’t mean they stop playing…or investing. After all, what other options are there? Everyone is in it to win, whatever the game is, no matter how corrupt.
Why do you buy stock? Is it because you think they are actually going to be worth more in twenty years, or are you betting that some one else THINKS it will be worth more and is willing to pay to find out. The economy is based on perceptions of the future, the greater more idiotic future where people will pay dearly for what you hold. Idiocy has been the one prevailing human trait played on for profit for an eternity, and as such will continue to pay out for an eternity more. They are still building multi-million dollar casinos on the bet that people will flock there convinced that they are smarter and luckier than everyone else and will win big, beat the house, even though the odds are publicly available to the contrary. People, what can you do?
Ignorance is not knowing, Idiocy is knowing and caring not.
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Because it gives me a piece of ownership in the company i purchase the stock in. Silly me.
Confidence in government is always low.
Other confidence indexes are rather high.
Regardless, don’t say everyone. It is an absolute. Be nutty all you want, just don’t speak for me.
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@blacklisted –> “they assume the same metrics apply today as in the past.”
The same metrics do apply, but the metrics that happen over centuries, not over a couple decades.
–> “When was the last time the govt bond bubble popped?”
England went bankrupt at least twice during the 20th century. France went bankrupt a half dozen times between 1800-1994…. both were global reserve currencies the first time they went bankrupt.
–> “Where else does he think global capital is going to park?”
If markets drop 60% (and I don’t know if they will or not, but if we are following Hussman’s thinking…) if markets drop 60%, that means there is 60% less capital to park. I know, its not a one for one relationship, but the point remains that after a major economic routing, there is a shortage of capital. Capital destroyed by a market plunge (like capital destroyed by war) always disappears faster than demand for capital.
If Hussman’s scenario comes to pass, capital supply drops +/- 60%, capital demand drops only +/- 40%… there will be plenty of places to put the remaining capital.
When the $*(# hits the fan, everyone wants capital but few have it.
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What analyst has the DB that goes back centuries? There is only one – Armstrong. The majority is always wrong, and many unexpected things will happen before a new reserve materializes. Whether we get a “scary” pullback to get the bears to say I told you so, or volatility stops out the shorts, the majority will miss the next big move higher because they still think the DOW reflects economic health. Remember, it’s a strong dollar that will pop the dollar-based bond bubble.
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As Hussman explains in several other posts, at the end of the day what matters is not the price of an asset but the future cash flows the asset will generate to its owner (say as in real, sustained dividends over time). The day of reckoning will come when the market suddently internalizes the fact that there is a serious mismatch between future cash flows and present values. This is a fundamental law of finance. While it can be suspended for limited periods of time (as in Tesla investors throwing a billion dollars a quarter into thin air), it will never “be different” over the long run. Not now. Not 50 years from now. It’s all a matter of timing. Valuations can get very far away from cash flows (especially in this era of emphasis on non-GAPP earnings)… that is, until they stop doing that.
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You lost me at “Armstrong”.
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Just for the sake of argument say you had someone who could create unlimited amounts of money and they were constantly “investing” this newly created money into the stock market forcing it higher and higher. Where would it end? Why would it end?
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You are not the first con-man to suggest printing infinite amounts of currency. You are not even in the first 100. Hundreds before you have made this exact same suggestion, and every single one of them collapsed — even what were reserve currencies at the time (England and France).
Stop peddling this moronic nonsense. The stock market may or may not drop 60% (I have no idea) — but only a con-man tries to sell perpetual motion machines.
Enough with the fraud.
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It may be nonsense, but it has worked thus far. I think the issue is one of alternatives, and as long as there are other alternatives to turn you money towards, those most corrupt will fail.
But what if ALL alternatives are more or less equally corrupt, and in league with each other. Equally broke, equally fraudulent, all too interdependent upon each other NOT throwing stones at their single pane glass houses of fraud?
I believe the markets are as big as they are for two reasons. One is massive amounts of “invented” cash pushed into them, and the other is a complete lack of alternatives to invest. Banks pay nothing, and investments in real businesses is a risky deal at best in this nutty world. Like it or not, the US is still perceived as the safest bet on investing, if for no other reason America has demonstrated, even beyond Draghi, that they will do what ever it takes to support the markets…capitalism be damned. That gives us LOTS of rope for stupidity and I feel confident that they will use every last inch of it and still come up short.
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What has “worked so far” is just theft. That is all printing money is. It’s just a simple mechanism for those with first access to the fresh print, to steal from those without. And it is absolutely nothing else whatsoever.
Putting George Washington’s face on a piece of paper, creates exactly zero new value. Yet those who own “assets” that is being pumped up by the new money, inevitably gets richer. Hence, as anyone with as much as 1st grade arithmetic aptitude can easily see, those who do not own enough “assets,” therefore must robbed. All the time. Every time. Always. Period.
Theft can always work as a way of obtaining wealth, as long as there is something left to steal. And as long as those being robbed, refuse to do something meaningful about it. But sooner or later, you have stolen all there is to steal. Then what you are left with, is for those ever closer to the core of the theft racket, to start stealing from those more peripheral. So the beneficiary clique grows smaller and smaller, while those being robbed grow more and more numerous; until even the most placid and well indoctrinated of populations will have enough people with a clue, that they set in motion developments that bring the whole racket down.
Exactly when that will happen, is anyone’s guess. But it will happen. Always has, always will. Simple because it cannot not happen. You just cannot base an economy solely on theft forever. You will run out of things to steal. And out of people who simultaneously have something left to steal, and are complacent about you stealing it.
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Why do we suppose it will end in some inglorious crash? Could it be that this is a managed process enabling the transfer of ownership of all assets to the relative few using monetary dilution as the acid melting value from our hands.
A crash occurs when people suddenly suffer the epiphany of reality, but given our proven willing and knowing denial, I think this will just be a slow downward grind where real income and wealth will be replaced by entitlements until the day we realize that we own nothing and are simply tenants paying rent in their world…..At least until we no longer provide either political or productive power, at which time our redundance will render us gone.
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“…this is a managed process enabling the transfer of ownership of all assets to the relative few …”
That’s the plan. Not sure how “managed” it is, but that’s the plan regardless. But you have to remember, none of these “assets” are worth much by themselves.
At their core, all they represent is various mechanisms for those “owning” or controlling them for laying claim to a share of the productive output of someone else. Which is fine and dandy, as long as the arrangements allowing for that, is entered into voluntarily. You let me work a section of a river you credibly claim as yours and are able to defend, and give you a cut of the gold I wash type scenarios.
But once that is no longer the case, and those mechanisms are instead hollowed out by way of Newspeak constructs, that purport to represent age old arrangements that free individuals would enter into, but are in reality nothing more than lightly disguised theft and enslavement, there are no longer any incentives left for producing anything. At least anything above that which cannot be stolen.
Instead, incentives are directed at taking back some of the loot the privileged clique stole. As that’s where the money is. So you end up with increased criminality. If some bankster had government rob you to the point of destitution, and has credibly promised he will continue to do so as long as you produce anything worth stealing; why not instead invade his house, rape his wife, steal what you can take along, and kidnap his kids? Torturing them until he pays you back some of what was stolen? After all, you live in a place where crass theft and jackbooted thuggery is the name of the game, and the officially sanctioned way to get ahead. And when in Rome…..
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“Could it be that this is a managed process enabling the transfer of ownership of all assets to the relative few using monetary dilution as the acid melting value from our hands.”
That’s assuming all the articles that quote studies that claim all this supposed wealth is concentrated in the hands of a few are correct.
Until they show me how they get these numbers I do not believe them as they just don’t add up.
Bill Gates, the richest man in the world, owns about 167 million shares of Microsoft after his most recent transaction (a sale). This can be seen at nasdaq.com. He holds less than 3% of the 5.8 billion shares outstanding. MSFT is over 75% institutionally owned (think 401ks, mutual funds, IRAs, private/public pensions, etc.). But although Gate’s ownership is less than 3% it is somewhere around 14-15% of his wealth. Looking at it another way, something that generates a significant portion of the world’s richest man’s “wealth” is 97%+ owned by others. And Gates is donating much of it away, so why would he care about how much richer Fed policy can make him?
Bezos, a top-3 guy in terms of wealth, owns a significant portion of AMZN shares at just under 80 million. At today’s price that’s over $78 billion, by far the majority of his wealth. But institutions hold about 62% of the company and own almost 300 million, or well over 3x what Bezos owns. These institutions include outfits such as Vanguard, Fidelity, T Rowe Price, etc, which are not known for managing the money of the super-rich. Taking out the institutions and Bezos still leaves over 100 million shares (more than Bezos has) held by others.
The real problem is not the Fed catering to the super-rich, a claim with which I do not agree. It is what happens to all the currently locked-up retirement (upper) middle-class “wealth” if this all collapses.
All large-scale aggregate “wealth” claims are BS anyway as they are always extrapolated from the results of the latest marginal transactions in markets and then stated as if they represent the whole realistically. They can’t. US M1, which is the money used to settle stock transactions (non-M1 higher measures must first be converted to M1, generally through a sale) is $3.7 trillion. Yet the stock market alone is supposedly worth around $25 trillion. With M1 under $4 trillion clearly the stock market cannot be collectively “sold” for anything approaching $25 trillion. Then there are other assets and the money that is required just to run the economy.
The inflationary process does hurt the NSR (non-super-rich) more as a lower portion of their assets are in areas that benefit from monetary inflation than the super-rich and the percentage of assets required to maintain the lifestyle of the NSR is much higher. But IMO the NSR own a lot more than these envy-driven studies state and the thing that worries the Fed is not how to make that 0.x% even richer.
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Made a mistake. Institutions own 5.8 billion MSFT shares. Total share count is over 7.7 billion, of which Gates owns 167 million, or a bit over 2%.
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It (the dollar) … fails one way or the other …
The first way …We default which will kills the value of the $$$ this
is an instantaneous failure … think of this as the exponential
failure
The “print” the …$$$ to oblivion … this is the arithmetic failure
… slow and steady … to zero…
“Learn to distinguish the difference between errors of knowledge and
breaches of morality. An error of knowledge is not a moral flaw,
provided you are willing to correct it; only a mystic would judge
human beings by the standard of an impossible, automatic omniscience.
But a breach of morality is the conscious choice of an action you
know to be evil, or a willful evasion of knowledge, a suspension of
sight and of thought.
That which you do not know, is not a moral charge against you; but
that which you refuse to know, is an account of infamy growing in your
soul. Make every allowance for errors of knowledge; do not forgive or
accept any break of morality.”
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Jakobsen,Rickards,and now Hussman, They have been telling us to stay out of the S&P 500 since March 2009, but they’ll tell anyone who listens that they sounded the warning signals in March 2000 and October 2007.
These guys make a lot of money in a climbing market…. and even more money in a declining market. Heads they gain, tails they gain even more. A nice livelihood if you can get it.
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No he’s been telling us to stay out a lot longer than that! I stayed out of the markets in 2005 etc b/c of Hussman’s claim the market had far more to fall. Instead I missed out on the recovery. Hussman has been a perma-bear for close to 20 years. Twice during that time was right.
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I wonder is Hussman makes millions – his fund’s track records are terrible, even if he did avoid the worst of the 2000 & 2007 crashes.
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I wonder if there are any historical examples of the world being this much in aggregate debt and what happened as a result.
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There are plenty of historical examples of empires collapsing due to too much debt.
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+1
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Empires, but what of the world all together at the same time?
Have we ever had a world so unified by a common economic failure such as this?
And have we ever had such an absolute and all-encompassing control of the worlds financial system and information? We are seeing much of the world engaged in the same crap at the same time, all sharing the same data. NO place to run, no place to hide. Every alternate door puts us in the exact same place….government control. I can’t crash…THEY WON’T LET IT.
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The world is not unified. A bunch of banksters, bureaucrats and other leeches from many different countries are unified. They have robbed the rest of their countrymen. And are now busy trying to peddle the idiocy, that themselves and those they have robbed and are robbing, constitute some sort of “we” that the robbery victims should somehow feel compelled to preserve.
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We are not unified ideological or directly by law, but we do share a common fate as directed by the powers that be. The progressive dream is a centrally controlled economy, and the fact that this is done by circumstance rather than by acts of law is but a temporary and transient issue. We are being controlled by deliberately contrived circumstance. World wide chaos.
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–> “Empires, but what of the world all together at the same time?”
When the Roman empire collapsed, it was the whole world — or at least every part of the world that they knew about. Other parts of the world, outside the indebted Roman bankruptcy, probably didn’t care.
When the G7 collapses under its own debt, it will be the “end of the world” (for G7 countries). But the rest of the world will go on
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We’re in uncharted waters. Previously if one country were in debt, another would have a corresponding credit. Not so any more with central banks holding much of the debt.
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The Fed of pre-2008 and post-2008 are two different animals. Therefore one cannot equate the two Fed’s action. Also the Fed will act early, more forcefully and in unison with other CBs, much more than before. How effective it will be is anybody’s guess. IMO, Unless the CBs are discredited it is unlikely we will get a market crash.
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“The Fed of pre-2008 and post-2008 are two different animals.”
…
How?
There has been no change in their charter. Sure, they’ve been more activist. But at the end of the day it is all about investor confidence. Back in 2007 Federal Reserve started to slash effective federal funds rate from 5.25% down to just over 0% in late 2008. November 2008 Bernanke announced QE. STILL markets went down till bottom reached March 2009.
“Confidence” restored when Congress pressured FASB to change asset valuation from mark to market — mark to model … about the time market started its ascent.
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“There has been no change in their charter.”
That has not stopped them from usurping powers and handing out largesse all in the guise of helping the economy – ‘if I do not do this, then the Main street will be worse off’ and helped by the politicians changing accounting rules. Forget the gall of it, the very action is anti-thesis of capitalism. They will go all out IF a market crash occurs. And you will get the entire pack of wolves aka CBs in this con job.
“Sure, they’ve been more activist.”
That answers your question – How?. The beast post 2008 would buy up everything should the market crash. IMO, The psyche of the CBs pre-2008 and post-2008 is vastly different.
You could even say they have been printing like mad, buying up everything and doling out money to their pals to buy up everything. How long this would work is anybody’s guess.
““Confidence” restored when Congress pressured FASB to change asset valuation from mark to market — mark to model … about the time market started its ascent.”
Agreed. But then everytime that vanes, buoy asset prices with QE1, 2, Twist and 3, ECB, BoJ taking up the baton of QE, SNB buying up equities and the like.
How do you get out of this trap if you are a CB chief? By getting out at the right time, writing something like ‘Courage to Act’ despite having been clueless and mouthed all nonsense and then crow about having saved the world.
Can the unwind happen? Yeah it might (and markets will crash) but it will be over the dead body of the Fed and other CBs. I am not saying whether they will succeed or not but that they are going to do all they can and some.
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Currency Risk = Stock Market Risk thanks to the CBs. For the stock market to fall precipitously, it seems to me you don’t need one currency to fail i.e. the dollar. You need all of them, or at least the dollar, euro and yen to become valueless i.e. investors won’t sell their stock for the government blessed paper.
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Hussman will be right one of these days, just like a stopped clock. Investing is also about timing not just valuations. Hussman has been wrong on equity markets for years and missed the entire bull market since 2009.
This market shows no signs yet of loss of momentum despite all the headwinds. We can be certain there will be more money printing by central banks when the market declines 20-25%. The important signal will be how the market responds to more printing then.
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I think Hussman will be right in that the market returns over the next 10-12 years will be very poor, like -1% to +1% annualized. What I am not sure about is if the 60% interim decline will happen. Sure, the markets are overvalued to that extent and in a sane world, such a decline would be almost imminent. But will the market be *allowed* to fall even 25%, let alone 60%? – that is the question.
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Hussman’s weakness is that he is an academic and not a trader. If he were a trader, he’d likely have obeyed the technicals a little more. There is no doubt he will be right at some point because, as he says, valuations are all about the future cashflows a business can generate and at the moment stock prices rely on the ‘greater fool theory’ more than their future prospects.
Where I think things might be ‘different this time’ is in the policy response to a crash. It’s not difficult to foresee a time when the Fed and other CBs end up being the single largest buyers of stocks as part of yet more QE programs. In this case, the losses in ‘real’ terms might be 60 or 70% but in nominal terms there may be little difference.
It would certainly be ironic if investors were racking up capital gains via higher prices while in real terms they were taking a huge capital hit as the value of all fiat currencies plunged into the abyss.
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Hussman is doing the math, and this market ignores the math. Today’s rally is lunacy considering the damage to both Houston and Florida. They jam the shorts on some fallacy that the storms weren’t that bad and completely ignore reality. Who in their right mind would buy this market knowing that both Florida and the Houston metro area won’t be celebrating Christmas this year. The retailers are already screwed and now with the losses mounting in the real economy, the central banks will have to put in overtime propping up this pig.
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As the Fed continues to prove Hussman wrong. Oh, well,,,who ya gonna call?
But, just imagine the Fed inspired money blitz a 60% market crash would create? A universal income for all, including their goldfish?
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“As the Fed continues to prove Hussman wrong. ”
…
Wow, talk about spiking the ball at the 5 yard line.
If meltdown starts this week? Next month? Next year?
And before you break out the broken clock analogy, markets don’t crash 60% (not saying they will) unless imbalances allowed to fester for years.
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At this point, the Fed holds the aces,,,,not Hussman.
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“Moral Hazard”.
The reason its different this time. This just ain’t our grandfather’s economy no mo’. Hussman’s grandfather’s either.
Might be the reason all the pundits have been wrong these last 9 years is, they are using old navigation charts to sail uncharted waters?
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But, what the heck, no one expected FDR to confiscate gold back in ’33, either ?!?
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“Might be the reason all the pundits have been wrong these last 9 years is, they are using old navigation charts to sail uncharted waters?”
Nobody is navigating anything any longer.
Things change as they continue to remain the same. Was any of this around when Paulson was saving the world with his mini flip phone cellphone? How about when the dotcom bubble burst?
i.) Advanced analytics used by High Frequency Traders (HFT) in their algorithms prevent anything from falling by aggressively “buying the dips”. Will they soon start aggressively “selling the spikes”?
ii.) Passive investing continues to gobble up AUM. Fewer and fewer active investors to yell “Fire!” on a crowded trading floor. How can anybody panic sell when all the emotion gets siphoned out of the equation?
iii.) Automatic enrollment by employers. More and more, new employees now have to actively decline participating in their 401(k) plans. These folks
keep the financial ship upright and sailing along by providing much needed ballast in the lower stowage compartments, which feature lower returns.
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I have a question.
HFT algorithms, do you think they are directional trading systems designed to take open positions (long or short)?
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Things are different now. Now the FEDs only job is to prevent to stock market from crashing. Before it was simply one of their important jobs. If the market is crashing, they’ll do whatever is necessary to stop the crash. Even it means buying a lot of US equities. They may not succeed.
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BOJ has been doing that (buying equities) for quite a while. The Nikkei today is at the same level that it was 31, 25, 23, 20, 17, 10 and 2 years ago.
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The unwavering faith in the ego of central bankers is heavily flawed. BoJ is hardly the first omnipotent central bank to fail to control its own economy or its own stock market.
The only thing the BoJ achieved was to completely neuter the JGB market.
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“The only thing the BoJ achieved was to completely neuter the JGB market.”
What prevents our Fed from “achieving” that?!
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I think the Fed **IS** neutering the Treasury market. I know lots of former primary dealer employees (banks that make markets in US Treasuries). Cash volume is way down, even though there is twice as much debt outstanding. CME trading volume in Treasury futures is way down.
The BoJ now has to stuff their garbage JGB’s into the Post Office savings accounts, because no one else will buy them. Many JGB trading desks are doing 1-2 trades PER WEEK, they sleep and do suduku puzzles.
Meanwhile the Nikkei remains about 1/3rd of its peak price? The mighty Japan, Inc isn’t even mentioned anymore — China, Vietnam, Thailand, South Korea, Singapore, Philipines… not Japan. Sony has been moved to the discount rack.
That is what the BoJ’s “print print print” policies have achieved.
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The unsustainable certainly seems to be sustaining. How long must it last until we can “officially” consider it sustainable? The fact that it has remained flat is assumed to not be deliberate?
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“BOJ has been doing that (buying equities) for quite a while.”
…and to think that all this time we’ve been lead to believe that it was only Ben Bernanke who had the “courage to act”!
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Bernanke and Yellen might **THINK** that is the Fed’s job, but officially they are wrong. The next chair might not adhere to Bernanke’s warped thinking.
Even if Congress officially changes the Fed’s mandate (when they can’t agree on lunch), there is a second much bigger problem.
The Fed’s power comes from being the central bank of the largest economy in the world (at the moment). If most people do not have stock trading accounts, it means most of the economy backing the Fed does not support Bernanke’s imaginary mandate.
Hillary’s failed attempt at rigging elections aside, the deplorables will put in candidates like Trump whether the powers that be like it or not. Trump has his money in real estate, not stocks.
No intelligent person expected the swamp to be willingly drained; it was always going to put up a fight. But even Kings who ruled by “divine right” (in their own minds anyway) learned that the swamp needs the deplorables more than the deplorables need the swamp.
Washington DC will yield, or the deplorables will send someone the swamp likes even less than Trump. Check the history section of your local bookstore before you argue about this, the swamp always loses in the end (not always gracefully, not always on the first try, and unfortunately not always without bloodshed).
Bernanke and his disciples may WANT to rig the stock market, and they might even try… but they won’t be the first to try or the first to fail.
I don’t agree with everything Hussman writes, but the unwavering belief in the “power” (ego) of central bankers is absurd.
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+1
There’s still a lot of water under the bridge between some half literate, easily played, ineffectual, orange haired tweet doll; and the infinitely more effective guys the Somalis sent to drain the Barre, but at least things are moving in the right direction.
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….Barre Swamp…
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By its charter Federal Reserve not allowed to purchase equities.
Last year Yellen said Congress should revisit this topic.
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What about the much rumored plunge protection team?
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THEY made a lot of money. Bernanke gets $250K “speaking fees” to talk about ideas that don’t work and that he didn’t come up with first anyway.
The rest of the economy got a giant pile of debt
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Still a rumor?
Seriously, I don’t buy into it for one simple reason. If Federal Reserve operated a hedge fund or whatever, then the (massive) profits go where? To the taxpayer? Ha ha. I think Wall Street wants to keep those profits. Anyways, if you recall back then Discount Window opened to practically one and all. Near 0% cost to liquidity. Geithner – every time he opened his mouth – stated no large Wall Street banks will fail (the bogus stress tests proved as much).
Oh, I don’t dispute the fix was in. But it was Wall Street out in front … with the full weight of US Government behind it.
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Why should they operate a hedge fund? There are other ways to do it – print money and hand it off to hedge funds, for instance.
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in Behind the Potemkin Village he gives his interpretation of the Phillips Curve, very good reading. If there is a this time its different argument it has to do with employment and GDP considered with China as the 51st state. To that he might reply yes but we pay for that with government debt, which is a tax on future earnings. In the meantime monetary policy is wearing blinders and nothing could ever fundamentally alter the nature of the debt we owe. Right now the SNB is printing money out of thin air and buying FAANG stocks. How you factor that in? To my way of thinking there is so much s**t going on, crypto currency, derivatives, QE, CBs buying anything that moves that something is going to unravel.
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Most interesting article I have read this month—thanks for reprinting Hussman.
Harry L. Munsinger, J.D., Ph.D.
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Hussman literally writes the same article every week, going back years. I admire his persistence, if not his predictions. He’ll either be right SOME day or a massive dollar devaluation will make the nominal value of the stock market affectingly a crash, even without falling.
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*effectively
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When you filter the truth 1,000 times, the truth will disappear.
Avoiding the truth is not lying.
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Dear Mish
Have you looked at what this man have achieved as an fund manager (blue line):
https://www.hussmanfunds.com/pdf/hsgperf.pdf
Even if the SP 500 fell by 60% and he managed to keep his fund close to flat in value he would not have been doing better than SP500.
Basically he has hedged his clients money away, if he had not been hedging he would have been doing fine.
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Yes!
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I started reading Hussman’s collumn around 2005 and gave up about nine years later, as he was always saying the same thing and it never came to pass. I understand him to be a brilliant man. The little extra I know about him due to a personal connection he has with a relative of a former coworker only increases my respect for the man and his opinions.
However, I believe John Hussman thinks we live in a sane cause and effect world that contains only a measure of randomness, when it fact it seems to me that we live in some kind of strange Bizarro world where nothing works as expected.
There really doesn’t seem to be any historical basis to use to predict the outcome of a global economy completely awash in every kind of imaginable debt. There is no doubt it will come to an end and that it will end badly, but when and how? The central banks of the entire world keep printing money and that money has to go someplace until the day everyone decides that it is all a lie.
Then I fear that the result will be blood in the streets.
I am retired. I may be gone from this vail of tears before the end–or not. At the moment, I am hearing echoes from the past.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”
I guess we just have to keep dancing to the best of our ability.
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Hussman’s flagship fund (HSGFX) is ALREADY down 60% because of his obstinate bearishness – so his followers don’t need to wait for the meltdown, he already provided it! I’m pretty sure he will eventually be proven right about poor returns going forward. So what? HIs record stinks. Do you want to be “Right” or do you want to make money??
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Morningstar has his Strategic Growth fund in the 100th (!) percentile in his category for 1, 3, 5 & 10 years!
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Are not the BOJ and the Swiss bank buying stocks in unusually large quantities?
The US Fed can’t buy stocks now, right? Directly. And, probably others can’t either. But they operate under rules that could be changed.
So, what happens when more of these central banks buy up large percentages of stock markets with magic money?
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Yes, and our government can’t stifle free speech either.
Our government does as it likes, and tells us to get used to it…after all, they are doing for us. Destroying our constitutional republic to save the supposed freedoms held within. I know I believe them. Don’t you?
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So what would that be, like around dow 8k? In other words 3 weeks from dow 12k and everyone piling in again lol right to asinine levels. We’ll see I guess. Time for super secret QE.
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I approach the market from a technical perspective. I apply digital signal processing to the daily market close using data going back to the year 1927. A 17 year sinusoid is topping. The 7.2 year sinusoid topped ~2 years ago, so it’s in the down phase. The 3.3 year sinusoid is topping, which is the best of the three for timing a market top. In 2018, all three sinusoids will be in their down phase, and in 2008 only the 3.3 and 7.2 year sinusoids were in their down phases; so a 60% drop in the Dow Industrials is very realistic.
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P.S.
The likelihood of a forecast becomes more reliable when multiple analytic approaches agree.
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Six,
Phillip Anderson also mentioned in his premium subscription that in 2019, there will be severe recession since the economy is in the downturn.
https://www.portphillippublishing.com.au/2014/05/16/the-18-year-real-estate-cycle/
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Again,,,,bottom line,,,barring all out unwinnable war, there is only one politically acceptable way out of this mess. Devaluation. On that, I’m “All In.”
Having “Faith” in the Fed is one thing,,,”Fighting” it is different.
So, until the Potent Director, and its currency, bite the dust, the game is on. Out of Fiat and into things “Real.” Stores of wealth, income producing assets and marketable collectibles, tools and skills.
In the end, Ludwig von Mises will be proven correct.
https://mises.org/library/dark-side-credit-boom
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“For example, the 10% annual total return of the S&P 500 since 1960 also derives from growth in S&P 500 revenues averaging 5.7% annually since the 2000 peak, dividend income averaging about 3.0% annually, and a much steeper increase in the S&P 500 price/revenue ratio contributing 1.3% annually (taking the current price/revenue multiple to the same level observed at the 2000 market peak).”
5.7% of the 10% growth in the S&P500 total return is attributable to the 5.7% growth in revenues and the rest is attributable to wealth being sucked out of the rest of the system by people with the hope that they can get something for nothing other than what they consider a little, remote risk.
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JIM ROGERS: The worst crash in our lifetime is coming
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How did the market even get to this level? For those of us who have felt the market has been disconnecting from the real economy the events as of late make it appear the market is jacked up, so distorted and whacked it can go no further before melting down. The article below suggests it may be time to bury your wealth then bury the shovel,
http://brucewilds.blogspot.com/2016/10/is-it-time-to-bury-your-wealth-then.html
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Lets assume that there is a bubble (most likely) for the sake of discussion.
The question is is the bubble in asset prices or in world monetary policy?
If again we hold the real value of assets constants that would mean the bubble is in the value of money which appears to be verified by the amount of fiat money creation.
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If you care how the real world operates, versus the theories of snake oil salesmen and biased pundits that lack the historical data, today’s 3 blog posts (9/12) from Armstrong should at least have you looking in the right direction – https://www.armstrongeconomics.com/blog/.
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Here is the problem: Because Hussman has been bearish for so long (and wrong), his flagship fund (HSGFX) is ALREADY down over 60%. So if you’re a Hussman investor, no need to wait for the market to tank 60% – you’re already there!
A simple 200-day Moving Average on any US stock market index would have handily beaten Hussman (and 99% of Fund Managers) over the past 17 years.
So here’s your Lesson to learn from this: Follow the Trend and stick to a simple robust trading system. And one more thing: Avoid making predictions about the future, as nobody knows what is going to happen.
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“Some know full well the stock market is in a bubble but they expect they will get out on time.”
The insiders will. Bruce Karatz sold $400 million worth of KB Homes stock, including $150 million, the month the stock topped out.
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“Many of my readers think the “Fed won’t allow another major stock market decline”. But if the Fed could prevent bubbles from popping why did we have two crashes already?”
Perhaps the Fed has a lot more power than it did before due to technology and power gained as a result of 9/11 etc.?
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Not really
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in 2000 then potus Bush brought his new Fed chief Bernanke into the cabinet. It was never made official, and Obama tolerated Bernanke for six years before he made a change. It comes down to two conflicting doctrines, one is that the assets on the Feds balance sheet belong to the US Treasury, Why would a private bank take on so much bad paper (2008) with no guarantee? So the Fed at least has GSE status. The other doctrine is the one about Fed independence. Trump could say, you;re independent,? fine, your balance sheet belongs to you. Good news for taxpayers. So far the Fed hasn’t done anything contrary to US economic policy. You also have to consider the role of MULE which the Fed plays, offering their services as agents in international transactions which may or may not be entirely legal. This is why Paul wants to audit them – all the way back to Nixon…
Not saying Yellen is a crook I do think that sometimes men in black walk into ME and tell everyone to take a long lunch. But how do you suppose they fund things like ISIS? They need a platform.
The Fed is really the private banker to a number of US government interests, Of growing interest is any discord between the Fed and the charter banks, who really are private. They are obviously not happy with low interest rates. And the Fed used its influence on the charters to take DBs derivative book when they were in trouble last year. Some of the charters failed their stress test afterwards. The phony rate hikes were the Fed throwing the banks a bone. So the real question did we nationalize the banking system after 2008, and nobody told you?
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The Fed, like trading volumes, is impotent against global investment flows.
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A 60% decline would leave markers higher than when Hussman started warning investors. Kind of makes all his work pointless. Buy, hold and dollar cost averaging would beat all the work Hussman has done. Makes him useless.
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Oh and it’s not just Rickards
Martin Weiss claims he cut his vacation short to fly home to have an emergency call about the end of the world in October.
When Weiss says buy you sell and when he says sell you go long on margin.
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