John Hussman On Market Mean-Reversion

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  • Tue, May 27, 2014 - 11:38pm

    #1

    Adam Taggart

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    John Hussman On Market Mean-Reversion

Here is the excellent presentation John Hussman gave at the 2014 Wine Country Conference in Sonoma, CA.

John is an exceptionally quantitative scholar of the markets, which is apparent in spades in this presentation. He shows some very powerful charts here, which in essence say: if you believe in math, if you believe in reversion to the mean, then today's financial markets are dizzyingly overpriced:

We remain in agreement with John that bubble markets like today's force investors to either look like idiots today (by sitting on the sidelines) or look like ones tomorrow (by riding the bubble until it pops disastrously). We're comfortable with the former.

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  • Wed, May 28, 2014 - 06:02pm

    #2

    Rector

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    Oh.

I just hideous regression analysis flashbacks to business school.  You should have warned us about that.  The sum of a log is the product. . .I accept the conclusion.  

  • Fri, May 30, 2014 - 02:22pm

    #3
    pyranablade

    pyranablade

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    The lack of comments might mean

Maybe if a lot of people understood the video they would comment on it.

Some of us did have statistics in college, but maybe it wasn't business statistics. I propose that somebody who understands the underlying math and the underlying economics of this presentation would paraphrase it for the rest of us…dumb it down as needed. Some things may get lost in the translation, but at least the whole video won't be posted in vain.

 

  • Fri, May 30, 2014 - 04:05pm

    #4
    KugsCheese

    KugsCheese

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    Re: The lack of comments might mean

Hussman explains his basic point at ~12:20.  And the assumption is human actions in the aggregate like a stock market or the economy will act like all natural phenomenon: growth has to correct (e.g. death). 

  • Fri, May 30, 2014 - 04:59pm

    #5
    pyranablade

    pyranablade

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    Thanks Kugs

Kugs, sounds more pessimistic than the Law of Entropy that John Michael Greer talks about. So everything will go back to zero?

  • Fri, May 30, 2014 - 05:03pm

    #6
    KugsCheese

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    The problem I have even with

The problem I have even with these stats is that the time period is too short.  The FED since 1971 has so distorted the money rate and dependent markets that outliers are more probable now.  So there is a very real chance that such a crash could come that wipes out returns for 30 years or more, think Dark Ages type disruption.

  • Sat, May 31, 2014 - 11:40am

    #7
    robie robinson

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    zero may be aproached

but it will never be realized…did i just make an absolute statement about absolutely nothing?

  • Sat, May 31, 2014 - 01:07pm

    #8
    Chris Martenson

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    And the problem I have…

[quote=KugsCheese]

The problem I have even with these stats is that the time period is too short.  The FED since 1971 has so distorted the money rate and dependent markets that outliers are more probable now.  So there is a very real chance that such a crash could come that wipes out returns for 30 years or more, think Dark Ages type disruption.

[/quote]

And the problem I have…is that all the historical ratios we come to expect to be mean-reverted to were formed during a period of intense fossil fuel extraction.

During nearly the entire time-series net energy was rising.  It is now nosing over and will someday go in reverse.

What do any historical relationships between earnings and prices mean when net energy is declining?

Not a lot, is my view.

There's going to be a whole slew of new ratios and relationships worked out over time, but the idea that the markers for wealth (stock values, debt instruments, and currency) can just continually grow exponentially while net energy declines is simply an unworkable proposition to me.

  • Sat, May 31, 2014 - 08:28pm

    #9
    davefairtex

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    amen brother

Chris-

And the problem I have…is that all the historical ratios we come to expect to be mean-reverted to were formed during a period of intense fossil fuel extraction.

Yeah.  I feel exactly the same way.  After studying Hussman's basic formula – the thing he bases all of his analysis on – there's one little assumed number in there that drives everything, and that's the assumption of an annual 6.3% nominal growth year over year.  Its an underlying assumption that was developed under the century-long regime of our using up all those fossil fuels.  Historically he's right to use this number; he didn't pick it by accident.  He's a very careful guy.

And since he's super-smart, he likely knows about this very issue of this built-in assumption possibly being wildly optimistic going forward.  His bread-and-butter talk looks forward 10 years – the 10-year expected return.  If in the next 10 years, we hit peak non-cheap oil – and more importantly the implications of that become widely accepted – that 6.3% will vanish and it will turn into a built-in negative number!

I shudder to think what that will do to those expected 10 year return charts.

I wonder if he's done that yet.  Dropping in a negative number in place of that 6.3%.

Or heck.  Just putting in 0% and seeing what THAT does.

Without some sort of Arthur(ian) Deux Ex Machina from LENR, the repricing we experience – over the long term – will be the stuff of legend.

Anyhow…back to my charts.  🙂

  • Sun, Jun 01, 2014 - 12:00am

    #10
    aggrivated

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    What I heard.

When it comes to the statistical part he might as well have been speaking ancient Persian. What I carried out from the conclusions drawn–sit in cash or an alternative and wait for a better opportunity to buy any stocks.  The Fed has brought future earnings into today's timeframe with its policies. To buy at today's prices is to buy high and sell low. 

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