Podcast

John Hussman: The Stock Market Is Overvalued By 100%

Expect prices to drop by 50% (or more)
Saturday, November 8, 2014, 5:04 PM

John Hussman is highly respected for his prodigious use of data and adherence to what it tells him about the state of the financial markets. His regular weekly market commentary is widely regarded as one of the best-researched, best-articulated publications available to money managers.

John's public appearances are rare, so we're especially grateful he made time to speak with us yesterday about the precarious state in which he sees global markets. Based on historical norms and averages, he calculates that the ZIRP and QE policies of the Fed and other world central banks have led to an overvaluation in the stock market where prices are 2 times higher than they should be:

John Hussman:  What's interesting here is that if you think about equities, they're not a claim on next year’s prediction of earnings by Wall Street analysts. A stock, in fact any security, is a claim on any long-term stream of cash flows that investors can expect to be delivered to them over a very long period of time.

When you look at equities you can calculate something called duration. It's essentially the effective life of a security over which you are collecting cash flows in return for the amount you pay. For the S&P 500 the duration is about 50 years. In other words it is a very, very long-term asset. The only reason you would want to price that asset based on your estimate of next year’s earnings is if you were convinced that next year’s earnings are actually representative of the very, very long-term stream -- and I'm talking 50 years or so of earnings that you're likely to get -- that those earnings are in a sense accurately proportional to the whole long-term stream.

What's amazing about that is that is it has never been true. It has never been true historically. If you look at corporate profits and especially corporate profit margins, they're one of the most cyclical and mean-reverting series in economics. Right now, we have corporate profits that are close to about 11% of GDP, but if you look at that series you will find that corporate profits as a share of GDP have always dropped back to about 5.5% or below in every single economic cycle including recent decades, including not only the financial crisis but 2002 and every other economic cycle we have been in.

Right now stocks as a multiple of last year’s expected earnings may look only modestly over valued or modestly richly valued. Really if you look at the measures of valuation that are most correlated to the returns that stocks deliver over time say over seven years or over the next 10 years the S&P 500 in our estimation is about double the level of valuation that would give investors a normal rate of return.

So right now, we've got stocks valued at a point where we estimate the 10 year prospective return on the S&P 500 will be about 1.6 to 1.7% annualized -- talking right now with the S&P 500 at 2032 as of today’s close.

Chris Martenson: I guess 1.6 or 7% doesn’t sound bad if you are getting 0% on your risk-free money, I guess. But this says that any move by the Fed to normalize -- which means rates have to go up -- any move to drain liquidity from the system is going to have its own impact. If we held all things equal, a normalization effort is going to then basically expose that the stock market is roughly overvalued by 100%.

John Hussman:  100%, yes. I actually think the case is a little bit harsher than that; in fact, quite a bit harsher than that.

The idea that well, "1.7% isn’t so bad" or "1.6% isn’t so bad" ignores the fact that really in every market cycle and economic cycle we have had a point where stocks were fairly valued or undervalued.The only cycle in which we didn’t see that was actually the 2002 low where stocks actually ended that decline at an overvalued level on a historical basis.  But valuations were still relatively high on a historical basis in 2002. They got slightly undervalued in 2009, but not deeply.

On a historical basis, what's interesting is that if you look at measures of valuation that correct for the level of profit margins, you actually get about a 90% correlation with subsequent 10 year returns. That relationship has held up even over the past several decades. It has held up even over the past 5 years where the expected return that you would have forecasted based on time-tested valuations turned out to be pretty close to what you would have forecasted 10 years earlier.

Right now, like I say, we are looking at stocks that have been pressed to long-term expected returns that are really dismal. But more important than that, in every market cycle that we've seen with the mild exception of 2002, we've seen stocks price revert back to normal rates of return. In order to get to that point from here, we would have to have equities drop by about half. 

This is one of the highest-quality and deepest-diving podcasts we've recorded in the 3-year history of our series. Part 1 is publicly available below. Part 2 can be accessed here (enrollment required). 

Click the play button below to listen to Part 1 of Chris' interview with John Hussman (26m:29s):

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, of course, Christ Martenson. How do we make sense of the world’s financial markets? Professionals all across the spectrum of investments and investing are increasingly turning sour on the markets that the central banks have created, and sometimes are even revolted by what they see. Not everyone, but the chorus is growing. Something is wrong with the markets. What is wrong can be summed up in one word I think: speculation. As today’s guest is going to put it—he put it so well recently—the entire global financial system has been turned into a massive speculative carry trade. And if you think that fundamentals no longer matter and that central banks can control every wiggle and tune every economic dial to the heart’s content, then you probably shouldn’t listen to this podcast at all because it's going to be a waste of your time. But if you know that prosperity cannot be printed out of thin air and that reversion to the mean is an important concept, you are going to love this podcast.

Today we are going to talk with one of my favorite people in the world, a great guitar player and a true gentleman and a friend, John Hussman. The principal at Hussman Funds. John, hey it is a real treat to have you on the program today.

John Hussman: Hey. Likewise. I love talking to you.

Chris Martenson: Thanks. I can’t think of any better place to start to describe today’s massively distorted financial environment then with the Bank of Japan’s recent move which we are calling Kuroda's Halloween Massacre, mainly because it sounds spooky. What did you take from that event in terms of what it tells us about the mindset of the Bank of Japan and where we are in this narrative of Central Bank inspired reflation, I guess we will call it?

John Hussman: There are actually two pieces to that. One is that it really smacks of desperation in some sense because the Bank of Japan has been doing this for quite some time. The Federal Reserve has made equivalent efforts. Really the idea behind quantitative easing is that if you create enough idle bank reserves you will somehow trigger spending. The way quantitative easing basically works is the central bank buys bonds that have been issued and they are held by the public and it goes out and buys those bonds and creates bank reserves and currency instead. Bank reserves and currency are what we call the monetary base. And the basic idea is that you make people uncomfortable holding zero-interest money. So if you got cash in your pocket, it is not earning anything and you got bank reserves that essentially aren’t being paid anything. In the US it is about a quarter of a percent that the Fed pays on idle reserves. But it is essentially nothing. If people are holding these very low interest assets, they reach for yield. The whole mechanism behind quantitative easing, the whole economic argument for quantitative easing is that by holding interest rates low you will either stimulate intersensitive demand—housing and that sort of thing—but at this point we really don’t’ see that. The only other mechanism by which it could work is if people become so uncomfortable with zero interest rates that they feel forced to reach for yield in more speculative vehicles.

Now the Federal Reserve, Bernanke particularly, believed that if you made people speculate enough and they drove prices up enough that they would feel wealthier and go out and spend. That actually contradicts what economists have known for decades and what Milton Friedman won a Nobel Price largely for demonstrating which is that people don’t consume off of speculative sources of income. They don’t consume off of volatile asset prices. They consume off of what they believe their long-term permanent income is and their view of their long-term earnings power and so forth.

And so what we’ve seen in reality is very little effect from quantitative easing, but they keep on pushing this accelerator because it is all they know. It is kind of like if you give somebody a hammer everything looks like a nail. With these central banks, if you give them a tool like quantitative easing and they are allowed to do it and the public somehow maintains hope that it will have some effect, they have kept on doing it for some time. We are not seeing the effects. We are seeing enormous speculation though because when you got interest rates at zero, people sometimes feel forced to take risk. And if they feel forced to take risk, they will start doing it, and what we have seen is they have done it without reference to value. And right now we have some enormous valuation gaps in the market that will be closed over time.

Chris Martenson: Well, let’s talk about those enormous valuation gaps. Let’s start with equities. That is the headline show that people are watching and paying attention to. Now October starts. Equities have a tiny bit of a stumble. They are down 6, 7% depending on the index we are talking about. The Fed trots out Bullard who immediately says "hey, careful here people, we are going to keep interest rates low forever. We are going to throw more QE into this if we have to." I took that as a sign that even slight weakness can’t be tolerated in this market. Is that because do you think the Fed officials know they have created a speculative monster and they need it to keep going?

John Hussman: I actually think that Bullard was acting out of sync with the rest of the FOMC. I think there is less tolerance, except for perhaps Kocherlakota, to do more QE. I think the general view, at least at the Yellen Fed, is that there hasn’t been a great deal of benefit from that. And I do think that they are serious about moving the other way. I think it is going to be a much higher bar to getting more quantitative easing. Even in the event that we get normal cyclical weakness in the economy.

What I think happened with—certainly Bullard has been on the Dovish side of QE, but I think what is going on is that there is an increasing recognition that assets are at a speculative level. They wouldn’t admit that outright, except for Richard Fisher who has been very outspoken about it. I think broadly speaking, the view at the Fed is that they would like to get to a normalization of policy over time and that tweaking this with another round of QE isn’t likely to do a whole lot for the real economy.

Chris Martenson: Now what are your views on the impact of QE on the equity market stuff?

John Hussman: Alright, so what is interesting here is that if you think about equities they are not a claim on next year’s earnings. They are not a claim on next year’s prediction of earnings by Wall Street analysts. A stock, in fact any security, is a claim on a very long-term stream of cash flows that investors can expect to be delivered to them over a very long period of time. When you look at equities you can calculate something called duration. It is essentially the effective life of a security over which you are collecting cash flows in return for the amount you pay. For the S&P 500 the duration is about 50 years. In other words, it is a very, very long-term asset.

The only reason you would want to price that asset based on your estimate of next year’s earnings is if you were convinced that next year’s earnings are actually representative of the very, very long-term stream—and I am talking 50 years or so—of earnings that you are likely to get. In other words, that those earnings are in a sense accurately proportional to the whole long-term stream. What is amazing about that is that is it has never been true. It has never been true historically.

If you look at corporate profits, and especially corporate profit margins, they are one of the most cyclical and mean reverting series in economics. Right now we have corporate profits that are close to about 11% of GDP, but if you look at that series you will find that corporate profits as a share of GDP have always dropped back to about 5.5% or below in every single economic cycle, including recent decades, including not only the financial crisis but 2000, 2002, and every other economic cycle we have been in.

Right now, stocks as a multiple of last year’s expected earnings may look only modestly overvalued or modestly richly valued. But really if you look at the measures of valuation that are most correlated to the returns that stocks deliver over time—say over seven years or over the next 10 years—the S&P 500 in our estimation is about double the level of valuation that would give investors a normal rate of return.

So right now we have got stocks valued at a point where we estimate the 10 year prospective returns on the S&P 500 will be about 1.6 to 1.7% annualized. We are talking right now with the S&P 500 at 2032 as of today’s close.

Chris Martenson: I guess 1.6 or 1.7% doesn’t sound bad if you are getting 0 on your risk-free money I guess. But this says that any move by the Fed to normalize, which means rates have to go up, any move to drain liquidity from the system is going to have its own impact. If we held all things equal, a normalization effort is going to then basically expose that the stock market is roughly overvalued by 100%.

John Hussman: One hundred percent. Yeah. I actually think the case is a little bit harsher than that. In fact, quite a bit harsher than that. The idea that well, 1.7% isn’t so bad or 1.6% isn’t so bad ignores the fact that really in every market cycle and economic cycle we have had a point where stocks were fairly valued or undervalued. The only cycle that we didn’t see that was actually the 2002 low where stocks actually ended that decline at an overvalued level on a historical basis. We still ended up being able to reduce our hedges by about 70% after that bare market and get much more constructive. But valuations were still relatively high on a historical basis in 2002. They got slightly undervalued in 2009, but not deeply.

On a historical basis, what is interesting is that if you look at measures of valuation that correct for the level of profit margins, you actually get about a 90% correlation with subsequent 10 year returns. That relationship has held up even over the past several decades. It has held up even over the past five years where the expected return that you would have forecasted, based on time tested valuations, turned out to be pretty close to what you would have forecasted 10 years earlier.

Right now, like I say, we are looking at stocks that have been pressed to long-term expected returns that are really dismal. But more importantly than that, in every market cycle that we have seen, with like I say the mild exception of 2002, we have seen stocks price back to normal rates of return. At that point, in order to get to that point, we would have to have equities drop by about half.

Chris Martenson: Half. Well, some people are saying that because for instance, Bank of Japan—and I think the US Fed is in the same quandary—they can’t really allow rates to rise because then the interest expense for government debt would consume entirely whatever tax receipts they got after a certain point. For Japan that is a very low point. It is somewhere between 2 and 3% depending on which analysis you like. Looking at that, there is an argument to be made that the central banks can’t ever allow rates to go back to normal. The long-term historical norm in Japan was closer to 6%, now it is a blended rate of just under 2%, 1.5% somewhere around there. If it gets to 2 it is sort of like lights out from a mathematical debt cycle behavior sort of a standpoint. What do you say to that? Are the central banks really trapped and they can’t allow rates to rise, or do you think the markets have a mind of their own and rates will rise if they need to?

John Hussman: Essentially, I would like to suggest that the amount of risk that we see in the equity market does not predicate on whether the federal reserve or the bank of Japan raises rates at all. One of the things that is interesting is that if you look at the Federal Funds rate during the 2000 and 2002 decline and during the 2007, 2009 decline, both where stocks dropped half of their value. The NASDAQ during 2002 dropped more than ¾ of its value. In 2007/2009 the S&P dropped about 55% of its value. If you look at what interest rates were doing, what the Federal Reserve was doing during that period it was easing aggressively. It was cutting interest rates frantically during both of those declines. And so the idea that interest rates have to go up in order to trigger a down move really doesn’t get as much support in the historical data as people often suggest.

What actually happens, the most hostile condition that you can approach in the market is one where stocks have been in a very overvalued, overbought, over bullish condition for possibly several years. And then you start seeing a breakdown in market internals. And by market internals I mean breadth, I mean leadership, I mean advanced decline. Various indices failing to confirm highs and so forth. Because what is actually happening is when people are taking risk and they are very eager to take risk you will see them take risk in everything. You will see what we sometimes call trend uniformity. You will see not only stocks going up, high quality stocks, low quality stocks, junk bonds, advanced declines, small stocks, large stocks, utilities, transports, foreign stocks. In other words, when people are willing to take risk they are out there throwing the dice on everything and you can read that preference out of the uniformity or lack thereof of market action.

When you start seeing the following sequence of very overvalued, overbought, over bullish, extremely lopsided optimism about the market, extreme valuations, and then you start seeing a breakdown in market internals, (which is actually what we started to see several weeks back) and we still have not recovered in terms of internal action, then you are seeing a situation where there is an increased preference to avoid risk and where investors are becoming more risk averse; they are backing away. In that environment when you have very, very low, thin risk premiums and people are backing away from risk, it doesn’t matter that there is a lot of zero interest rate money out there because zero interest rate money in a risk averse environment is desirable.

What quantitative easing really relies on, and has relied on, is the view of safe, low interest rate money as kind of the pariah of the investment world. It is an undesirable asset, as an inferior asset. When risk aversion starts rising, that is no longer true.

So the Federal Reserve during 2000, 2002, during 2007, 2009 tried very hard to create a bunch of low interest, 0 interest rate money in order to try and turn things around. But during those environments low interest rate, safe money was not an inferior asset. So stocks lost half their value or more anyway. And I think that we are likely to get to that point.

I shouldn’t give timing, but I will say that we are seeing a lot more shortfall in the global economy than is widely observed here in the United States. And the likelihood of the United States decoupling from the global economy is not high. That is not to say I am expecting a recession right now. But what I would say is that if you start to see the purchasing managers index deteriorate toward 50 or below, if you start seeing the S&P below where it was six months earlier, if you see any quick uptick in the unemployment rate—even a few tenths of a percent—all of a sudden those small things which individually would mean nothing, if you see them in a syndrome, have generally been some of your first indications that the US economy is weakening. That, along with what we already see, which is a very narrow yield curve. You don’t have to have an inverted yield curve. You can't get one with zero interest rates on the short end. What you really need to trigger recession warning is just a yield curve that is not particularly steep. Right now we don’t have that. If we were to get those other components of that syndrome, you could say with a reasonable historical level of confidence that recession risks had grown considerably.

Chris Martenson: Now to get back to this idea of the market internals and the non-confirmations—I can’t turn on CNBC without them trotting out somebody who says "I love this market. Very bullish here. We have all the right signs." Obviously, a market has people taking both sides of a story. But the headline is that the Dow has hit all time new records and did it set another one today here on Friday? Probably. The non-confirms, what are you seeing out there in terms of other indexes and sub-indexes and components that aren’t confirming right now?

John Hussman: Small CAPs were really the first ones to roll over. But you are also seeing for instance if you look at the New York Stock Exchange Index, the composites, that has performed relatively weaker. It hasn’t confirmed the highs. You certainly see the advanced decline lines struggling. You see a tendency toward big pick ups in new lows. So even though we have been running at new highs and we are at all time highs, you see these big pick ups and new lows on relatively small amounts of weakness, which basically says that the average stock in the market is actually not participating as much. So there are a whole lot of these things.

The other one is really credit spreads – junk spreads, BAA versus AAA in the Moody’s. If you look at the uniformity of the market not only across stocks, but also across other assets, you are starting to get subtle indications of a shift in risk aversion. And those subtle indications unfortunately are sometimes all you get.

We saw that for instance in 1987 where in that particular instance you saw the subtle breakdowns occurring in utilities and junk bonds and so forth, corporate bonds—you really didn’t see anything else. It looked very strong up until the point where the bottom kind of fell out. You see generally, for instance, the 2000 top: We actually had breadth diverging for a long time and then you started seeing a concert of additional breakdowns which moved our measures to negative on September 1st of that year based on the same kind of analysis. And that was really the last hurrah that you saw on the index.

That is not to say that we haven’t been frustrated for an enormously long time in this cycle because one of the things that quantitative easing has done that I didn’t anticipate is that normally speaking, if you look at bull markets historically, once you have gotten to what we call an extreme syndrome of over-valued, over-bought, over bullish conditions (and these are measureable things that we use), once you got to that point, stocks kind of headed south in pretty quick order. And what quantitative easing has really done is it has sustained a very speculative meme a whole lot longer than has occurred in prior cycles. That has been very frustrating to us.

That is why we really have focused much more recently on this uniformity as well. That is one of the things that has always been good to us. It was good to us in 2000, was good to us in 2007 in terms of identifying the break points of those speculative episodes. And the fact that we are starting to see the same breakdowns here is really why we have been much more I guess aggressive in using warning words like... there are only three times where we have used the word "crash" in the headline of our weekly comments. One was in 2010, but it wasn’t a warning. It was more talking about the dynamic of bubble crash, bubble crash. And the other two have been in the past month because we are very concerned about the risk of abrupt things happening in this market because we are starting to see that internal deterioration, and that creates some sense that risk aversion is growing. That may reverse, and we kind of... our rule is to take our evidence as it comes. I may back down on the immediacy of my concerns. But here and now I would say those concerns are really quite high.

Chris Martenson: Let’s talk about this idea of being in bubbles again. The Fed famously hews to the idea that you can’t see them except in the rearview mirror, but it is obvious that we have a whole lot of speculative froth however you want to measure that, right? I have a variety of measures. One is I could look at price of stocks to their sales. And I got screen after screen of just absolutely monstrous price to sales ratios. Or I could look at price earnings. It used to be you would say put my filter at a PE of 200; you might get a page or two. Now I get several pages of PEs over 600. It is just astonishing. I have my own measures or looking at junk bonds that are yielding 5% in the five handle range. All of these things say to me that we are back at that sort of place. Would you agree with that definition that we are in the bubble psychology, the bubble pricing, that we are there again?

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21 Comments

GordonX's picture
GordonX
Status: Member (Offline)
Joined: Nov 9 2014
Posts: 1
Hussman's Greatest Hits
Now Everyone Thinks The Market’s Going To Crash
Henry Blodget | May 30, 2010, 10:23 AM | 14,368 | 38
… Seth Klarman at Baupost Group is worried. John Hussman of the Hussman Funds says all sorts of warning lights have lit up across his screen. …
 
80% Chance Of A Market Crash In The Next Year
John P. Hussman, PhD | Dec. 7, 2009, 6:12 AM | 2,932 | 9
Email. Zip. 80% Chance Of A Market Crash In The Next Year. John P. Hussman, PhD | Dec. … The following is an excerpt from fund manager John Hussman’s weekly letter …
 
Hussman: The Market Is More Overbought Than Any Time In History
Henry Blodget | Oct. 20, 2009, 6:49 AM | 3,720 | 19
… Hussman: The Market Is More Overbought Than Any Time In History. Henry Blodget | Oct. … You have successfully emailed the post. John Hussman rains on the parade: …
 
Hussman On Stocks: “Abrupt Downside Risk”
Henry Blodget | May 28, 2009, 7:05 AM | 4,788 | 10
Enter you email address and zip code to set up customized email alerts. Email. Zip. Hussman On Stocks: “Abrupt Downside Risk”. Henry …
 
John Hussman: Volume Warns Of A Sharp Pullback
Vincent Fernando | Oct. 12, 2009, 4:23 PM | 1,889 | 9
Enter you email address and zip code to set up customized email alerts. Email. Zip. John Hussman: Volume Warns Of A Sharp Pullback. Vincent Fernando | Oct. …
 
A Great New Bull Market? Why?
Henry Blodget | May 14, 2009, 11:53 AM | 4,554 | 19
… In the meantime, here’s fund manager John Hussman, who comes to the same conclusion that we have: … Read John Hussman’s whole column here >. …
 
Enjoying The Suckers’ Rally?
Henry Blodget | Apr. 15, 2009, 1:41 PM | 13,297 | 44
… Fund manager John Hussman lays out a persuasive bear case in this week’s letter. Here’s an excerpt: … Read John Hussman’s full note here >. …
 
Deseret News, The (Salt Lake City, UT) – June 12, 1994
 
NEWSLETTER SAYS STOCKS ARE A BEAR
 
Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331), which The Hulbert Financial Digest has called “the most promising newcomer among investment newsletters” after its first three-year performance doubled the market’s return, has turned bearish on stocks. “The market is beginning to display the classic traits generally associated with bull-market tops. The time to buy stocks is in the middle of a recession, not when an expansion…
 
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A Coupla Bears Tell Why They’re Still Growling
Pay-Per-View – Los Angeles Times – ProQuest Archiver – Mar 3, 1995
It’s not the end of civilization, Hussman says: “Stocks are just due for a natural, normal, run-of-the-mill bear market.” …
 
——–
 
Analyst unimpressed by Pyxis rival
Pay-Per-View – San Diego Union – Tribune – ProQuest Archiver – Jul 30, 1995
John P. Hussman of the Michigan-based newsletter Hussman Econometrics is not bullish on the stock market now,
 
———
 
BusinessWeek: May 15, 1995
Adds John P. Hussman, a money manager and investment newsletter writer based in Farmington Hills, Mich.: “There’s a likelihood of slipping into a bear market at any time.”
 
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S&P’S 500 DIVIDEND YIELD IS 2.66%, LOWEST OF CENTURY
$2.95 – Deseret News – NewsBank – Jun 18, 1995
“The stock market has left itself no room for error,” observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, MI 48331). …
 
———–
 
May 5, 1996
 
STOCKS OFFER LOW-RISK PREMIUM, PAPER SAYS
The latest argument for higher stock prices is that Baby Boomers are saving more and investing it in stocks, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334). “In fact, there’s been no evidence of any significant increase in the U.S. savings rate. The money-flow argument ignores the fact that every buyer’s dollar that enters the market leaves it moments later with a seller. Stocks currently offer the lowest risk-premium in…
 
——–
 
Published on March 26, 1996, The Washington Times{PUBLICATION2}
 
Market’s total value points to bad times
 
There have been five times this century when the size of the stock market (total capitalization) relative to the size of the economy (nominal gross domestic product) exceeded 75 percent, as it does today, observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331)
 
“Each instance coincided with a Standard & Poor’s 500 dividend yield of only 3 percent or less, as is also the case now. Each marked the peak of a major bull market
 
————
 
Mr. Bear and Mr. Bull
By Mark Hulbert, 02.10.97
Forbes
 
The bear is John Hussman, editor of Hussman Econometrics, and adjunct professor of economics at the University of Michigan. What sets Hussman apart from the other bears isn’t his focus on the market’s fundamental extreme overvaluation. That’s something he shares with virtually every other bear. What makes Hussman’s bearishness noteworthy is his compelling explanation of the mistakes he made several years ago when he and the others turned prematurely bearish. ;
 
———-
 
Published on July 1, 1997, The Washington Times{PUBLICATION2}
 
Sky-high prices may warn of stocks’ fall
 
Historically, when the price-earnings ratio on the Standard & Poor’s 500 has been above 20-to-1, as it has been recently, it has always been because earnings are depressed, observes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).
 
“This is the first time in history that we’ve seen a P/E over 20-to-1 on record earnings. The only two times the P/E exceeded even 19-to-1 on record earnings was in 1964 and 1972. In
 
——–
 
Published on June 3, 1997, The Washington Times{PUBLICATION2}
 
As dividend yields sink, how far can stocks rise?
 
“The extremely high returns on stocks over the past 14 years have been the result of a decline from the highest dividend yield in two generations, 6.7 percent in August 1982, to the lowest dividend yield in history, now well below 2 percent,” notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).
 
“It seems unlikely that the dividend yield can fall much from current levels. So it seems equally unlikely that stocks can rise
 
————
 
Nov 7, 1997
 
Stocks have never been this highly valued when earnings were at record levels, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, …
 
———-
 
Economist: U.S. might already be in recession
 
The San Diego Union – Tribune – San Diego, Calif.
Author: DON BAUDER
Date: Oct 30, 1998
 
He’s John P. Hussman of Sunrise, Fla.-based Hussman Econometric Advisors, and he says the markets are already giving off clear recessionary signals: The interest rate spread between corporate debt and Treasury debt has widened, indicating growing fear of credit risk, while the spread between long- and short-term Treasury instrument interest rates has narrowed considerably, suggesting the market expects a very sharp growth slowdown.
 
Combine these so-called “forward-looking” indicators with other similar ones, such as the stock market decline, the drop in consumer confidence and the National Association of Purchasing Managers Index suggesting that manufacturing is contracting, and “the signal says, `Hey, we’re expecting very slow growth, probably recession,’” Hussman says
.
 
Jbarney's picture
Jbarney
Status: Silver Member (Offline)
Joined: Nov 26 2010
Posts: 232
First Post?

Are any of us really going to be swayed by GordonX's post? Why bother?

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 4726
Hmmmmm.....

Say GordonX, that's quite an impressive list.  I certainly hope you compiled it yourself because posting without attribution is one of our biggest and most unforgivable cardinal sins.

More to the point, it seems like you've got quite a long-term view on Mr. Hussman, and I think that just posting a hit and run collection of market calls is kinda fishy.

Who are you and why do you care so much?  What are your preferred market calls?  What's your motivation here?

jrf29's picture
jrf29
Status: Gold Member (Offline)
Joined: Apr 18 2008
Posts: 453
Interesting list

After some research, I have found that our friend GordonX seems to be quite a dedicated "anti-fan", who follows Hussman wherever he goes, from Business Insider to the WSJ and various other forums.  Whenever Hussman publishes something, Gordon makes it his business to be first in the comments section with an updated version of his list.

The list appears to be Gordon's own work, and he has been adding to it and updating up over the years.  After some spot-checking, the articles seem to be real.  Nor does it seem (based on limited spot-checking) to misrepresent Hussman's almost constantly negative medium-term predictions.

As user "dewey longfish" said on another forum a few years back (under the article: "Hussman: The Market is in a Topping Process," July 18, 2011):

Quote:
Here’s a partial list of bearish comments by Hussman...compiled by Hussman-hater Gordon on similar forums. I do actually see one bullish comment in ’96, but he was consistently bearish all during the bubble years. During the mid-late ’90s, he was quoted often in financial news publications, and he was always wrong. I wrote several columnists back then and asked, “Why do you quote someone who’s always wrong, and shouldn’t you point out that they’ve been consistently wrong in the past?” but never got a response.

I’ll admit now that he’s only ALMOST always wrong.

I have never followed Hussman before, but if it is true that he is a permabear, that would be relevant and would certainly affect the lens through which I see his comments.  Any further information that anybody else can dig up to further clarify this issue might be useful.

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Ister
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Hussman is a permabear (or glass half-empty guy)

Yes, Hussman is a perma-bear, at least the amount I have been watchiong him (8+ years).

That doesn't mean he can't be right, but he clearly has NOT been right (esp. in timing, even semi-accurately) most of the time.

There are no guarantees in the markets and as Keynes said: it's a beauty contest about who picks the most beautiful contestant, based on what the others think is most beautiful.

Reflexivity works, both ways. In due time...

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One of the best podcasts??

"This is one of the highest-quality and deepest-diving podcasts we've recorded in the 3-year history of our series."

Gee,  I thought the opposite.  And not b/c of Chris, who's always prepared w good questions.

Hussman seemed to try to explain everything as though he has all the answers.  He had a way of

complicating things, was difficult to follow and offered little insight.

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Time2help
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50% correction

...unless we go full Zimbabwe with the printing press (a distinct possibility, IMO).  Then it's "to the moon, Alice!"

YMMV

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Thetallestmanonearth
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I've been accused by friends

I've been accused by friends of being a permabear with regards to the trajectory of society.  A few weeks ago a new i-gadget came out and oil prices moved down allowing "better" sales numbers for SUV's.  My friends reactions: wrong again! why are you always so negative when the world is clearly trending towards progress?  My answer is that if you watch the trend-line without an eye to the x and the y axis it's easy to forecast the future based on the past, but when you understand what is fundamental (the resource story) and where that is going, you can never really be bullish again.....even if I'm wrong tomorrow, next month and next year, I proceed with full confidence and fear that I will be right eventually.  Just waiting for the phase change. Until then, I'm seeking out other people with contrarian long-term views to teach me what they can.  I don't always expect them to be right, I just want new information to chew on to help me decide how to prepare for the future.  So thank you Chris and John for another fascinating podcast!

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Time2help
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Re: I've been accused by friends

Thetallestmanonearth wrote:

I've been accused by friends of being a permabear with regards to the trajectory of society. 

Typical end to a conversation with friends (as of last year): 

Friend: "Why do you chose to live in fear?"  Response: "Why do you chose to live in denial?"

Typical as of this year: 

Friend: "Why do you chose to live in fear?"  Response: "You're an idiot".

Net result is less "friends".  But the ones that have stayed around are true friends (the ones that matter, IMO).

John Wayne wrote:

"Life's hard.  It's harder if your stupid."

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I hear a lot of arguments in

I hear a lot of arguments in the bearish online community trying to make sense of how the majority maintain such positive views of the world despite such obviously nonnegotiable problems.  Truth is they do it the same way I did.  A friend of a friend tried to talk to me about peak oil in 2007 and warn how unstable the financial industry was.  At the time I was working on a project that had me interacting with a company working on developing fracking fluids and other chemicals that were expected to free up centuries worth of oil.  I looked at him sympathetically and said something to the effect of "sure, if it wasn't for technology we'd run out of oil, but as it stands we're set for the rest of our lives.  Clearly we're hurting the planet doing it, but we'll figure out some way to reverse that going forward....because we have to."  I went on after that to take out a massive student loan for flight school and left my job in chemicals to become a pilot.  Fast forward a year and a half and I'm a commercial pilot living in my parents basement paying for my car with unemployment checks that are running out and trying to understand what the heck happened to my plans.  When I wasn't applying for jobs or drinking away my anxiety about the future I was watching netflix documentaries on dark topics....not so much because I wanted to understand the problems of the world, but because they reflected my mood.  That is when I heard about peak oil again and listened with an open mind because it was introduced on my terms and there was no one there to debate against.  Just the facts laid out in a way that explained exactly what was happening in my life at the time.

I slipped back into a job in the chemical business because I couldn't figure out how to service my loans or meet a nice girl growing organic kale with hand tools and living in a bunker.  Since then I've built a really nice middle class lifestyle, gotten married and enjoyed a lot of fruits of a world that didn't immediate collapse, but I've carried my new views forward and developed a lot of plan B's for when the inevitable happens.

People don't look at what's happening in the world because they don't need to yet.  As long as yesterday was ok, it's fair to assume that tomorrow will be too.  Intelligent views to the contrary don't fit with plans based on past performance so they are dismissed using one form or another of intellectual gymnastics.

When the next phase change comes, a new round of people will join the movement we're all a part of here.  Most will find a way to continue to ignore the facts.  Eventually a tipping point will be reached (the 100th monkey moment) when our situation will seem self evident, but by that point it will be too late to do much about it except respond to cascading crisis.

It's been said here recently that the human mind is rationalizing, not rational.  I like that.  We need a reason to break with our old patterns and rationalize new ones.  Being told that our old models are broken by someone who clearly isn't pursuing the channels of success we aspire too is interesting at best, but not a trigger (for most people) to start rationalizing new behaviors and views on the world.  And let us know forget that OUR behaviors and beliefs are rationalized as well.

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It's difficult...

It's difficult being a rational person in a largely irrational world.  John Hussman simply notes the fundamentals and compares these to prior episodes of history and then asks what the risk-adjusted expected returns are.

It's a highly mathematical and logical approach.

For instance, we might note that global equities are up 38% over the past year while corporate earnings are up 3%.

The thing mainly driving earnings per share higher are share buy backs.  Is it 'permabearish' to note that this is not a sustainable arrangement and that this has always historically worked out poorly for investors who were simply long?

As long as we insist that the markets are always right, and that you are either right or wrong depending on your relationship to the market's movements, then you leave out the big world of risk adjusting your returns.

The thing I wonder about is how it is possible to be fully enmeshed within our third big bubble in the past 15 years and for so many to simply be buying into the hype of this bubble without demonstrating much caution based on a whole lot of recent experience?

For example, shouldn't this chart engender some caution?

Nobody doubts the "too much, too fast" nature of the prior two bubbles but somehow this third one 'proves' that cautious investors are idiots for preferring to step to the side and remain cautious in the face of an obvious print-fest engineered by the central banks.

The only way I think you can legitimately cast stones towards Mr Hussman's views is if you first bother to fully answer this question; why is it different this time?

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rational vs. irrational

As the conversation tilts towards the same old problem of those who get it vs. those who don't (want to) get it, I find myself heaving another yet another big sigh... In my circle of friends and family there are many highly intelligent people who just refuse to even entertain the idea that there is anything less than a bright future. As my brother put it - "I have kids, I have to believe in a brighter future".  I deduce there is little hope when people of his stature/intelligence will not even engage in a conversation that somehow rains on his/their parade - even when trying to make the point that it is the kids futures we are trying to look out for.

It never ceases to amaze me how irrational some otherwise perfectly rational people can become when presented with a fact based contrarian perspective. They then rationalize their thinking by quoting irrational MSM gobble-de-gook.

I have given up trying to talk to anyone about this stuff and instead quietly go about doing my thing, getting ready for what we all know is coming at us, which is probably sooner than most think.

Jan

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In summary...

Thetallestmanonearth wrote:

a) It's been said here recently that the human mind is rationalizing, not rational. I like that.

cmartenson wrote:

b) It's difficult being a rational person in a largely irrational world.

westcoastjan wrote:

c) It never ceases to amaze me how irrational some otherwise perfectly rational people can become when presented with a fact based contrarian perspective.

d) All of the above.

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Worldviews

Unfortunately, the perspective of the masses remains that the current state of affairs will always get better. I have not given up on trying to spread the message.  As a teacher there is a set curriculum that I have to cover but within it there are still opportunities to discuss the future with my students and people in the community. Often, most of them turn a deaf ear and only listen to my points of view while they have to.  However, I am sure I do get through to some people. Even if it is on a small level.

I suppose you can't blame some of those who have not taken the red pill yet. They are totally comfortable in the current reality.  In fact, if you think about it, anyone born after 1990 has a really limited time frame of life experience to draw upon. The internet has made life so much easier and stories of the Great Depression are limited to text books and old documentaries. I am not defending anyone's reliance on the belief the world will never change, but it is understandable.  Even people of my generation have been captivated by the idea that the world is getting better. That progress is technology and our future is bright and limitless. I have some extremely smart friends who still believe that debt is something to be managed and they refuse to entertain the ideas of peak oil, a debt crisis, or a currency crisis as "real" possible outcomes. In their minds, the statistical chances of something like that happening are virtually near zero. Why prep for something that very likely won't happen.

Like Thetallestmanonearth, my journey to awareness was not as direct as it could have been.  When I took the red pill I did freak out a little bit, but thankfully life went on, I embraced the change, and while I will never be prepared as what I would like to be, I am vastly more prepared than I was four years ago.  My personal skill set is better, I have land to develop and manage, and my debts are close to gone.  Everyday that goes by I do something more to move my own resiliency along.  Even if it is just making sure I am tending to the compost or lifting weights.

I think what drew me into this thread was GordonX's blatant attempt to discredit someone Chris had brought on to interview. I have never been of the opinion that Chris's guests march lock step with one another.  All you have to do is listen to several of the podcasts, and you do get a wide difference of opinion, even within the community.  For example, one of the areas that I love hearing from PP is the focus on the silver markets.  If you listen to a PP podcast from David Morgan or Ted Butler on silver, even though the topic is the same, you get some different information.

It has happened a couple of times before, where posters come to the community to blatantly go after or discredit Chris or some of the guests. On some level, I actually draw strength from such efforts.  I don't like to go too far down the Rabbit Hole, but have to wonder why their would be attempts to discredit or hinder an honest flow of alternative ideas within the prepper community.

I don't care of CM urged all of us to get SOME physical silver.  Not as an investment...but just in case.  I don't care that I bought some at $28 or $36 or $42 or that I continued to buy back down along the most recent slide.  The silver I bought at $17 three weeks ago is just as valuable to me as the silver I bought when my world view changed.  It is the same with all of my preps. Every time I go fishing, it builds the skills. The apple trees and blueberry tress we have put on the property.....they are much more valuable to me than any visitor to my property will ever know.

I took the red pill and guys like GordonX always make me feel better about it.

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Michael_Rudmin
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why is it different this time?

it could be different for many reasons:

War. Nationalized gold. Ebola kills 1/3 of world population. civil disorder and national emergency.

In the end, I suspect that the area under the curve of the bubble indicates the total quantity of assets invested by 'greater fools'.

This time, the money has been taken from those who won't invest as greater fools, and has been given to those who will. So you could see the bubble get twice as large.

After that, if the government nationalizes the property of 'enemies of state', then the bubble could get larger yet.
I'm not saying that it IS different this time; I'm just saying why it might be.

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Until they can't

Things do tend to go on until they can't.  Rationalizing vs. rational is one way of looking at it.  In Sufi gnosticism they say that the chief feature human beings have is that they are liars.  If we can stand the initial sting to our collective species ego, there is a lot that we can parse from that simple statement.  We tend to claim and be adamant about a lot of things of which we have no first hand knowledge, which in our modern disconnected world, it appears to have become a necessity.  In the west with our existential angst, we seem to have difficulty even admitting on one hand that first hand knowledge even exists while on the other hand we indulge ourselves is a reductionist positivism.  We have created a world philosophically that has, if it exists at all, only what meaning that we project onto it.  If that isn't a recipe for rationalizing being, I don't know what is.

At the same time have It was pretty clear to me anyway, some thirty years ago, and a lot of other people that we were on an unsustainable path.  There have been a lot of stock market ups and downs since then, lots of money was made, if that was your game.  We have an issue of scale here, if you are trying to time the market based on your knowledge of the lack of sustainability of our current system, I think you are in for a world of hurt.  The complexities of the nuances of reality defy our ability to predict future with our rational mind.  Its not only time to change the channel, but pick up your television set and though it out the window. Chasing the symptoms of a disease can be very complex.  Especially when all our efforts are directed at the symptoms, its hard to predict how the inner cause will manifest itself in the future.  But we do know what the root cause of the disease is, those efforts directed there will always bear fruit, are the transcendent forces we are most in need of.

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Why is this time different?

The debt based monetary system is failing.  All bets are off on where the "markets" are going to go.  The forces directing things are much more political than economic.  Anyone who thinks they can predict with any certainty on where things are headed is foolish.  I say be as diversified as possible, including having a % in paper wealth such as stocks.   There are huge amounts of "wealth" in this world, both paper & physical, and it has to go somewhere.  

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I think we can draw two good lessons at the same time

There seem to be those who would say, "Hussman is a permabear, therefore his theories are to be totally ignored" and others who seem to say, "We have taken the red pill, therefore anybody who makes negative predictions of any stripe is a friend of the good fight." 

With the greatest respect for everybody on the thread, I propose that there is a more nuanced distinction to be made.  It seems to me that both Gordon and Hussman have valid points.

Take a seismologist who knows that tectonic stress is already at unsustainably high levels, and is rising by the year.  A major earthquake is inevitable.  And he says so to the press. That is one thing.

But claiming to have the information necessary to make data-based, time-specific predictions is quite another thing.  If this same seismologist spent the better part of 20 years making unqualified (and incorrect) specific near-term predictions of earthquake activity in the greater Los Angeles area, would scientists regard him as a responsible member of the scientific community?

To his credit, Hussman gives about as good of an answer to such criticism as one could expect:

John Hussman on PP.com wrote:
"[I]f something is not working we have to figure out why. We have to go to the data and we have to go to theory... It ended up being a big shot in the foot for me, for my reputation. And I don’t deny it at all. I practically write about it every week. I don’t believe that people should run from challenges that they had. The only way that people are going to trust what you do now is if they understand why what you did then didn’t work. And for us what didn’t work was placing a historically normal emphasis on...extremely over valued, over bought, over bullish conditions in an environment where the federal reserve and other central banks created a meme."

Bravo.  Although such explanations of what went wrong begin to blanch when weighed against stories like this from 1997:

Forbes Magazine wrote:
Hussman's [focus is] on the market’s fundamental extreme overvaluation.

What makes Hussman’s bearishness noteworthy is his compelling explanation of the mistakes he made several years ago when he and the others turned prematurely bearish.

Hussman says he didn’t pay enough attention to the trend in interest rates. According to his historical analysis, whenever rates are trending lower, stocks tend to go up even during periods of extreme market overvaluation. The now-wiser Hussman . . . [goes on to predict that the market has "nowhere to go but down or sideways for the next few years"].

- Mr. Bear and Mr. Bull, Forbes, Feb. 10, 1997 

1997. The "now-wiser Hussman" song and dance only works so many times.  Fortunes have been made, traders have cashed those fortunes into gold and silver and retired to Bimini during all this time.

The problem with Hussman's communication style is that if he only intends to speak about what should happen in a mathematician's paradise, he often forgets to say so.  The result is the disastrous record of embarrassingly (almost humorously) wrong predictions that GordonX has been able to compile.  Hussman handed Gordon the ammunition.

Sooner or later the seismologist has to stop making near-term predictions based on models that clearly don't possess sufficient predictive power, (and stop claiming that he's fixed the model when he hasn't!) or else risk looking as though he really lacks judgment.

To this extent, I believe Gordon has a valid point:   An analyst who consistently oversteps what the data can prove, consistently gets burned by it, and consistently continues to do it is not reacting in a logical way to the lessons that his experiments are trying to teach him about his ability to make near-term predictions.  It suggests a certain amount of intellectual hubris, in my opinion.

It's not news that the market is an illogical place.  It's also not news that earthquakes are hard to predict. This is why rational seismologists refrain from making unqualified near-term predictions of earthquakes.

On the other hand, I agree very much with Hussman's fundamentals analysis.  The market is in trouble.  Everything is not rosy.  He makes excellent points about how far diverged from reality our markets have become.  Bravo to that analysis, it is trenchant and incisive and it was a pleasure listening to it.

I am saying it isn't necessary to take either Gordon's side or Hussman's.  It is possible to be on Hussman's "side" while also accepting Gordon's implicit criticism and suggesting, in a truly constructive way, that Hussman might want to consider altering his forecasting and communication style a little bit to avoid needlessly tarnishing his own excellent work. 

I honestly and truly believe that John Hussman would professionally benefit by internalizing the criticism that was implicit in Gordon's post, however crudely it was stated.  Hussman deserves that benefit.
 

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Bankers Slave
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Great thread folks.

Need to post this that reflects the sentiments here.

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sand_puppy
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Predicting how much a turkey will weigh tomorrow

This discussion reminds me of the difficulty of predicting tomorrow's weight in a turkey.  Do we extend out the historical trendline, or do we recall that tomorrow is Thanksgiving day and a sudden change of state is possible?  (Or will that change of state be next year on Thanksgiving?)  (Taleb)

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John HUSSMAN

John HUSSMAN

John Hussman (Trades, Portfolio)'s extremely dismal performance record and entirely inappropriate philosophy of 'investing' [ I prefer to, in my view, correctly refer to it as 'speculating', actually ] I believe, very strongly act against his advice/recommendation/forecasts/analyses being taken seriously.

His performance record is revealed as MINUS 3.5% over five years, and about MINUS 1% over ten years = refer: http://www.gurufocus.com/StockBuy.php?GuruName=John+Hussman

The USA broader stock (and bond) markets have performed better by a huge multiple over the above two periods.

Furthermore, he writes a freely available newsletter [ refer www.hussmanfunds.com ] each week in which he, in my view, a) writes about known phenomena as though he is the first to present this obvious information ; b) attempts to present this information as though it could influence others to his - wrong for the last 6 years - investment views. Why John Hussman (Trades, Portfolio) could believe that anyone seriously accepts his weekly views, given his utterly dismal record, demonstrates the sadly unsatisfactory state-of-mind of this investment manager, in my opinion.

John Hussman (Trades, Portfolio)'s output and record gives me the appearance of an arrogant [ he assumes possession of superior market knowledge in his weekly comments ], obstinant [ falsely challenges market pricing, to his consistent - about 6 years now - failure ], and delusional [ false beliefs maintained despite much evidence to the contrary and resistant to change ] speculator [ operates with a strategy of trying to beat his anticipated market movements, again although being dismally wrong now for almost 6 years ]

My feeling is that his 'forecast/predictive' investment philosophy, demonstrated over the last SIX years to have been disgustingly inaccurate, shows an ignorant approach to investment markets.

Why John Hussman (Trades, Portfolio) yet has any funds to manage ( he has reported huge outflows from his funds during the recent years ) is a bad slight on the investment area.

Investors ought to be made aware of the above issues, I feel, for their protection.

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