Excerpted from John Hussman's Weekly Market Comment, via The Burning Platform blog,
Time for our weekly reality check with John Hussman.
Fact #1
Meanwhile, the S&P 500 is more than double its historical valuation norms on reliable measures (with about 90% correlation with actual subsequent 10-year market returns), sentiment is lopsided, and we observe dispersion across market internals, along with widening credit spreads. These and similar considerations present a coherent pattern that has been informative in market cycles across a century of history – including the period since 2009. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.
The market is overvalued in the extreme. The vitriolic response towards anyone who points out this FACT proves it is accurate. Wall Street is run by liars, thieves and shysters. They would sell your grandmother for a buck.
For now, our concerns about market risk are as severe as they were at the 2000 and 2007 peaks, and these concerns are equally dismissed and reviled, which is oddly encouraging.
The fact that you were right in being bullish during the early 1990’s, called the 2000 collapse, and called the 2008 collapse is meaningless to the sycophants on Wall Street and frequenting the cheerleading entertainment shows on CNBC and Bloomberg. The record low ratings of these worthless Wall Street propaganda shows tells the whole story. Hussman has been right and will be right this time.
Equally important, I know exactly the conditions under which our approach has repeatedly been accurate in cycles across a century of history, and in three decades of real-time work in finance: I know what led me to encourage a leveraged-long position in the early 1990’s, and why were right about the 2000-2002 collapse, and why we were right to become constructive in 2003, and why we were right about yield-seeking behavior causing a housing bubble, and why we were right about the 2007-2009 collapse. And we know that the valuation methods that scream that the S&P 500 is priced at more than double reliable norms, and that warn of zero or negative S&P 500 total returns for the next 8-9 years, are the same valuation methods that indicated stocks as undervalued in 2008-2009.
The toady faux journalists working for the corporate mainstream media regurgitate corporate press releases, government manipulated statistics, and Wall Street crapola disguised as investment reports. The paragraph below explains why Wall Street has reported record profits and pays themselves billions in bonuses, while grandmothers slowly starve to death.
As an important side note, the financial crisis was not resolved by quantitative easing or monetary heroics. Rather, the crisis ended – and in hindsight, ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned mark-to-market rules, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The decision by the FASB gave banks “significant judgment” in the values that they assigned to assets, which had the immediate effect of making banks solvent on paper despite being insolvent in fact. Rather than requiring the restructuring of bad debt, policy makers decided to hide it behind an accounting veil, and to gradually make the banks whole by lowering their costs and punishing ordinary savers with zero interest rates, creating yet another massive speculative yield-seeking bubble in risky assets at the same time.
Remember 2000? Internet stocks were off the charts overvalued. You could actually find bargains in large cap value stocks. Today nothing is undervalued. The entire stock market is overvalued. Bonds are overvalued. Real estate is overvalued. The entire world is overvalued.
The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme.
Based on valuation metrics that are about 90% correlated with actual subsequent returns across history, we estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years. At this point, the suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk.
John Hussman and a few other honest fact based analysts who are not captured or beholden to Wall Street are the only rational people left in the world. Everyone else has gone completely mad.
As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad.
The smart money has been exiting. Time is growing short. Those who think this can go on for years are badly mistaken. The global economy is deteriorating rapidly. The American consumer has propped up the world economy for decades. They are exhausted and broke. There is no one to step into the breach. Central bankers have printed trillions and have only delayed the ultimate collapse. Decide now whether you can withstand a 50% decline in your portfolio.
Internal dispersion continued to show subtle signs of growing risk aversion last week, particularly Friday when yields on Treasury debt and other issues perceived as “default free” plunged, while commodity prices also plunged across the board, junk bond yields rose, and the number of individual issues setting new 52-week lows shot higher despite major indices near record highs. This market action and internal dispersion suggests growing perceptions of either a negative shock to global growth or concerns about fresh credit risk (not that those two are separable given the size of global debt burdens). With regard to the U.S., we don’t observe recession warnings yet – the usual sequence features a slowdown in real sales and consumption first, then production, then personal income, and employment (a clear lagging indicator) much later. Still, we’re keeping watch on our recession warning composites, as a recession in Japan, a slowdown in China, and emerging weakness in Europe are all likely to have an impact on U.S. activity.
More broadly, the main thing I encourage is for investors to understand the actual depth of market declines that have been part and parcel of market cycles across history (the risk is not 5-10%, but 30-50% and occasionally more, depending on the level of valuation at the peak). These must be anticipated and accepted as a part of passive investment strategies.
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via Zero Hedge http://ift.tt/1ywf216 Tyler Durden