Hussman Weekly Market Comment: Borrowing Returns from the Future
Two aphorisms regularly become popular during speculative periods in the market. One is the statement by John Maynard Keynes that "the market can stay irrational longer than you can remain solvent." The other is Warren Buffett's remark that "a pack of lemmings looks like a bunch of individualists compared with Wall Street once it gets a concept in its teeth."
It is widely understood that markets can experience extended periods of irrational speculation and valuation bubbles. This becomes problematic when people begin to rely on the irrationality of others as a justification for continuing to speculate, because at that point, they require the assistance of increasingly "greater fools" in order to sustain the advance. Keynes was quite right in the sense that one should never maintain a leveraged position against the market, because leveraged losses certainly do threaten solvency. But investors are not forced to accept risk just because other investors are speculating - there is no great risk in positions that accept no great risk. Moreover, investors cannot safely ignore valuations, because once valuations become rich, the returns from continuing to speculate are not easily retained even if they emerge for a while.
If actual returns did not periodically overshoot the returns that are warranted by fundamentals, we would never observe the extended periods of predictably excellent or dismal market returns that have historically corrected those overshoots. Presently, the probable outcome over the coming years leans moderately toward the "dismal" side, but nowhere as negative what we observed in 1929, 2000 or even 2007.
We have to be realistic that projected returns were actually driven to negative levels at the peaks of 1929 and 2000, so we can't rule out a further price advance that would compress projected long-term market returns to even lower levels than we observe here. Still, both of those valuation extremes were produced by multi-year periods of rapid, low-volatility economic growth, coupled with the introduction of revolutionary new technologies. A Federal Reserve policy that amounts primarily to rhetoric seems to be an awfully thin substitute at present.
- Hussman Weekly Market Comment: The Federal Reserve's Two Legged Stool
Link to: The Federal Reserve's Two Legged StoolExtraordinary market returns and dismal market returns both come from somewhere. Long periods of outstanding market returns have their origins in depressed valuations. Long periods of dismal market returns...
- Hussman Weekly Market Comment: The Right Kind Of Hope
Happy New Year. We enter 2012 with a great deal of hope, but our hopes are not for more bailouts, or money printing, or any of the myriad policies that investors seem to hope will save bad investments and sustain elevated valuations. Instead, our hope...
- Hussman Weekly Market Comment: Anatomy Of A Bubble
Presently, the Shiller P/E stands at 24. Be careful how you interpret the data in the table for Shiller P/E's above 24, since these levels were almost never observed in data prior to the late-1990's market bubble. You can see the odd effect of...
- Hussman Weekly Market Comment: Rich Valuations And Poor Market Returns
Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this "cyclically-adjusted P/E" or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation). Prior to the mid-1990's market bubble,...
- Hussman Weekly Market Comment: Misquoting Keynes
The famous quote attributed to John Maynard Keynes - "the market can remain irrational longer than you can remain solvent" - is a favorite of speculators here. Actually, I very much agree with this observation, provided that it is correctly understood....