Money and Finance

Hussman Weekly Market Comment: Capitulation Everywhere

“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.”- Benjamin Graham

“Human beings desperately want to belong, but, they also desperately want to understand the environment around them. Often, the desire to belong and the desire to know the truth conflict. The idea of the majority view or the ‘mainstream,’ gives people the sense that they are a part of a group, and at the same time, gives them the illusion of being informed.”- Brandon Smith

The bears are gone, extinct, vanished. Among the ones remaining, many are people whom even I would consider to be either permabears or nut-cases. And yet, the historical evidence for major defensiveness has rarely been stronger.

The newest iteration of the bullish case is the idea of a “great rotation” from bonds and cash to stocks, as if the outstanding quantity of each is not held by someone at every point in time. The head of a “too big to fail” investment firm argued last week that stocks are “underowned” – as if every share of stock presently in existence is not actually owned by someone. To assert that stocks can be “underowned” seems to reflect either a misunderstanding of how markets work, or a desire to distribute overvalued institutional holdings onto the unwashed muppets. Likewise, the idea of a “rotation” out of bonds and into stocks begs the question of who will buy the bonds and sell the stocks, as someone must be on the other side of that trade. Similarly, to “move cash into the market” requires a seller of stock who becomes the new holder of said cash.

Quite simply, the reason that pension funds and other investors hold more bonds relative to stocks than they have historically is that there are more bonds outstanding, relative to stocks, than there have been historically. What is viewed as “underinvestment” in stocks is actually a symptom of a rise in the gross indebtedness of the global economy, enabled and encouraged by quantitative easing of central banks, which have been successful in suppressing all apparent costs of that releveraging.

The "rotation" fallacy has emerged even in the work of analysts that we admire. Ray Dalio of Bridgewater talked on CNBC last week of a move “out of” cash and “into” stocks, seemingly reversing comments he made only weeks ago at the Dealbook conference (h/t PragCap) where he suggested that risk premiums are likely to expand, that the effects of QE are diminishing as we do more rounds, that we’re facing austerity, that growth is flagging, that the economy is facing unprecedented risk, and that we face a slowdown with very little room to maneuver. Meanwhile, Albert Edwards of SocGen suggested that there has been an excessive “move away from equities” in recent years – instead of noting, for example, that the volume of U.S. government debt foisted upon the public (even excluding what has been purchased by the Fed) has doubledsince 2007, not to mention other sources of global debt issuance, while the market capitalization of stocks has merely recovered to its previously overvalued highs.

- With Stocks So High, Should Investors Move To Cash?
Link to article: With Stocks So High, Should Investors Move to Cash?As stock indexes hit record highs, nervous investors increasingly face a difficult choice: Do they keep betting as heavily on the markets, or do they move more money into cash? The...

- Howard Marks Memo: Hemlines And Investment Styles
While the details change, the pendulum-like fluctuation of investment styles is a constant. Fear versus greed, pursuit of safety versus aggressiveness, stocks versus bonds, and growth versus value are just a few examples of the areas in which we see this...

- Tradewinds - David Iben’s March 2010 Commentary: Avatar
Thanks to Mike G. for passing this along. The current investment environment is complex and challenging to say the least. Capitalism as we've known it is dead. The financial system is broken and the currencies are being debased. Should investors prefer...

- Barron's Interviews - Howard Marks And Rob Arnott
From November and December. Interestingly, they both mentioned convertible bonds as an attractive area right now.-Interview with Howard Marks (11/17/2008):-What went wrong with risk management?- First of all, you need a risk manager who knows the business...

- Sell Or Not To Sell?
Okay, we all have stocks which are not doing well and stocks which are doing very well. As I wrote before, for me it's always very hard to pull this trigger and sell my winner... I know that lots of dividend stock investors think that we need to...

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