Hussman Weekly Market Comment: Economic Measures Continue to Slow
Based on the data that we've observed in recent months, my view remains that a fresh downturn in the economy remains a not only a possibility but a likelihood. Little of the economic improvement we've observed since 2009 appears intrinsic, but instead appears driven by enormous government interventions that are now trailing off. Still, while I believe that there is a second shoe that has not dropped, I recognize that the full force of government policy is to obscure, stimulate, intervene and borrow in every effort to kick that can down the road. I believe that the unaddressed and unresolved problems relating to debt service, employment conditions and housing are too large for this to be successful, but as we move through the remainder of this year - as I've said throughout 2010 - we are gradually assigning greater probability to the "post-1940" dataset. Accordingly, there are developments that could potentially move us to a more constructive position. We don't observe those at present, but an improvement in economic evidence and a clearing of overbought conditions, leaving market internals intact, would be one configuration that might warrant less defensiveness.
How constructive is "constructive"? Without an improvement in valuation levels, a constructive investment exposure for us here would likely be limited to a removal of perhaps 20% of our hedges, because the improvement in expected return and reduction in expected risk will not be dramatic unless valuations retreat sharply. That said, we occasionally observe conditions that warrant placing about 1-2% of assets into call options, which would allow a subsequent market advance to soften our hedges without actually removing the put option side of our defenses.
A better configuration would include a significant retreat in valuations and a massive, if uncomfortable, amount of debt restructuring. Those two events would be the best way to put the recent (and probably ongoing) debt crisis behind us, and could easily allow us to completely lift our hedges for an extended period of time in anticipation of an unobstructed recovery.
To some extent, I view current market conditions as something of a "Ponzi game" in that valuations appear neither sustainable nor likely to produce acceptably high long-term returns, and speculators increasingly rely on finding a greater fool. As the mathematician John Allen Paulos has observed, "people generally worry only about what happens one or two steps ahead and anticipate being able to get out before a collapse... In countless situations people prepare exclusively for near-term outcomes and don't look very far ahead. They myopically discount the future at an absurdly steep rate." Undoubtedly, we have periodically missed returns due to our aversion to risks that rely on the ability to find a "greater fool" in order to get out safely. But it is important to recognize that speculative risks are not a source of durable long-term returns. At a Shiller P/E of 21 and a historical peak-to-peak S&P 500 earnings growth rate of 6%, a simple reversion to the historical (non-bubble) Shiller norm of 14 would require seven years of earnings growth and yet zero growth in prices. Stocks are not cheap here.
- Hussman Weekly Market Comment: Warning: Goat Rodeo
Goat Rodeo - Appalachian slang for a chaotic, high-risk, or unmanageable scenario requiring countless things to go right in order to walk away unharmed. Over the years, of the most frequent phrases in these weekly comments has been "on average." Most...
- Hussman Weekly Market Comment: Hard-negative
With the exception of extreme market conditions (see Warning- Examine All Risk Exposures , and Extreme Conditions and Typical Outcomes ), I try not to wave my arms around about near-term market risks, but I think it's important to cut straight to...
- Hussman Weekly Market Comment: A Reprieve From Misguided Recklessness
An immediate note on market conditions. Last week's market advance cleared out the "predictable" expectation for constructive returns that briefly emerged from the recent market selloff. That doesn't mean that the market can't advance further,...
- 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: Not Yet Out Of The Woods
Given the data in hand, it's clear that past growth downturns of the same extent have often gone on to become recessions. However, there are a few exceptions where these growth rates dipped below zero and then recovered. If we had good reason to expect...