Tuesday, January 7, 2014

Latest Hussman

Sunday's comment:

"Given the unfortunate resolution of similarly extreme overvalued, overbought, overbullish, rising-yield periods in history, it's almost mind-boggling that investors actually expect the present speculative run to end well. The accelerating pitch and shallowing corrections of the recent advance are worth noting. As I wrote about the oil market in July 2008 as prices raced toward $150 a barrel (see The Outlook for Inflation and the Likelihood of $60 Oil) 'Geek's Rule o' Thumb: When you have to fit a sixth-order polynomial to capture price history because exponential growth is too conservative, you're probably close to a peak.'"


Taylor Conant said...

I say this not in the sense that I wish him to throw in the towel or concede the opposing argument but, I would love to see Hussman "invert" and try writing a thoughtful piece from a bullish standpoint. In other words, to try to respond to his own criticisms as he thinks an intelligent bull would.

Again, not to "concede the argument" or for him to realize he's actually wrong to be a bear, but to better appreciate how and why people come to their erroneous conclusions. He describes it as "mind-boggling" and it very well may be but I am sure there are some "reasons", even if they're not good ones.

James said...

I would love to see Hussman "invert" and try writing a thoughtful piece from a bullish standpoint

It's not quite an inversion, but this piece addresses Hussman's arguments from the bull side. The author makes some valid criticisms but also says a lot of dumb new-era things like the following:
In 2007, worrying about peak profit margins would have gotten you out of a market that was about to endure systemic banking crisis. In each case, the market success of the call was pure coincidence–being right for the wrong reasons.

He seems to be pretty typical of Hussman's critics in the sense that he refutes a lot of H's specific arguments but doesn't disprove the basic idea that we're in a bubble-- IMO, he misses the forest for the trees.

Taylor Conant said...


Interesting you linked to that guy, I had someone send me his "Greatest Predictor of Future Stock Market Returns" piece recently. Never heard of him before and I am usually skeptical of people who create anonymity SPECIFICALLY through adopting the pen name of ancient heroes.

Anyway, thanks for sharing but my point wasn't just to see Hussman's arguments addressed, it was to see them addressed by Hussman himself, imagining himself as a bull. It was instigated specifically by his "mind-boggling" comment. The bull viewpoint may be wrong but I would assume there is some kind of humanity behind it and I would be fascinated to see the result of Hussman, as a thought experiment, attempting to get in touch with it.

CP said...

The mind is flummoxed and boggled.

James said...

I would be fascinated to see the result of Hussman, as a thought experiment, attempting to get in touch with it.

I'm not Hussman, but this is the bullish argument I'd make as a bear:

Profit margins are artificially high, but structural factors (easy money, gov't deficits) ensure that they'll stay high for the foreseeable future. By the time they fall, many companies, esp. cheap cyclicals, will have produced earnings greater than their current market caps. For some companies the earnings will be fictitious, or they'll be wasted on overpriced acquisitions, but other companies will produce cash earnings that can be returned to shareholders.

Complacent debt markets make it easier for companies to reward shareholders. E.g., when companies take on debt to pay large special dividends, they preserve the upside for shareholders but transfer a lot of the downside to bondholders. Some companies, like TDG and WYNN, have paid out special divs in excess of than their 2009 market caps and are still earning lots of money.

Anonymous said...

If there are no net nets and the HY spread is at a multi-year low, it's time for a value investor to be in cash.

theyenguy said...

The end of stimulus has arrived. Liberalism’s peak wealth and peak economic growth, has not come about because of the confidence in the world central bankers, but rather just the opposite; peak wealth has come as the currency carry traders strongly sold the Japanese Yen, realizing that the world central banks’ monetary policies no longer stimulate global growth, and have crossed the rubicon of sound monetary policy, and have made “money good” investments, bad; such include Emerging Market Bonds, EMB, Municipal Bonds, MUB, Treasury Bonds, TLT, Mortgage Backed Bonds, MBB, as well as Emerging Markets, EEM, such as brazil, EWZ, EWZS, Indonesia, IDX, IDXJ, Thailand, THD, and Philippines, EPHE, as is seen in their combined ongoing Yahoo Finance Chart

Peak systemic risk has been attained. Conservative economist Doug Noland relates After beginning 1990 at $12.80 TN, Total U.S. (Non-Financial and Financial) marketable debt ended Q3 2013 at $58.08 TN. Over this period, hedge fund asset jumped from about $40 billion to end 2013 in the neighborhood of $2.7 TN. The Fed's balance sheet has inflated from $315 billion to $4.0 TN. Fundamental to my macro credit analysis has been the thesis that prolonged credit bubbles inflate myriad price and spending levels throughout the economy. In the end, this inflation is unsustainable. Efforts to inflate out of deep financial and economic structural maladjustment risk systemic collapse. Our experimental central bank has in five years inflated its balance sheet from $900 billion to $4.0 TN.

Sustainable Gains said...

Found this blog from Illusion of Prosperity, and like the content and comments very much.

With regard to Hussman, my perspective is that he's not wrong, just early, in the vein of "the market can remain irrational longer than you can stay solvent".

As for valuations, yes, the "complacent" bond market is propping up equity valuations. But it's easy to be complacent when you've gotten hammered at the Fed's punchbowl and are down for the count. At least until the Fed takes the punchbowl away, and probably a bit afterwards. But then the hangover begins.