John P. Hussman, Ph.D.
To understand major investment collapses, we should distinguish causes from triggers.
The central cause of a collapse is typically the extreme overvaluation that preceded it. Indeed, when equity valuations have been similarly extreme on historically reliable measures, as they were in 1901, 1907, 1929, 1937, 2000, and 2007 (as well as lesser instances such as 1973), the market has always followed by losing half of its value.
Once reliable measures of valuation become obscenely elevated, steep losses are already inevitable; baked in the cake. What typically triggers the breakdown is the violation of some widely-observed “support” threshold (often roughly 14% below the market peak) that shifts trend-followers from feeding self-reinforcing speculation to feeding self-reinforcing liquidation. For a more formal analysis, see Complex Systems, Feedback Loops, and the Bubble-Crash Cycle, and Lessons from the Iron Law of Equilibrium.
The greatest danger comes when investors insist on speculating even after market internals have deteriorated and momentum has rolled over. Following a long period of speculative success, they may be tempted to ignore latent risks, and to keep speculating on the time-delay between the emergence of latent risks and their abrupt expression. They fall victim to the delusion that, in the words of Citigroup’s Chuck Prince just before the global financial crisis, “as long as the music is playing, you’ve got to get up and dance.”
No, you don’t. When you insist on tap dancing at the edge of a fragile cliff, or lace up your skates when the ice is thin, each moment of success may offer false encouragement to press your luck, but it also ensures that you’ll have no escape when underlying risk inevitably meets an occasion to express itself.
Current Shiller PE Ratio 25.84
DYI Comments: All one has to do is look at the chart above and allow your eyes to move from the extreme right hand side moving left across all of the previous tops. THE U.S. MARKET IS IN BUBBLE LAND! DYI's weighted averaging formula which is based on dividend yield is now so outrageously priced has "kick us out" of the market and rightfully so! DYI are NOT market timers. I'm a hard nosed value player and have no desire to lace up my skates, despite all the warnings of thin ice and go skating. I completely agree with John Hussman that future average annual returns for long term investors will be dismal at best and losses [(-2% to -4%)DYI forecast] for those holding or buying stocks at this time and holding for the next 12 to 15 years!
Don't look for a balanced account to bail you out. 60% stocks, 40% bonds. Intermediate term bonds the stable for most balance funds yields are sub atomic low any advantage from rebalancing will be muted. If we move into a rising yield environment which is very possible for a holding period of 12 to 15 years, it is possible for a 60%-40% portfolio to be at a loss at the end.
For those of you who are dollar cost averaging your return through the years we be a blended or averaged return. When dollar cost averaging, it is a cleverly disguised lump sums normally done once or twice a month into your 401k, thrift savings plan, Roth IRA etc. Those dollars placed today into stocks will have dismal returns or losses for many years. Today and in DYI opinion is not the time for stocks or long term bonds as both of their valuations are so far away from their respective average. Bubble land for sure.
Could stock and bond prices rise further? Of course they can. I have no magic ball that will give me those answers for short term moves in the market. What I do know central banks world wide have distorted through their insane sub atomic interest rates and money printing bathing the world economies with liquidity have "pumped up" the U.S. market into a bubble.
Central banks with their sub atomic low rates have destroyed the savings for most retired folks who depend upon bank CD's all for their quest to bail out their banks. This financial engineering has done NOTHING for the general economy and improvement for the common man. This is being expressed in our Presidential race with Trump and Sanders as the outsiders and Clinton as establishment. Today more and more young people find it impossible to afford a house or invest to out run your intentional debasement of our currency.
The Central banks have committed fraud by stealing primarily from the citizens of America and England to bail out the banks of New York and London so you don't have to face the music. They made bad bets and are BANKRUPT!
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 5/1/16
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTSThe Great Wait Continues...
DYI
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