Bubble

Trouble!

Bubbles are generated when investors drive valuations higher without simultaneously adjusting expectations for future returns lower. In other words, the defining feature of a bubble is inconsistency between expected returns based on price behavior and expected returns based on valuations. The ‘Bubble Term’ measures the gap between the two.

In order to generate the return in investors heads, the bubble has to supplement deliverable cash flows with ever-larger speculative gains. As a result, sustaining the bubble requires valuation multiples to increase forever, without any upper bound. The reason the current bubble feels so good to investors is that, up until the present moment, valuation multiples have done exactly that.

John Hussman President, Hussman Investment Trust

DYI Comments:

U.S. Stocks held or bought today - go to sleep like Rip Van Winkle - waking 10 years from now you can expect an estimated average annual return of NEGATIVE 2.59%!

For those youngsters who have a 20 year time horizon - once again for stocks held or purchased today waking 20 years from now can expect an estimated average annual return of POSITVE 1.71%!  This is nominal return before fee's, possible taxes and INFLATION (DYI estimate 4% per annum).

30 Year Time Horizon:  Estimated Average Annual Return - POSITIVE 3.19%!  And of course estimate is before fee's, possible taxes, and the biggest tax called INFLATION.

No doubt time in the market does improve returns but at these historical valuations you'll need to be a Harvard or Yale endowments who's time horizon for the long term is 100 years (estimated average annual nominal return 5.29%!).  But alas we are mere mortals who have a time horizon of 20 to 40 years to put it all together so our retirement is not needing the cookbook for 30 ways to prepare Alpo!

Click HERE  for Money Chimp and you can make your own estimates all depending on valuations.