Single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels...John P. Hussman

Deja Vu: The Fed's Real "Policy Error" Was To Encourage Years of Speculation

John P. Hussman, Ph.D.

Over the past several years, yield-seeking investors, starved for any “pickup” in yield over Treasury securities, have piled into the junk debt and leveraged loan markets. 

Just as equity valuations have been driven to the second most extreme point in history 

(and the single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels), 

risk premiums on speculative debt were compressed to razor-thin levels. 

By 2014, the spread between junk bond yields and Treasury yields had fallen to less than 2.4%. Since then, years of expected “risk-premiums” have been erased by capital losses, and defaults haven’t even spiked yet (they do so with a lag). 

From an economic standpoint, the unfortunate fact is that the proceeds from aggressive issuance of junk debt and leveraged loans in the past few years were channeled into speculation. 

Excess capacity in energy production was expanded at the cyclical peak in oil prices, and heavy stock buybacks were executed at obscene equity valuations. 

The end result will be unintended wealth transfers and deadweight losses for the economy. Since the late-1990’s, the Federal Reserve has actively encouraged the channeling of trillions of dollars of savings into speculation. Recurring cycles of malinvestment and crisis have progressively weakened the resilience and long-term growth prospects of the U.S. economy.

DYI Comments:  The Fed's have blown another bubble this time to biblical proportions as the median stock valuation is now greater than the year 2000.  Below is GMO's(which is in line with DYI) forecast for prices over the next 7 years.  The only asset category that I disagree with is emerging markets during any U.S. major melt down will drop those markets as well to deliver negative 7 year returns.

Prices today for main stream stocks and bonds have been so marked up our formula has "kick us out of the market" and rightfully.  Don't take the Fed's bait as this market no longer has any investment merit (except for Oil/Gas/Service and/or Precious Metals Mining Companies).  So while everyone else is losing their heads don't go and lose yours.

THE GREAT WAIT CONTINUES...

 Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  12/1/15

Active Allocation Bands (excluding cash) 0% to 60%

78% - Cash -Short Term Bond Index - VBIRX

22% -Gold- Precious Metals & Mining - VGPMX

 0% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

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