Bubble
News
June 19, 2017
John P. Hussman, Ph.D.
As of last week, our assessment of the overall market return/risk profile remains dominated by three factors, the first being wickedly extreme valuations (which we associate with near-zero expected S&P 500 nominal total returns over the coming 12-year period,
with the likelihood of interim losses on the order of 50%-60%,
the second being the most extreme syndromes of overvalued, overbought, overbullish conditions we define, and the third - and the most important in terms of near-term market risk - being divergent and deteriorating market internals on the measures we use to assess investor risk-preferences.
Investors would do well to understand the distinction between an overvalued market that retains uniformly favorable market internals, and an overvalued market that has lost that feature. I’ve openly detailed our challenges in this half cycle and how we adapted, primarily in 2014 (see Being Wrong In An Interesting Way for a detailed narrative).
The central lesson of this half-cycle is not that quantitative easing or zero interest rates can be relied on to permanently support stocks,
but rather, that the novel and deranged monetary policy of the Federal Reserve was able to encourage continued yield-seeking speculation long after the emergence of “overvalued, overbought, overbullish” extremes that had reliably heralded steep downside risk in prior market cycles across history.
In the face of zero interest rates, one had to wait for market internals to deteriorate explicitly (indicating a shift in investor preferences from speculation to risk-aversion), before adopting a hard-negative market outlook.
As I detailed in The Most Broadly Overvalued Moment in Market History, to the extent that investors view interest rates as important, the proper way to factor them in is to first use existing prices and valuations to estimate prospective market returns (an exercise of arithmetic that does not require the use of interest rates), and then to compare those prospective returns with interest rates to judge whether prospective equity market returns are adequate.
At present, we estimate that despite their rather depressed yields, Treasury bonds, as well as a sequence of investments in Treasury bills, are likely to outperform the total return of the S&P 500 well beyond a 12-year horizon.
That’s a far cry from how stocks were priced between late-2008 and 2012.
DYI:
DYI has been pounding the table for so long I feel as if I’m the boy who
cried wolf. The wolf will be at the door
we simply don’t know when speculator/investors will shift from their aggressive
capital gains and /or yield seeking mentality to risk aversion. What pin will intercept this bubble? Who knows?
An economy that rolls over into recession is my top pick. The economy has been growing (very slowly)
since March of 2009 creating multiple imbalances that will need to be “worked
off” through a decline in GDP.
Corporate and Treasury bills, notes, and
bonds will outperform stocks held or bought from this level and held for the
next 10 to 12 years and most likely up to 20 years as the compounding effect of
dividend increases overcomes static bond interest income. All in all, not a good time to invest in
stocks.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/17
Stockman: This is the Most Hideously Overvalued Market in History
“You want to pay twenty-five times earnings going into a world where the Fed yesterday said ‘we’re going to shrink the balance sheet by $2 trillion over the next several years?’ Where we have a government that is in total chaos. A president that they’re trying to unseat. A debt ceiling that can’t be raised. A tax bill that will never pass. Going into all of that, to say nothing of the red Ponzi in China that one of these days will spill its guts all over the world economy. And you want to pay twenty-five times earnings for today’s stock? Be my guest. This is a mania.”
“Seven weeks after the Lehman bankruptcy [former Federal Reserve Chairman] Bernanke doubled the size of the balance sheet [of the Fed] from $900 to 1.8 trillion. He did in seven weeks what the Fed did in ninety-four years. My point is, they can’t do it again. They’re out of dry powder.”
DYI: China... a debt bubble of biblical proportions.
As the saying goes markets can stay far longer irrational than anyone
believes possible as China is emblematic of that statement. I would have thought over 5 years ago their
debt bubble would have burst; but no it has grown exponentially nearing the 300%
mark of total madness. This number is
understated as many businessmen in China borrow from black market sources, this
figure could easily topple the 400% threshold.
What will it take to bring down this house of cards? I don’t know but when it does it will be the “shot
heard around the world!” Along with its
side effects economically bringing on a world wide recession; countries heavily
dependent upon trade with China such as Canada or Australia will go into a flat
out depression.
"The Next Leg Is Clearly Lower" - Global Excess Liquidity Collapses
The most charitable thing that can be said about the central banks is that perhaps they actually believed their own BS, but I seriously doubt it. Even the most dense of observers has noticed by now that we are 9 years into the ‘emergency measures’ and nothing even remotely close to healthy economic growth has emerged.
One year of emergency measures is already a bit too long. 3 years is embarrassing. 9 years tells you that the Fed isn’t in this for the reasons they state.
Instead, they are orchestrating the largest wealth transfer in all of history, from the many to the few.
Once you realize this is their goal, then they've succeeded amazingly. Mission accomplished!
We have the widest wealth and income gaps in all of history. The big banks have complete control of the political and financial machinery of every country of the world.
And the corporate controlled media simply cheerleads the whole thing, convincing most people it's all been for their own good.
Make America Great
7
Sisters
Of
Institutional Change
1.) End the Federal Reserve
2.) Repeal 17th Amendment – Reinstate Federal Senators chosen by State Legislators.
1. Term Limits – Constitutional Amendment
A. Two six year terms for Senators
B. Three terms House of Representatives
3.) Repeal 16th Amendment – Income tax replace with value added tax.
4.) Pass the Balanced Budget Amendment
5.) Exit the United Nations
6.) Reign in the Medical Industrial Complex
a. Enforce Anti-Trust Laws
b. Pass Legislation for re-importation of ethical drugs
7.) End Federal and Private Student Loans
DYI
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