Tuesday, June 27, 2017

Bubble
News
June 26, 2017


John P. Hussman, Ph.D.
With no material change to our investment outlook, I’ll keep this comment brief. On the basis of the most reliable valuation measures we identify (those most tightly correlated with actual subsequent 10-12 year S&P 500 total returns),
current market valuations stand about 140-165% above historical norms.
No market cycle in history, even those prior to the mid-1960s when interest rates were similarly low, has failed bring valuations within 25% of these norms, or lower, over the completion of the market cycle.
On a 12-year horizon, we project likely S&P 500 nominal total returns averaging close to zero, with the likelihood of an interim market loss on the order of 50-60% over the completion of the current cycle.
Put simply, with market internals unfavorable and interest rates off the zero bound, the two main supports that made the half-cycle since 2009 “different” have already been kicked away.
From here, we expect the dynamics of this market cycle to resemble other periods when offensive valuations and extreme overvalued, overbought, overbullish syndromes were joined by deteriorating market internals (particularly when interest rates were off their lows). Short term market outcomes are anybody’s guess, but across history, that overall combination has typically defined crash dynamics.

Retail Apocalypse Engulfs US Economy

The retail apocalypse grows: Not even halfway through 2017, closures of retail stores have doubled last year’s closures as of this time and already exceed the last peak in closures during the crash of 2008. The bottom line is simple here. Commercial real-estate investment trusts (REITs), malls, mortgage-backed securities (remember those), and their bankers are in a lot of trouble. The anchor stores are closing up the worst, which will pull others down in the wake by reducing traffic to malls. “Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst.” 
According to Credit Suisse, 20-25% of US shopping malls will shut down within the next five years. 
While this is due to a paradigm shift in how people do their shopping, not just an overall reduction in retail sales, it will send shudders and close shutters throughout real-estate-based retail economy, having a huge impact on construction, land sales, banking, jobs, etc.
Harry Dent points out that this was predictable because of his central thesis that baby boomers are moving out of the boom stage when they spend big; then moving into the fixed-income stage where they have to cut back significantly. 
Others have pointed out that retail stores are closing because millennials, who are replacing the boomers, prefer to shop electronically. 
Some stores are closing because they are dinosaurs who didn’t keep up with fashion or who ran bad business models. And some of the retail collapse is due to people just not having expendable income in a world saturated with towering debt and long-stagnant income and declining benefits. Still others are collapsing because rents are back to being insane. All of those reasons are true, and all of them are why there is nothing Trump or the Federal Reserve can do to stop the retail apocalypse that is already all around us.
DYI:  Sub prime for car and trucks sales that have appeared to be rolling over; student loan debt defaults are leaping; retail brick and mortar stores slated for a reduction biblical in size; the continuing military and medical industrial complex chewing up ever increasing percentage of our nations economy; political, economic, and social unrest increasing in our cities; international debt bubbles across a spectrum of countries such as Canada, Australia, New Zealand, China, EU countries especially the U.K. and Switzerland.  All of these appear to be coalescing at the same time that has the potential to drive down the high flying U.S. stock market by 55% to 70% (DYI’s projection). 


So hang onto your hat and your cash as better values await!
Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/17

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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DYI 

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