The professional investor has no choice but to sit by quietly while the mob has its day, until enthusiasm or panic of the speculators and non-professionals has been spent. J. Paul Getty

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August 28, 2017

The Conceit of Central Bankers and the Brief Illusion of Wealth

John P. Hussman, Ph.D.

At the recent market high, the consensus of these measures was consistent with estimated S&P 500 total returns of zero over the coming 12-year period,

 with an interim market loss on the order of -60% over the completion of the present market cycle.

It’s also worth remembering that when interest rates are low because growth is also low, no valuation premium is “justified” at all.

In short, the belief that Fed-induced speculation creates “wealth” is a conceit that rests on the delusion that “wealth” is embodied in the price of an asset, rather than the stream of cash flows it delivers over time. It is a dogmatic misconception of self-congratulatory central bankers that even the deepest economic downturn since the Great Depression was incapable of shaking. This lesson will be reiterated again, and again, until investors learn it, and until Congress properly restrains the Fed's wildly activist abandonment of systematic policy rules (remember also that the global financial crisis was the result, not the origin, of the Fed's activism). At present, we observe the combination of offensive overvaluation, the most extreme “overvalued, overbought, overbullish” syndromes we identify, and importantly, continued deterioration in market internals. In my estimation, and from any extensive evaluation of financial history, the delay of negative consequences has not eliminated them, but has instead made the likely eventual outcomes worse.

 DYI