John Hussman

Our country has entered a period of Crisis. We may or may not successfully navigate our way through the visible icebergs and more dangerous icebergs just below the surface. The similarities between the course of our country and the maiden voyage of the Titanic are eerily allegorical...

Just over a year ago we discussed in great detail the cyclical nature of profit margins, the elegance of the Kalecki (profits) equation (and its Japanese outlier real-world fallacy), and the current desire to 'invest' in dividends and not CapEx creating a vicious cycle of cash-flow-sagging aging assets. The situation has not improved. As John Hussman notes, the Shiller P/E passed its 24x Maginot Line last week and yet, with revenues stagnant and earnings eking out gains, we are to believe valuations are cheap and margins will save the day. "The impression that stocks are “reasonably valued” relative to earnings is an illusion driven by profit margins that are 70% above their historical norm. Almost universally, Wall Street analysts are making the mistake of valuing stocks on the basis of a single year of forward operating earnings, as if the present estimate is a sufficient statistic that is representative of the entire future stream of cash flows." It is not...

Our financial markets actually have a natural equilibrium state that is far removed from where they are today. But interfering monetary policy (e.g. QE) and delusional fiscal policy have pulled the system away from its authentic state, to the point now where the forces to correct are placing growing strain on the status quo. As the system seeks to return to where it should naturally be, the yields that the Fed is so desperately trying to engineer are going to become less in size and number. Investors need to realize that much of the "growth" the Fed is trying to return to was manufactured and unnatural. We are returning to a lower-growth environment, whether we want to or not.

It is clear now that we must have been wrong about the economy. No more proof is needed than the fact the Dow has gone up 1,500 points. Everyone knows the stock market reflects the true health of the nation – multi-millionaire Jim Cramer and his millionaire CNBC talking head cohorts tell us so. Ignore the fact that the bottom 80% only own 5% of the financial assets in this country and are not benefitted by the stock market in any way. It is time to open your eyes and arise from your stupor. Observe what is happening around you. Look closely. Does the storyline match what you see in your ever day reality? It is them versus us. Whether you call them the invisible government, ruling class, financial overlords, oligarchs, the powers that be, ruling elite, or owners; there are powerful wealthy men who call the shots in this global criminal enterprise. No amount of propaganda can cover up the physical, economic, social, and psychological descent afflicting our world. There’s a bad moon rising and trouble is on the way.

Whether you're aware of it or not, a great battle is being waged around us. It is a war of two opposing narratives: the future of our economy and our standard of living. The dominant story, championed by flotillas of press releases and parading talking heads, tells an inspiring tale of recovery and return to growth. The other side, less visible but with a full armament of high-caliber data, tells a very different story. One of growing instability, downside risk, and inequality. As different as they are in substance, they both share one fundamental prediction – and this is why you should care: This battle is about to break. And when it does, one side will turn out to be much more 'right' than the other. The time for action has arrived. To position yourself in the direction of the break you think is most likely to happen. It's time to choose a side.

This week's Barron's cover looks like a pretty strong warning sign for stocks (not only the cover, but also what's inside). However, there may be an even more stunning capitulation datum out there, in this case a survey that we have frequently mentioned in the past, the NAAIM survey of fund managers. This survey has reached an all time high in net bullishness last week, with managers on average 104% long. The nonsense people will talk – people who really should know better -  is sometimes truly breathtaking. Recently a number of strategists from large institutions, i.e., people who get paid big bucks for coming up with this stuff, have assured us that “equities are underowned”, that “money will flow from bonds to equities”, and that “money sitting on the sidelines” will be drawn into the market. These fallacies are destroyed below. And finally, while, theoretically, the “inflation” backdrop is a kind of sweet spot for stock, even to those who insist that stocks will protect one against the ravages of sharply rising prices of goods and services, As Kyle Bass recently explained, the devaluation of money in the wider sense was even more pronounced than the increase in stock prices. Stocks did not protect anyone in the sense of fully preserving one's purchasing power. The only things that actually preserved purchasing power were gold, foreign exchange and assorted hard assets for which a liquid market exists.

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

While the impact of the Fiscal Cliff remains front-and-center in everyone's mind, SocGen's Albert Edwards has another, more prescient, insight into why stocks are reverting. In his words, "commentators are worrying about an impending fiscal cliff, we have actually already stepped off the profits cliff." As we noted last week, the divergence between markets and macro suggest a rather ghastly echo of 2008; as the market is falling in line with the dismal outlook for profits (rather than the more upbeat macro economic data). As far as the latter, we are getting close to a cyclical peak - so macro surprises are 'as good as it gets' - and for the former (earnings outlooks), Edwards shows an unprecedented level of optimism about EPS going forward. As we proceed into the new year, Edwards expects "the combination of poor profits and poor economic data to prove toxic."

”We now live in a world with fiat-based paper money being printed with impunity. There are no risk- free assets anymore, anywhere."

The recent release of the final estimate of Q2 GDP, and the September's Durable Goods Report, confirmed that indeed the economy was far weaker than the headline releases, and media spin, suggested. While the media quickly glossed over the surface of the report there were very important underlying variables that tell us much about the economy ahead. The problem is that there is little historical precedent in the U.S. as to whether maintaining ultra-low interest rate policies, and inducing liquidity, during a balance sheet deleveraging cycle, actually leads to an economic recovery.  This is particularly troublesome when looking at a large portion of the population rapidly heading towards retirement whom will become net drawers versus net contributors to the economic system. The important point for investors, who have a limited amount of time to plan and save for retirement, is that "hope" and "getting back to even" are not successful investment strategies.

If you still require proof that in the short term, market action is driven by perceptions and sentiment rather than reality, here it is. It is worth quoting again what Mrs. Merkel said in Ottawa in toto:

“The European Central Bank, although it is of course independent, is completely in line with what we’ve said all along. And the results of the meeting of the central bank and their decisions, actually shows that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the Euro.”

Does this sound like 'unlimited bond buying without preconditions' to anyone? No? Investors seemed to think that is what it meant. We see no painless way out for Spain, regardless of what ultimately happens. Even if the ECB were to act without conditionality or limits, it could not possibly alter the underlying solvency problems -  and this isn't going to happen anyway. So what are markets currently pricing in? Everybody seems quite certain of a happy end at the moment. The bet is that massive central bank intervention is heading our way in the near future and will boost asset prices further. This is a mindset that has very likely set up the markets for disappointment.

Government Was Just Trying to "Foam the Runway" to Help Giant Banks

Forty five years after the War on Poverty began, there are 49 million Americans living in poverty. That’s a solid good return on the $16 trillion spent so far. It’s on par with the 16 year zero percent real return in the stock market. We have produced a vast underclass of ignorant, uneducated, illiterate, dependent people who have become a huge voting block for the Democratic Party. Politicians, on the left, promise more entitlements to these people in order to get elected. Politicians on the right will not cut the entitlements for fear of being branded as uncaring. The Republicans agree to keep the welfare state growing and the Democrats agree to keep the warfare state growing -bipartisanship in all its glory. And the middle class has been caught in a pincer movement between the free shit entitlement army and the free shit corporate army. The oligarchs have been incredibly effective at using their control of the media, academia and ideological think tanks to keep the middle class ire focused upon the lower classes. While the middle class is fixated on people making $13,400 per year, the ultra-wealthy are bribing politicians to pass laws and create tax loopholes, netting them billions of ill-gotten loot. These specialists at Edward Bernays propaganda techniques were actually able to gain overwhelming support from the middle class for the repeal of estate taxes by rebranding them “death taxes”, even though the estate tax only impacts 15,000 households out of 117 million households in the U.S. The .01% won again.

But I would contend that you need to be careful for what you wish for as something has happened to the relationship between bonds and stocks over the past 2 years.

No wonder one third of Americans are obese. The crap we are shoveling into our bodies is on par with the misinformation, propaganda and lies that are being programmed into our minds by government bureaucrats, corrupt politicians, corporate media gurus, and central banker puppets. Chief Clinton propaganda mouthpiece, James Carville, famously remarked during the 1992 presidential campaign that, “It’s the economy, stupid”. Clinton was able to successfully convince the American voters that George Bush’s handling of the economy caused the 1991 recession. In retrospect, it was revealed the economy had been recovering for months prior to the election. No one could ever accuse the American people of being perceptive, realistic or critical thinking when it comes to economics, math, history or distinguishing between truth or lies. Our government controlled public school system has successfully dumbed down the populace to a level where they enjoy their slavery and prefer conscious ignorance to critical thought.