Hussman Warns S&P 500 Over-Valuation Now Higher Than Housing In 2006

Tyler Durden's picture


Excerpted from Hussman Funds Market Comment,

Based on valuation metrics that have demonstrated a near-90% correlation with subsequent 10-year S&P 500 total returns, not only historically but also in recent decades, we estimate that U.S. equities are more than 100% above the level that would be associated with historically normal future returns. We presently estimate 10-year nominal total returns for the S&P 500 averaging just 2.2% annually over the coming decade, with zero or negative nominal total returns on every horizon of less than 7 years. Regardless of very short-term market direction, it is urgent for investors to understand where the equity markets are positioned in the context of the full cycle.

It is the series of extreme instances over the past year that give investors the hope and delusion that historically reckless market conditions will lead only to further gains and greater highs. This is a mistake born of complacency in the face of a nearly uninterrupted, Fed-enabled 5-year market advance, and is the same mistake that was made in 2000 and again in 2007. By the time the present market cycle is completed, we expect the S&P 500 to be at least 40% lower than present levels. Only the reliance on historically unreliable valuation metrics, and what Galbraith called the “extreme brevity of financial memory” makes that assertion seem the least bit controversial.

Investors and policy-makers that focus attention on some alternative valuation measure (usually because it seems pleasantly benign) would be well-advised to examine the data, and compare the historical relationship between competing measures and actual subsequent market returns.

It is incorrect to believe that the 2008-2009 market plunge and financial crisis were caused by the housing bubble. The housing bubble was merely the expression of a very specific underlying dynamic. The true cause of that episode can be found earlier, in Federal Reserve policies that suppressed short-term interest rates following the 2000-2002 recession, and provoked a multi-year speculative “reach for yield” into mortgage securities. Wall Street was quite happy to supply the desired “product” to investors who – observing that the housing market had never experienced major losses – misinvested trillions of dollars of savings, chasing mortgage securities and financing a speculative bubble. Of course, the only way to generate enough “product” was to make mortgage loans of progressively lower quality to anyone with a pulse. To believe that the housing bubble caused the crash was is to ignore its origin in Federal Reserve policies that forced investors to reach for yield.

Tragically, the Federal Reserve has done the same thing again – starving investors of safe returns, and promoting a reach for yield into increasingly elevated and speculative assets. Thinking about the crisis only from the perspective of housing, investors and policy-makers have allowed the same process to play out more broadly in the equity market.

On a quantitative basis, the overvaluation of the equity market is greater percentage-wise, and greater dollar-wise, than the overvaluation of housing in 2006-2007. We fully expect that from present valuations, U.S. stocks will produce zero or negative returns on every horizon shorter than 7 years.

There is no antidote or alchemy that will allow a buy-and-hold approach to squeeze water from this stone.

There is no painless monetary fix that will shift the allocation of capital toward productive investment and away from distortive speculation.

Instead, one must wait for the rain. Impatient, crowd-following investors are all too willing to wastefully scatter seeds onto this parched desert, thinking that this is their only chance to sow. To wait patiently in the expectation of fertile soil and rain is not an act of pessimism, but an act of optimism and informed experience.

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Mon, 03/10/2014 - 17:06 | 4532027 economics9698
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Take a look at the Venezuelian stock market for our future.

Mon, 03/10/2014 - 19:52 | 4532652 National Blessing
National Blessing's picture

Full cycle.  There.  I mentioned it.  Bastards.

Mon, 03/10/2014 - 17:18 | 4532069 flacon
flacon's picture

W.W.C.S.D. (What Would Chuck Schumer Do?)

Mon, 03/10/2014 - 17:24 | 4532087 Kilgore Trout
Kilgore Trout's picture

Get to work, Mr. Yellen!

Mon, 03/10/2014 - 19:51 | 4532646 National Blessing
National Blessing's picture

The stock market inflated?  Wow, only a genius could figure that one out.  He must have went to Harvard.  Bastards.

Mon, 03/10/2014 - 17:26 | 4532095 yogibear
yogibear's picture

"Get to work Mr Bernanke"

Get to work printing so we can spend more.

Maybe the Russians, Chinese, Saudis and Indians can join in and dump the US dollar. Stop playing the US game of insolvency,

Mon, 03/10/2014 - 18:07 | 4532290 Abi Normal
Abi Normal's picture

Everything is a bubble, why, it's bubblicious!!!  America, no make that the world, is like a balloon looking for a pin to pop it!

Mon, 03/10/2014 - 21:01 | 4532942 NFisher
NFisher's picture

You know whats overvalued? Hussman's opinion is.

Mon, 03/10/2014 - 17:10 | 4532044 Soul Glow
Soul Glow's picture

Paging Captain Obvious.

Mon, 03/10/2014 - 17:13 | 4532052 Bennie Noakes
Bennie Noakes's picture

This would be concerning except that Mr. Hussman has been offering equally convincing arguments as to why a market crash is imminent for the past few years now. The market will crash, but in its own good time.

Mr. Hussman is the bear who cried wolf.

Mon, 03/10/2014 - 19:26 | 4532570 asteroids
asteroids's picture

Selling a house or a mortgage takes months. Selling a stawk, takes seconds. The crash, when not if it comes, will be fast, and brutal.

Mon, 03/10/2014 - 19:58 | 4532682 Missiondweller
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I think many sophisticated investors are constantly amazed how long this has gone on.


I never would have believed this could continue past 2010. What do I know?

Mon, 03/10/2014 - 20:03 | 4532696 thamnosma
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That's not really true at all.  His analyses and investing all relate to historical risk/reward ratios.  He will be more or less invested and more or less hedged based upon his research.  After all, it's a long/short fund.  His funds were pretty fully invested with low hedges earlier in this rally.   As it has continued ad absurdum, he has been quite wary, especially over the last year.   I would say that reflects most of the people's thinking here.  By no means is Hussmann a perma-bull or a "crash crash" wolf as you attempt to label him.  

Tue, 03/11/2014 - 01:04 | 4533578 Muppet
Muppet's picture

I respect Hussman greatly.     However, investing in Hussman funds  has been catastrophic.   I bought in big in 2005/6 and sold in 2012 at breakeven.   Beginning 2009, Hussman funds have missed so much alpha.  Not just due to his "Depression era" back-testing but also missing gains since.  So when the collapse occurs, and when 40% is lost by other fund managers, will those invested in Hussman funds have done better?    Its very unclear.   

Lets say Hussman funds remain breakeven when most others soon fall 40%.   Well, those others will begin their fall from lofty heights due to recent  gains that Hussman funds did not accrue.   His funds haven't participated.   So when others fall by 40%, will Hussman shareholders have higher balances to finally show?    That is very hard to say.   Hussman has missed an incredible amount of alpha.... and this f-ing market continues to crush his chances.

I respect Hussman, but money matters and his performance is really nagging at this point.

Mon, 03/10/2014 - 17:17 | 4532063 Rathmullan
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Even Boris might have to go against her better judgement and taper this month. No, not because the S&P is in bubbleland, (afterall, that's the goal) but because there is a strong whiff of "USD reserve currency status loss" in the air.

Tue, 03/11/2014 - 05:48 | 4533732 Rodders75
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Yeah yeah yeah valuations are too high, etc etc. But what I want to see to tell me the market is in a bubble is prices going *parabolic* not moving in a orderly step fashion with higher lows and ST moving averages above LT ones, as today. Parabolic was the case in late '99. It is not today. I also want to see multiple bearish pundits chucking in the towel, not just a sprinkling like Hendry and Gross. I also want to see people giving up day jobs to trade stocks. Bears' views are framed by the recent reality. Yes the market will crash, but for the moment it is climbing the wall of worry. 

Mon, 03/10/2014 - 17:20 | 4532072 NOTaREALmerican
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I'm thinkin in a system with perpetually increasing optimism AND perpetually increasing debt (money) each sucessive "top" of the bubble must be higher than the previous high.

So, using my ruler on the computer monitor I'd say the top will be June 3rd 2016 @ 11:58am EDT.  

Until then, BATFATH. 

Mon, 03/10/2014 - 19:54 | 4532658 The Wisp
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Ever notice every doom prediction on Zero Hedge is always,  2 years Out..

Mon, 03/10/2014 - 17:22 | 4532073 ParkAveFlasher
ParkAveFlasher's picture

Just BTFEMVS (BTF equity market vinegar strokes).

Mon, 03/10/2014 - 17:23 | 4532086 Spungo
Spungo's picture

IMO, the market is not as overpriced as he thinks it is since the value of equity is always relative to other things. If you could get 10% on a government bond, stocks would need to pay at least 10% dividend to make any sense at all. When interest rates are zero, the fair market value of stocks is much higher. The market is also a lot more unstable when interest rates are too low. Instead of balancing your portfolio with stocks and bonds, it starts to make sense to borrow money to buy stocks. My personal opinion (based on nothing) is that stocks are about 30% too expensive. Markets always overshoot, so it's not unreasonable to expect a 50% drop from the peak of the current market to the bottom of the next bear market.

Mon, 03/10/2014 - 17:33 | 4532131 gdgenius
gdgenius's picture

Stocks are simply a claim on future cash flows, regardless of where interest rates are. 0% interest rates may make you want to go borrow money to buy stocks, but that doesn't mean you'll receive an adequate return for the risk you take. It doesn't matter if rates are at 20% or 0%, you still have to pay attention to the price you're paying...

Mon, 03/10/2014 - 17:26 | 4532094 ebworthen
ebworthen's picture

"There is no antidote or alchemy that will allow a buy-and-hold approach to squeeze water from this stone."

Right, which is why normal working middle-class folks are trapped in 401K's/I.R.A.'s/Pension Funds.

That and FED Q.E. are the hot air blowing up this latest bubble for the mammon lusting money changers.

Mon, 03/10/2014 - 17:28 | 4532102 BabylonDeer
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I've a Question for you guys:

What are the probabilities of US/FED creating a new currency with a value relationship of let's say 1/5(or 10 or whatever), that could technically cut off more than a half of the current US debt?

Mon, 03/10/2014 - 17:46 | 4532205 EndOfDayExit
EndOfDayExit's picture

And how would that cut down on the debt again? If only keeping the debt payable in the original dollars... but then they could as well just default 90% of it. Creating a new currency at a fraction of the old one does not really solve anything unless somebody is getting a haircut in the process of replacing one's old dollars with the new ones.

Mon, 03/10/2014 - 17:51 | 4532229 NOTaREALmerican
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Re:  that could technically cut off more than a half of the current US debt?

Why would they want to cut the US debt?

Mon, 03/10/2014 - 19:18 | 4532551 X_mloclaM
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The Austerity thread mentions jubilee, no doubt it's legit, however the reps are in banker pockets, or get in 'em, or get gotten, thus endgame is price inflation combined with collapsing economic activity (trust, trade), a monetary system reset after debts are no longer sufficient to settle trade (bank note counterpart to the Treasury buys less real assets, far quicker than expectations) and subjects are emotionally prone to "public ledger" suggestions from "i need a cause" lames

Mon, 03/10/2014 - 18:32 | 4532404 Fuh Querada
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100% according to Jim Willie - the new Scheiss dollar:

80% devaluation in 3 years (see latest interview with Greg Hunter)

Mon, 03/10/2014 - 17:29 | 4532107 TheRideNeverEnds
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The market may be higher than the housing bubble now but it will be higherer soon...

Mon, 03/10/2014 - 17:30 | 4532114 kito
kito's picture

hussman has been warning of overvaluation for years already. he has been getting his ass kicked by the bernank. poor guy couldnt separate logic from what he had to do as a fiduciary. 

Mon, 03/10/2014 - 18:26 | 4532379 LooseLee
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Logic. Do you know the meaning of the term?

Mon, 03/10/2014 - 19:23 | 4532564 X_mloclaM
X_mloclaM's picture

Precisely why your not a fiduciary, we know you, and your sad little commentaries, perhaps stay long Nikke in silver terms please and STFU

Mon, 03/10/2014 - 17:30 | 4532116 fonzannoon
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anyone else think this plane was skanked by aliens?  10 countries looking and nothing found. not one thing? it just vanished off satellite and poof, gone.

alien skank.

Mon, 03/10/2014 - 17:33 | 4532133 kito
kito's picture

fonz that should make people holding physical gold very nervous......

Mon, 03/10/2014 - 17:35 | 4532137 fonzannoon
fonzannoon's picture

I have never told any friends or family this but I have never seen an alien. ever.

Mon, 03/10/2014 - 17:39 | 4532166 kito
kito's picture

thats because they repress your memory. you need to see a hypnotherapist to verify. wait on second thought, probably not a good idea. you might learn they had probed you.

Mon, 03/10/2014 - 17:43 | 4532144 Jack D. Ripper
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Mon, 03/10/2014 - 17:43 | 4532183 PontifexMaximus
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Did u forget to hit the turbo sarc buttom?

Mon, 03/10/2014 - 18:05 | 4532285 Jack D. Ripper
Jack D. Ripper's picture

I personally think the Commies probably did it.

Or the plane might have taken a detour through the Twilight Zone. Paging Grant Sheckly!

Mon, 03/10/2014 - 17:39 | 4532162 Hulk
Hulk's picture

The plane and its occupants were raptured. Of the 7 billion on the planet, only 239 were good enough...

Mon, 03/10/2014 - 17:41 | 4532173 fonzannoon
fonzannoon's picture

when i was younger my appendix ruptured. does that count?

Mon, 03/10/2014 - 17:42 | 4532177 kito
kito's picture

it was a diversified plane. good petri sampling of earths inhabitants. i heard they were considering the u.n. but the they deemed the subjects rancid. 

Mon, 03/10/2014 - 17:47 | 4532212 fonzannoon
fonzannoon's picture

it's aliens. they took it. there is literally no better explanation. this has been weird from the start. people are becoming so docile they are willing to believe it vanished. no one gives a shit about anything anymore.

Mon, 03/10/2014 - 18:23 | 4532369 Landrew
Landrew's picture

I am not a religious person, but I laughed out loud! Thanks I needed that. I am flying 9.5 k miles in three weeks and it's one less thing to worry about ha!

Mon, 03/10/2014 - 18:18 | 4532340 tip e. canoe
tip e. canoe's picture

secure your tinfoil hat tight for this one, fonz:

about 2/3rds down, you'll find the following sentence:

The next three pictures, showing the circular grid energy formations surrounding the east coast of China and surrounding area:

read the following couple paragraphs, and take a close look at picture 3.

i have an old book that gives the exact lat/long of each vortex, have to dig it out cuz the spot where the plane disappeared looks darn close to #25.

Mon, 03/10/2014 - 18:42 | 4532442 tip e. canoe
tip e. canoe's picture

found it online:

vortex #25: 10.8100000 N, 103.2000000 E

plane disappearance : 6°55?15?N 103°34?43?E

presented with no comment.

Mon, 03/10/2014 - 19:50 | 4532642 BringOnTheAsteroid
BringOnTheAsteroid's picture

Oh, jesus george, you can't possibly be posting this stuff with anything but an incredibly large dose of sarcasm. I swear to god, this world is going fucking insane. We are no longer capable of seperating fact from fantasy. 

Fonz - I'm reaching out to you man, don't put ideas in peoples heads, they are dumb enough already.

Let me get this straight. Crystal grid, vortex shit made this plane vanish contravening one of the most basic laws of physics in the conservation of energy or, or , OR, the plane nosed over reasonably close to the water hitting it in a vertical dive before any debris had a chance to break away from the plane and it went straight to the bottom of the fucking ocean. 

It's a fucking big ocean people, you try and find a plane in a hundred thousand square miles of sea a few kilometres deep.

OH, jesus h christ, can an asteroid just hit this earth and put us all out of our own deluded misery.

Mon, 03/10/2014 - 20:07 | 4532720 fonzannoon
fonzannoon's picture

LOL I am half serious on this one Bring on the asteroid although I appreciate your position here. What the hell though, lets hash this out a bit since there is nothing else going on.

I have thought about the possibility that the plane hit the water at such an angle that it made a very small debris field. It makes sense. The two problems with that are 1) why no distress call? 2) what about the black box? They said it's shallow water pretty much the whole trip there. 50 meters deep or it should be easy to locate right?

So it's either the plane went down that whole way and there was no distress call because of either a hijack or suicidal pilot. Or the plane blew up in mid air and they have not found it yet. Or alien skank. So I am going with 1/3 percentage to the first two scenarios and 34% alien skank. 

Tue, 03/11/2014 - 04:17 | 4533700 BringOnTheAsteroid
BringOnTheAsteroid's picture

Easy to locate Fonz, no, not even in 10 metre of water. If you we're put I charge of the recovery operation what would you do, where on earth would you start. Loss of cabin pressure and resulting hypoxia, suicidal pilot as you mentioned, there can be so many possibilities I'd suggest we wait a couple of weeks before going all alien retard.

The problem I have with posts like E. Canoe made is that when this plane is found he won't retract the post and confess that it was a dumb fucking childish immature stupid innane unintellectual waste of time, it will be forgotten and yet another silly idea is propogated making people even dumber, people who don't have the logic or dissernment to know fact from fantasy. Have you seen the internet lately. We are seriously going insane. Between Nibiru, reptilian government infiltrators, hAARP, demons stealing babies, vortex crystal grids, time travel portals. Holy shit, we are going insane.

I'll make a $1000.00 bet with anyone on this site the plane will be located. I chose that figure because it's big enough to make the crystal vortex grid energy nexus people think hard about their fantasies.

I think we have all become so disenchanted with our lives that we cling to pure entertainment to give some shread of pleasure.

Your we are yellen statement away from a 10% ramp in the S&P all those weeks ago was dead on and even better because it didn't even require the statement from Yellen.

Mon, 03/10/2014 - 23:20 | 4533394 tip e. canoe
tip e. canoe's picture

1: obviously, you didn't grok the tinfoil disclaimer at the top which was in itself a response to a comment about aliens.

2: the only facts that are known at this point are that 1 plane carrying 200+ human beings disappeared without a trace.

3: correlation does not imply causation, including within the realm of the so-called laws of physics.

4: i find it more than slightly hilarious that my intelligence is questioned by someone who makes a conscious decision to call him/herself BringOnTheFuckingAsteroid.

Tue, 03/11/2014 - 04:37 | 4533708 BringOnTheAsteroid
BringOnTheAsteroid's picture

Come on E, nothing personal, you've got to admit there are some crazy people out there flooding the intramaweb with complete unadulterated crazy talk that others are reading and simply not smart enough to dissern as bullshit. Sure we might all be holograms In the snowdome of some alien mad scientist but extraordinary claims need . . , blah, you know the rest.

I might change my nic to BringOnTheFertilityVirus. No one can conceivably argue that humans have not out stayed their welcome on this planet. The unbelievable beauty of this tiny planet and look what we do. Mow down the forests and put up Palm oil plantations, kill rhinos so we can achieve better erections, kill majestic elephants for a mantle piece trinket, cover the earth in nuclear power plants, sodomise children beneath the cloth of religion, torture each other in ways that go well beyond sadism, torture animals for fun, heinously kill whales in the most brutal fashion, I could continue for days. I would like nothing more than to see the earth rid of human vermin.

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