Current 'Wealth' Is Transitory: "The Risks Of Failing To Act Should Not Be Underestimated"

Tyler Durden's picture

Excerpted from John Hussman's Weekly Comment,

Investors who feel that zero interest rate policy offers them “no choice” but to hold stocks are likely choosing to experience negative returns instead of zero. While millions of investors appear to have the same expectation that they will be able to sell before everyone else, the question “sell to whom?” will probably remain unanswered until it is too late.


It’s an unfortunate situation, but much of what investors view as “wealth” here is little but transitory quotes on a screen and blotches of ink on pieces of paper that have today’s date on them. Investors seem to have forgotten how that works. Few are likely to realize that apparent wealth by selling, and those that do will essentially be redistributing it from the investors who buy. Meanwhile, don’t confuse time to sell with opportunity to sell. Trading volume remains quite tepid, and the majority of that volume represents existing owners exchanging what they hold rather than outright entry and exit. The investors who successfully leave the equity market at current valuations will exit through a needle’s eye.

Implied volatility in S&P 500 index options fell to just 10.3% last week, indicating enormous complacency about potential risk. I’ve noted before that extreme overvalued, overbought, overbullish conditions tend to feature “unpleasant skew”: the raw probability of an advance is typically greater than the probability of a decline, so the market tends to achieve a series of successive but fairly marginal new highs, which can feel excruciating for investors in a defensive position. The “skew” part is that while the raw probability favors an advance, the remaining probability often features vertical drops that can wipe out weeks or months of market gains in a handful of trading days. We’ve certainly seen an unusual persistence of overvalued, overbought, overbullish conditions without consequence in recent quarters, but it is notable that the implied skew in S&P 500 index options has soared.



Indeed, the ratio of implied skew to implied volatility spiked to the highest level in history on Friday.


The ratio of market capitalization to GDP, which Warren Buffett (correctly) observed in a 2001 Fortune interview is “probably the single best measure of where valuations stand at any given moment” is now about 150% (not just 50%) above its pre-bubble norm, even imputing a rebound in Q2 GDP growth. Of course, Buffett also wrote "A group of lemmings looks like a pack of individualists compared with Wall Street when it gets a concept in its teeth" - which may explain why Wall Street seems so entranced with the concept of QE instead of actually doing the math.



The ratio of market capitalization to GDP, presented below on an inverted scale, is beyond every point in history except for the final quarter of 1999 and the first two quarters of 2000.


As The BIS warned recently...

“The risks of failing to act should not be underestimated.”

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TeamDepends's picture

DOW 18000, bow down bitches!!!!

Boris Alatovkrap's picture

Make it your own money in Zimbabwe Stock Exchange!

holdbuysell's picture

Yup. Dow could go to 100K but in the words of Kyle Bass, it won't buy you three eggs.

To boot, when the currency is collapsing and the stock market is rocketing as result, remember there's a three day settlement period that you'll need to sit through before you can actually spend your winnings on actual stuff.

Check that. In rethinking, maybe you can buy 1.5 eggs by the time the settlement goes through.

813kml's picture

Too risky, I'm going to plow my millions back into the Nigerian exchange as soon as that exiled prince I loaned my life savings to cuts me a check.

TeamDepends's picture

But your amp still goes up to 11, dunnit?  'Cuz if not, well, that changes everything, dunnit?

Dr Benway's picture

But there is one group that does make cash gains from unrealized profits on ramped stock markets, namely the fund managers that do the ramping. Unrealized profits lead to fees and bonuses for pension fund managers, whether these "profits" are ultimately realizable or not. This is a seldom recognized systemic source of overvaluation.

Check out my newly updated blog on financial crime:

Sudden Debt's picture

The fact that the dow is now so high.... Without any serious fundamentals... Tells me we'll see dow 34000 before we see Dow 13000

It makes no sence but so is the current valuation and the Fed will keep on printing and will even increase it.

The dow is a representation of inflation and i think in that way, it's priced right for the near future when reality will sink in.

When they drop de dollar for example, the dow will be at 200k. Sure the economy will be in the craphouse but it's not like it's linked.

WhackoWarner's picture

What does that say to the premise that "comes the time to sell gold is when 1 oz.=Dow"   ???


seek's picture

I agree, and so do the charts from the Weimar Republic:

Now here's an interesting tidbit -- if you survived the hyperinflation without selling, you were up in USD terms. It hadn't occurred to me before, but part of the runup in US stocks could be the ultra-wealthy moving money in, knowing a collapse will come and that they'll still be better off. After all, they're holding shares in a company, and when it's valuation changes from USD to SDR or New USD or whatever the fuck it is, they'll have preserved at least some of their wealth.

It's messed up, but there's historical justification for it. I'll stick with PMs myself.

Urban Redneck's picture

Something I posted in Oct last year in re: Fergusson's book. The fact the Maestro of Mad Money Printing Press Pseudoscience beat BOTH gold and domestic stocks in the Weimar weirdness was rather surprising. But since neo-Keynesianism is now a global phenomenon, a hat trick would be a tall order.

But he's the rather more substantial problem I have with the gold-bug line- If granny had simply sold her marks and bought GBP in 1921 when gold was trading at 535p/oz she could have sold those very same fiat that JM Keynes himself was busy devaluing to pay off Britain's War/Empire debts and then bought 25% MOAR GOLD! with the same supply of JMK's finest 1-ply in 1925 at 427p/oz after the hyperinflation.

If granny had a stock broker and wanted to look beyond the Continent or the Frankfurt exchange, in 1921 the US was just coming out of a depression and kicking off the Roaring 20's -- she could have ridden the DOW from a low of 63 up to just over a hundred, and then bought EVEN MOAR GOLD! without her broker outperforming his benchmark. And if she was Jewish then she would already have the paper share certificates to burn at over 150 prior her flight from the Nazis in the later 30's (and that price includes the unrealized losses in the 1929 crash, and bypasses the risk of George Soros or his daddy finding the finding the gold Charlie Munger thought it was wise to sew into their clothes, after the Nazis had already slammed the exit door closed on that maneuver).

In order to say stocks didn't do as well as gold (which didn't do as well a Keynes) you have to confine yourself to the local stock market (priced in a hyper-inflating currency) and pick losers (either by virtue of timing or bankruptcy). It's certainly possible, and there is no bankruptcy risk in physical gold, but that doesn't make gold the "best investment".

Cognitive Dissonance's picture

"I think we can fit a few more souls on this side of the ship." - Goldman Sachs

OpenEyes's picture

He who panics first panics best

Shad_ow's picture

Only enough life boats for the 1% though.  Build you own at home and hunker down.


sixsigma cygnusatratus's picture

But...I thought it would be different this time, because..."the new economy, emerging markets, better understanding of highly sophisticated economic models...,etc."  Besides, they know what they're doing so they won't let it happen again; this sucker is iceberg-proof (just like the Lusitania)!

Hee hee hee! 

ZerOhead's picture



Obama is bringing "manufacturing" back to America

 "Is an iPhone made in China and exported to Europe a U.S. export?

Is an Apple executive a manufacturing worker?

Yes, and yes.  At least those could become the answers if a new proposal afoot among some in the administration is allowed to take effect.  Federal agencies grouped under the bland-sounding Economic Classification Policy Committee (ECPC) are proposing to radically redefine U.S. manufacturing and trade statistics.

Under the proposal, U.S. firms that have offshored their production abroad – like Apple – would become “factoryless goods” manufacturers.  The foreign factories that actually manufacture the goods – like the notorious iPhone-producing Foxconn factories in China – would no longer be manufacturers, but “service” providers for the rebranded “manufacturing” firms like Apple.

It appears the administration has been reading Orwell.

kowalli's picture

It's like drugs and prostitution were included in GDP...

ZerOhead's picture

That's Italy for now but I wouldn't be surprised...


"Italy will include prostitution and illegal drug sales in the gross domestic product calculation this year, a boost for its chronically stagnant economy and Prime Minister Matteo Renzi’s effort to meet deficit targets.

Drugs, prostitution and smuggling will be part of GDP as of 2014 and prior-year figures will be adjusted to reflect the change in methodology, the Istat national statistics office said today. The revision was made to comply with European Union rules, it said."

Mesquite's picture

If they could just get 0.05 / lb for bs..

.could eliminate ALL the debt..!!

I Write Code's picture

I suspect a lot of this is already done, this would only make it official.

But they won't you know, because if they impute all that activity to Apple you know why - so they can tax it.  I don't think Apple would like that.

homiegot's picture

Why do you think he's bringing in Central Americans?

Who was that masked man's picture

The DOW is just one letter short of DOWN.

813kml's picture

And four letters short of SCAM.

Dutti's picture

Are the US and other nations not continuing to print money? Did the stock market in Venezuela and Argentina multiply because they are model countries of smart government?

Yen Cross's picture

   With the markets so levered up millions of investors will be selling calls to cover their positions which in turn will make buying puts a nightmare for positions that are long term and not as levered for protection. The door will slam shut like a 'bear trap (sic) on longs.".

DOGGONE's picture

Heads out in the light
Look at these histories:

The Public Be Suckered

Maybe: write what you reckon!

Lucifer618's picture

Earnigs will eventually bring everything down, down down!!!

Too Big 2's picture

Damn the torpedos!  We must stay the course and adhere to the game plan that Mr. Greenspan, Mr. Bernake, Mr. Yellen, and finally the oh so brilliant Nobel Price winning NY Times columnist, Mrs. Krugman, have laid out. 

If they can only figure out a way around those pesky terrorist Tea Party(ers) so they could raise taxes, raise the min wage to $18/hr, and allow 100,000,000 undocumented immigrants into the USA we would all be better off.  The economic benefits would put the USA on par with....well...well...uh... what was the name of that successful country that did this???     

August's picture

>>>allow 100,000,000 undocumented immigrants into the USA we would all be better off.

I know it's difficult to grasp, but in Myanmar everyone has servants.

The US Chamber of Commerce understands this deep truth.

I Write Code's picture


Implied volatility in S&P 500 index options fell to just 10.3% last week, indicating enormous complacency about potential risk.

No, that is not how it works, the "psychological" complacency element in pricing stuff tends to be tiny, most of the quantitative price or value simply traces where PRICES ACTUALLY WENT, and Ms. Yellen has had that screwed down to nothing since six months before she took office.

If you want to say actual prices are "complacent" then you are simply speaking gibberish.


So are people planning to dump all their equities as soon as interest rates blip up?  No.  Some pros may try to play that way, but few retail customers.  Who are we talking about here?  So what's the best case scenario?  I dunno, ask Mr. Bernanke wtf he was thinking when he put is into this.  But I assume it's a year or two of flat equities market as QE ends and rates start to crawl up.  Flat-ish but say down 5% to 10% overall each year, but the leading stocks should do somewhat better, flat to 5% down.  Especially achievable *if* as planned the economy (anybody remember the economy!?) actually picks up a bit at the same time.  THAT was Bernanke's plan, and that's the weakest element of it.


And these are just the last installment payments on getting us back out of 2008.

Kreditanstalt's picture

"wipe out weeks or months of market gains"???

WHAT "market gains"?  There haven't been any...and this writer (who states that unrealized gains are not wealth) now counts them as "market gains"?

AdvancingTime's picture

I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large  percentage of wealth into intangible products or goods. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.

 It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it  leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  More in the article below.