John Hussman: "Make No Mistake - This Is An Equity Bubble, And A Highly Advanced One"

Tyler Durden's picture

In case someone needs a beyond idiotic op-ed on the state of the market, we urge them to read the following stunner from USA Today (which is simply a syndicated piece from the Motley Fool, complete with Batman style graphics). Beyond idiotic because in addition to quoting the perpetually amusing Stony Brook assistant professor, Noah Smith, who has never held a job outside of academia and is thus a credible source on all things markety (to wit: "The value of a financial asset is the discounted present value of its future payoffs, and when the discount rate -- of which the Fed interest rate is a component -- goes down, the true fundamental value of risky assets goes up mechanically and automatically. That's rational price appreciation, not a bubble." And by that logic under NIRP the value of an asset is... what? +??) it says this: "Stock prices correct all the time. But what's important to remember is that a correction isn't a bubble." Yes, a correction is not a bubble: it is the result of one, and usually transforms into something far worse once the bubble pops.

Entertaining propaganda aside, for some actually astute observations on the state of the market bubble we go to John Hussman, someone whose opinion on such issues does matter.

Selected excerpts from: Yes, This Is An Equity Bubble

Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000. The median price/revenue ratio of S&P 500 components is already far above the 2000 level, and the average across S&P 500 components is nearly the same as in 2000. The extent of this bubble is also partially obscured by record high profit margins that make P/E ratios on single-year measures seem less extreme (though the forward operating P/E of the S&P 500 is already beyond its 2007 peak even without accounting for margins).

Recall also that the ratio of nonfinancial market capitalization to GDP is presently about 1.35, versus a pre-bubble historical norm of about 0.55 and an extreme at the 2000 peak of 1.54. This measure is better correlated with actual subsequent market returns than nearly any alternative, as Warren Buffett also observed in a 2001 Fortune interview. So if one wishes to use the 2000 bubble peak as an objective, we suggest that it would take another 15% market advance to match that highest valuation extreme in history – a point that was predictably followed by a decade of negative returns for the S&P 500, averaging a nominal total return, including dividends, of just 3.7% annually in the more than 14 years since that peak, and even then only because valuations have again approached those previous bubble extremes. The blue line on the chart below shows market cap / GDP on an inverted left (log) scale, the red line shows the actual subsequent 10-year annual nominal total return of the S&P 500.

All of that said, the simple fact is that the
primary driver of the market here is not valuation, or even
fundamentals, but perception. The perception is that somehow the
Federal Reserve has the power to keep the stock market in suspended and
even diagonally advancing animation, and that zero interest rates
offer “no choice” but to hold equities
. Be careful here. What’s
actually true is that the Fed has now created $4 trillion of idle
currency and bank reserves that must be held by someone, and because
investors perceive risky assets as having no risk, they have
been willing to hold them in search of any near-term return greater
than zero. What is actually true is that even an additional year
of zero interest rates beyond present expectations would only be worth
a roughly 4% bump to market valuations. Given the current perceptions
of investors, the Federal Reserve can certainly postpone the collapse
of this bubble, but only by making the eventual outcome that much worse.

Remember how these things unwound after 1929 (even
before the add-on policy mistakes that created the Depression), 1972,
1987, 2000 and 2007 – all market peaks that uniquely shared the same
extreme overvalued, overbought, overbullish syndromes that have been
sustained even longer in the present half-cycle. These speculative
episodes don’t unwind slowly once risk perceptions change
. The shift in
risk perceptions is often accompanied by deteriorating market
internals and widening credit spreads slightly before the major indices
are in full retreat, but not always. Sometimes the shift comes in
response to an unexpected shock, and other times for no apparent reason
at all. Ultimately though, investors treat risky assets as risky
assets. At that point, investors become increasingly eager to hold
truly risk-free securities regardless of their yield. That’s when the
music stops. At that point, there is suddenly no bidder left for risky
and overvalued securities anywhere near prevailing levels.

History suggests that when that moment comes, the
first losses come quickly. Many trend-followers who promised themselves
to sell on the “break” suddenly can’t imagine selling the market
10-20% below its high, especially after a long bull market where every
dip was a buying opportunity. This is why many investors who think they
can get out actually don’t get out. Still, some do sell, and when
those trend-following sell signals occur at widely-followed threshholds
(as they did in 1987), the follow-through can be swift.

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Cattender's picture

the whole thing is fake. i have ZERO doubt about it..

Democratic koolaid's picture

The cup it alittle empty? So is it not due to fill back up?

Chris Jusset's picture

There has NEVER been an equity bubble that is MORE OBVIOUS than the current BUBBLE (which has been very deliberately inflated by the Fed).

It's simple: for the past 6 years, we've had intentional, well-planned BUBBLE BLOWING by the Fed (with ZIRP, QE, etc.).

remain calm's picture

Its not a bubble till it pops

economics9698's picture

I am just glad the bastards slammed silver, buying.

Drunk In Church's picture

Stay as far away from metal as you can.  Any metal.  When this bitch pops, you are gonna see deflation like you've never seen before.  The dollar will be king.  Bitchez.

Colonel Klink's picture

Can you create a username of "I'm a blog spamming asshole", so we can keep track of you?

FreedomGuy's picture

All markets are fake. Most everything is fixed from the price of labor to interest rates. The central planners are in the business of manipulating everything to a proscribed end.

Richard Chesler's picture

Translation: Back up the truck and load up on stocks. The corrupt state of affairs brought by Obozo and his handlers will remain until at least the spring of 2016.

Fraud and change bitchez!


jarana's picture

Maybe the electoral potential for some powerful groups of interests in a prior-to-2016-elections crash is too sweet to let it be...

Who knows.

I think this whole STOCKry has more intrinsic value as an entertainment than the one actually discounted by the INvestors, and I'm acting accordingly.

Make your bets!! ;)

rum_runner's picture

Yeah.. if only Romney had been elected.  If Rand Paul doesn't get elected or some other third party candidate in 2016 I am going to throw in the towel.  The Red/Blue pendulum is like the devil convincing the world he doesn't exist.

max2205's picture

We can only hope. I expect a pretty big blowoff move and reverse

3% was normal.....might be 6% this time

Cattender's picture

Fuck even Marketwatch has been saying it.....

I Write Code's picture

Then it's guaranteed bogus.

ekm1's picture

Every single point of Dow about eight thousand is just HFT point, nothing to do with the economy.


TRIPLE LEHMAN is imminent for manual trigger, in my view.

Economy is dying.

World has accelerated USD avoidance.



ThroxxOfVron's picture

We had a triple Lehman; -remember Bear Stearns and an AIG ?

Actually AIG was probably a triple Lehman all on it's own since it would probably have buried Goldman and a few others if the Oligarchy hadn't had Hank Paulson on deck to intercede.

Actually what ever happened to Wachovia and CountryWide?

I think that You need to up reexamine the destruction level of the event you are predicting.


P.S.  I think You are far closer to the truth than removed from it.  I'm just having a bit of fun pointing out that the level of destruction You are contemplating kinda reminds me of:

ekm1's picture

Financial destruction is a highly positive event for the real economy


We ought to get on our knees and pray for financial destructions of excessive claims on real assets and output

ThroxxOfVron's picture

You and I apparently have very similar forms of ( what ordinary persons would mistakenly conclude are religious ) convictions.

You are damned right I want the excessive claims and naked shorts vaporized.

ekm1's picture

It is an absolute inevitability.

If it doesn't occur in a normal way, then assassinations of executives will make it happen, very unfortunately.

HumanResourceProblem's picture

They don't allow that any more.

ekm1's picture

If not soon, then bullets through heads will solve the problem, very, very, very unfortunately.

I pray bank lobby surrenders without assassinations, I pray to God

ThroxxOfVron's picture

These are not fools; these are very clever and deliverate people.   I don't for a moment believe that they do not understand the ramifications of what they have wrought.

They refuse to restrain themselves and find less parasitic and destructive ways to lead their lives.

Not assassinations; executions.  

Assassinations would imply lawless acts undertaken for profit against persons who may be innocent.

Executions implies lawful acts undertaken for the public good against persons who have been proven guilty.

Indeed unfortunate; but, it is their choice to hazard such a conclusion.

You would think that such intelligent persons would heed voices such as ours warning them...


It will be painful to carry the self doubt and girisly memories afterwards, and some will.  Some will also harbor regret and horror.   There may be lingering stigma upon those who finally take action despite the necessity.

Part of the problem is that they don't think anyone is going to stand up and do it.

They will probably have to be proven dreadfully wrong in a very public way before they yield.

A terrible reckoning comes.

Yes.   I'm deeply saddened that it seems destined to come once again down to trees and rope and the like...


shovelhead's picture

I love the epic drama scenes but the more likely scenario will be a very pleasant retirement in a non-extradition country.

Personally, I would go with the false passport, a scruffy beard and a watercolor easle in the South of France.

ThirteenthFloor's picture

FOMC board members owned significant shares of AIG that's why it was bailed out. Bear/Furman was long on Gold, it was killed. Lehman was neck deep in mortgages, took bullet. GS was made whole on some Derivs and the Buffman got the call before the news that GS would be made whole so he could ride some gain in exchange for promoting higher taxes on the nuvo-rich. So we got 20/20 on history...who takes the next bullet ?

Bet on JPM, that's why JD leaves dodge with bogus throat cancer. The selling of 1 Chase to China is sign # 2.

Hearing some bad stuff at WF too.

Eireann go Brach's picture

It will pop before Obongo leaves office, karma will take care of that! Then all Americans will be allowed a one day hall pass, to beat anyone you know that voted for Obama!

tankster's picture

As if Romney would have been any better...

Ned Zeppelin's picture

Presidents have nothing to do wirh this, only morons think so.

Tulpa's picture

Speaking on behalf of the morons, who appointed Yellen again?

ThirteenthFloor's picture

Zep is correct its CFR. Obama just does the public speech. Read some CFR shit if you doubt my statement, or Greenspan's '05 Atlanta speech.

ThirteenthFloor's picture

Elections are rigged in multiple ways. Somalians like to vote multiple times for Dems, and if u study '08 carefully mcCain was leading until Lehman failed, Bush then made his "this sucker is going down speech", and no Rep could win, esp. one with shrapnel in the head.then Obama made his Commonwealth visit to pick up $$ from Soros and Club of Isles clan.

Only 27-30 per intelligent aware Americans even vote. Chk out stats.

Then you got Diebold, and John Boner changing the rules and bylaws at the convention.
Voting is obsolete thanks to the fascist state.

devo's picture

Leverage matters much more than valuations. This guy is living in the past. So long as liquidity/leverage continue, prices go higher.

However, for Goldman et al to make big bonus money, they will have to go short. This would be the only way we see a crash--if the white shoe boys want a bigger Christmas bonus. Not much bonus money to be made when everyone is on one side of a trade.

Freddie's picture

The United States is going full Zimbabwe retard.  Open borders, no jobs, EBT, money printing, auto companies owned by taxpayer and unions, banks engaged in massive fraud.   I said in 2008 that Obama would by Mugabe 2 but he is worse.

Oldwood's picture

The reality is hard to argue, but history is yet to be written. The question is who will following generations blame for the world they have, or if they will even care. Normalcy bias will shift and if the assholes have guessed correctly state dependency will trump all other alternatives.

Freddie's picture

Here is bravery folks.   Ukrainian people saying F You! to the Maidan-Kiev vermin trying to draft their sons and fathers for the NWO war.  The moms are burning the draft notices.  Sad that Americans did not do that for LBJ'$$ Lyndon Baines Goldberg's Vietnam War.

Where is The US Military and Pentagon defending The US Constitution?  

I have more respect for these brave Ukrainian mothers telling the Kiev scum to shove their US State Dept Nudelman war up their arses.

kill switch's picture


What appened to:


Silver Fixing Lawsuit: Deutsche Bank, HSBC And Bank Of Nova Scotia Manipulated Daily Benchmark Price


Was that deleted??

I Write Code's picture

It's ZIRP and QE.

QE is supposed to taper down, but with unknown effects on ZIRP - the market seems dubious.

And the Fed's $4t balance sheet is not likely to decrease anytime soon.

And the fiscal deficits will continue as long as Obumble remains in the White House.

The money was directed to equities by Ben W. Bernanke his own self.  Will he, or the Fed, ring a bell when it's over?

The most likely resolution is a spike of inflation in which most equities will melt *up*, preserving capital reasonably well.  Presumably gold will also serve this function, but it's hard to guess to exactly what degree.  And Bitcoin?  Shrug.  No idea.  Anyway, if any of this stuff is true, it's a bubble but one in which you need to participate, preferably retroactively to mid-2008.

andrewp111's picture

Be careful. A massive spurt of general inflation could bail out this bubble, but such an event is extremely dependent on politics. Sustainable general inflation that puts a "step function" on the price of everything requires rising wages. Without rising wages, any commodity inflation is likely to cause the return of the Depression instead. As long as we have divided government in DC, rising wages are unlikely to happen. So unless Obama gets impeached and uses that impeachment to rally his base and capture complete control of Congress in the Midterm, I wouldn't bet on general inflation bailing anything out.

Professorlocknload's picture


But,,, rising wages generally lag in the cycle. Sort of a "Trickle Through" thing. And, to paraphrase Hendry, 'Some $Trillion will do it.'

If the owner and creator of the currency wants inflation (devaluation), it will be.

Only a matter of time.

I Write Code's picture

All good points, and yet those who are running the show care very little about wage levels, if they want some inflation for their monetary games they will do it first and fix it later.  The problem is that so far, inflation has not come when called.  So they keep calling for it louder and louder, and eventually it just may answer.

Even more to the point they ARE getting their inflation, just keeping it out of the official deflator.  That inflation is in some part why the nominal stock prices look higher.  The trick is not to mistake the inflated numbers for a bubble, totally different things.

kchrisc's picture

Equities are just the bubble in the bubble that is the Rothschild Petro$ bubble.

saveUSsavers's picture

The TBTF "Gotmefreemoney" Primary Dealer Mafia Underwiters WILL PROP THIS UNTIL ***ALIBABA PAYDAY****  Tyler- you agree? Watch end of month prop into the IPO in August, imho..

Keltner Channel Surf's picture

A bubble that’s “highly advanced” -- just like the bubble-headed Talosians from Star Trek, an advanced civilization that became so dependent on an ability to create “real” illusions, they lost the capacity to live, endured unending boredom (and an associated lack of volatility), and began trapping traders, er, that is, space travelers to use as the basis for their addictive illusions . . .

catch edge ghost's picture

That's all good except it forgets that The Fed and its Friends are bigger than the Market. There is no Market.

I think most folks fail to realize that among the billionaire-parasite-richer-than-you crowd exists also a great many delusional utopians. It's the utopians you can count on to never let assets decline in a meaningful way ever again. Okay, maybe one more time, but after that one it doesn't matter, right?

As of right now, the price of everything should be very close to zero, but it is not. That's hyper-controlled inflation. And it will continue far longer than you or I will. But be not disheartened, fellow doomer, you'll still get to witness the farce we call the US Dollar descend into that special place in Hell where it belongs, if you quit smoking, eat well and exercise, etc. 

I firmly stand by my predictions the DOW will be OVER 9000! before the end of the year.

Ben Ghazi's picture

Dow OVER 9000?


Already there, great prediction.

The Most Interesting Frog in the World's picture

Actually I think the only dollars going bye bye are the ones in our bank accounts.

buzzsaw99's picture

What dive is he gonna do?

The Triple Lindy.

Melon! Melon! Melon!

There will be an additional springboard installed...