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Hussman On "The Greatest Risk That Investors Face Here"
Excerpted from John Hussman's Weekly Market Comment,
My impression is that today’s near-absence of risk premiums is both unintentional and poorly appreciated. That is, investors have pushed up prices, but they still expect future returns on risky assets to be positive. Indeed, because all of this yield seeking has driven a persistent uptrend in speculative assets in recent years, investors seem to believe that “QE just makes prices go up” in a way that ensures a permanent future of diagonally escalating prices. Meanwhile, though QE has fostered an enormous speculative misallocation of capital, a recent Fed survey finds that the majority of Americans feel no better off compared with 5 years ago.
We increasingly see carry being confused with expected return. Carry is the difference between the annual yield of a security and money market interest rates. For example, Wall Street acts as if a 2% dividend yield on equities, or a 5% junk bond yield is enough to make these securities appropriate even for investors with short horizons, not factoring in any compensation for risk or likely capital losses. This is the same thinking that contributed to the housing bubble and subsequent collapse. Banks, hedge funds, and other financial players borrowed massively to accumulate subprime mortgage-backed securities, attempting to “leverage the spread” between the higher yielding and increasingly risky mortgage debt and the lower yield that they paid to depositors and other funding sources.
We shudder at how much risk is being delivered – knowingly or not – to investors who plan to retire even a year from now. Barron’s published an article on target-term funds last month with this gem (italics mine): “JPMorgan's 2015 target-term fund has a 42% equity allocation, below that of its peers. Its fund holds emerging-market equity and debt, junk bonds, and commodities.”
...it's helpful to be aware of how compressed risk premiums unwind. They rarely do so in one fell swoop, but they also rarely do so gradually and diagonally. Compressed risk premiums normalize in spikes.
...when risk premiums are historically compressed and showing early signs of normalizing even moderately, a great deal of downside damage is likely to follow. Some of it will be on virtually no news at all, because that normalization is baked in the cake, and is independent of interest rates. All that’s required is for investors to begin to remember that risky securities actually involve risk. In that environment, selling begets selling.
Remember: this outcome is baked in the cake because prices are already elevated and risk premiums are already compressed. Every episode of compressed risk premiums in history has been followed by a series of spikes that restore them to normal levels. It may be possible for monetary policy to drag the process out by helping to punctuate the selloffs with renewed speculation, but there’s no way to defer this process permanently. Nor would the effort be constructive, because the only thing that compressed risk premiums do is to misallocate scarce savings to unproductive uses, allowing weak borrowers to harness strong demand. We don’t believe that risk has been permanently removed from risky assets. The belief that it has is itself the greatest risk that investors face here.
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imo the greatest risk is to society at large, not infestors
nothing like putting up a snap-together mansion put in place without a foundation...
"Risky" you say?
Nah-h-h-h, not any more risky than putting everything you own on the green 100-to-1 slot on the roulette wheell!
so, what's wrong about that? I gamble, lose it all at the Indian Casino...no problem...ain't it my scratch?
It's not your scratch when you're leveraged up.
"All that’s required is for investors to begin to remember that risky securities actually involve risk."
Buy signal if I ever saw one.
Exactly, the bottom is in; shorts are gonna get BTFO as we go straight back to new highs with no downticks on no volume and bad news. All the selling for 2014 has happened, only buy orders from here till JAN15.
If something seems TOO GOOD To be True.... it most likely is.
Obama comes to mind.
Risky motherfucking casino here.....how rigged are the dice/tables/cards?
THAT MUCH????
Honey...let's go to the dime slots....and shitty buffet...
Savings, Savings, We don't need no sticking Savings!
The really big earners in recent years have benefited greatly from the surging stock prices as much of their income has come from financial markets and gains in equities. Many people seem to think this is the hope of our future.
When you have more than you need or want to put money away for a rainy day where do you store it? If you rated people on a "wealth chart" by how many tangible assets they owned you might be shocked to find much of the wealth people own is in paper and this is full of risk. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/08/where-wealth-is-held.html
Nice article, I would like to have seen how much (figures) of different kinds of hard assets are held by the wealthy. Perhaps other examples of hard assets and their pluses and minuses.
That depends on how well that 'investor' is connected to Washington. Theres nothing a little corporate welfare cant take care of.
So you politicians, please spare me your hypocrisy when you complain about entitlements and such.
The BIG PRINT has yet to come.
Indeed
There should be no such thing as "Investor" anymore; just trader or cash but preferably PMs. Wish I had some.
.
PM and cash alone produce nothing productive.
Invest in your kids or your own skills, all other investments appear to be Racketeering.
Good point about productivity and Value Added to Economy. Automation, Computers, Robots have greatly increased productivity in the USA. I guess STEM Work adds value to the USA except some of it is fake studies and fake results brought on by some Wealthy Enterprise.
We have plenty of Homes and business offices, so we don't need much construction for a while. Infrastructure, Highways, Bridges, Electric Power, Water management, Agriculture,
Greenspan Said we needed more Hospitality and Retail Services Employment.
Listen, I've met some of your kids. Stick with the stock market.
consider gold a call option on dollar failure
It won't rise in price as long as there is a paper market for gold derivatives but that doesn't mean it never will.
Gold is not "needed" by industry, hence a perfect wealth-storage-only vehicle. Physically held gold is also no one's liability, you have already been paid.
I learned these from FOFOA.
Sell the long t bond hard. I need to reload.
Depends on what you think is an investment personally i would rather preserve my Purchasing power
Like I give a fuck about anyone who has, or thinks he has, enough money to retire on next year. Livin' in the USSA has become a waking nightmare for a lot of us. So, again, FUCK INVESTORS!!! They deserve everything they get or don't get!
Yeah, you tell 'em! Confiscate their shit and give it to lazy bastards that spent everything their whole lives and saved nada.
That's about it, now isn't it?
Everywhere you look, doing the " wrong" thing is being rewarded. How in the hell are you supposed to learn from your mistakes, if you don't suffer the consequences? I'm as guilty as the next guy. It's a human thing. I'll go another step, it's a life form thing.
The system and the system organizers, have so screwed things up, to prop up the losers, that now it seems what's wrong is right, and what's right is wrong.
Sacrifice and save, and see where that gets you. A thinking person, or even a non thinking person, will only go so far. Then they call " no mas" and say " can't beat em,join em" it's fucked up, but it's survival in this new age.
My best investment advice, to a young one TODAY.
Get a .gov job, and ride that ponzi payroll and retirement train. The only real examples I know of, of people not worrying, are .gov employees, and a few friends and relatives that have old legacy positions with some corp monopolies. Old timers with Verizon, or the utilities.
Get a degree. Get a good job, with a pension. Save for retirement. Yeah, right.
I have a 29 yo son. He is plugged into the fed .gov gravy train. He has talked about going to private industry because he is so bored and underutilized. Whole divisions of zombies who do nothing but try to maintain the status quo, and the absolute barest of bare minimums of production. And everyone involved, to the highest level of management ( a joke) is in on the gig. My advise was to shut up, and play the game. But it does ruin the soul.
This weeks Hussman was one of his most clear. If he's wrong, he's dead wrong. Gutsy man.
I never forget the time I came to the US. It was very foreign when adults and kids kept repeating "my car" "my house" my Doctor".
Took me a while to figure out that all it was financed, leased or borrowed.
The USA is a big laundromat for brains!
Great Picture. The market ist sometimes really crazy. I keep rational with dividend stocks.
Spamm ist a dish best served cold
Stop calling them "investors"..... They are all speculators (unless they are insiders in which case they are rectal speculum).
Every time the fed prints money regardless of reason they steal your purchasing power.one must figure this out to be ready for the next stage.
Wall Street Crashes:
Part 1 - U.S. stocks - 1929
Part 2 - U.S. housing - 2008
Part 3 - U.S. stocks - soon