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On The Cliff At The Edge Of The "Permanently High Plateau"
Excerpted from John Hussman's Weekly Market Comment,
The uncorrected half-cycle advance since 2009 has been accompanied by a resurgence of proponents advocating that stocks should simply be bought and held indefinitely, regardless of price. Some of these proponents have also used this mid-cycle victory-at-halftime as an opportunity to be rather impolite about it. On this subject, Graham and Dodd offer a useful warning in their 80-year old masterpiece, Security Analysis, speaking about the advance to the 1929 peak (whose valuations the present speculative episode has already matched or surpassed):
“Irrationality could not go further; yet it is important to note that mass speculation can flourish only in such an atmosphere of illogic and unreality. The self-deception of the mass speculator must, however, have its element of justification. This is usually some generalized statement, sound enough within its proper field, but twisted to fit the speculative mania… In the new-era bull market, the ‘rational’ basis was the record of long-term improvement shown by diversified stock holdings. There was, however, a radical fallacy involved in the new-era application of this historical fact. This should be apparent from even a superficial examination of the data contained in the small and rather sketchy volume from which the new-era theory may be said to have sprung. The book is entitled Common Stocks as Long Term Investments, by Edgar Lawrence Smith, published in 1924.
“In fact their rush to take advantage of the inherent attractiveness of common stocks itself produced conditions entirely different from those which had given rise to this attractiveness and upon which it basically depended [viz. much lower starting valuations in previous years]… But as soon as the price was advanced to a much higher price in relation to earnings, this advantage disappeared, and with it disappeared the entire theoretical basis for investment purchases of common stocks.”
I have no inclination to throw stones at buy-and-hold advocates. We’ve certainly had our own stumbles in the half-cycle since the 2009 low, partly because of my 2009-2010 insistence on stress-testing our approach against Depression-era outcomes, and partly because overvalued, overbullish, overbought syndromes that have been a crucial warning in prior market cycles have persisted much longer without consequence in this cycle, as a result of Fed-induced yield-seeking speculation.
Still, we do encourage buy-and-hold investors to understand and mentally prepare for the potential depth of interim losses inherent in that strategy (we would presently allow 40-55%). We also urge investors to align the proportion of assets in equities with the date that they’ll actually need the money. For funds that will be spent an average of 15 years into the future, with no new investment contributions, we believe that equity holdings should be limited to about 30% of assets strictly on the basis of duration (the S&P 500 presently has an estimated duration of about 50 years). This doesn’t even consider the fact that we expect only very low single-digit total returns for the S&P 500 over that horizon.
Following Graham, we go back to the importance of arithemetic in understanding why buy-and-hold strategies regularly reach their height of popularity at moments like the present. The returns that major stock market indices achieve over time can be reliably understood from the standpoint of where valuations stand at the start of a given window, and where they are at the end. At extremely elevated valuations, as we presently observe (on measures that are actually historically reliable), the past total returns of a buy-and-hold approach will always look quite favorable, because the backward-looking performance window ends at a quite favorable point. But this also generally means that the forward-looking performance window starts at the worst possible point, and unless valuations also happen to be elevated at the end of that window, future total returns are likely to be quite disappointing.
From this perspective, it is only because present valuations are so extreme that the total returns of the S&P 500 since the similarly extreme 2000 peak have worked out to be even modestly positive, at about 3.9% annually. We would suggest that this is a temporary artifact of severely elevated valuations at both the start and end of the 2000-2014 window. Whatever benefits investors perceive from the extreme elevation of mid-cycle valuations today are likely to be transitory. Following a largely uncorrected multi-year diagonal advance, it's exactly the illusion that risk is riskless and elevated valuations have reached a "permanently high plateau" that does so much violence to investors over the completion of the market cycle. It's a regularity that prompted me to quote from the Wallace Stevens poem Sunday Morning as the market approached the 2007 peak:
Does ripe fruit never fall? Or do the boughs hang always heavy in that perfect sky?
As in every cycle, we expect there will be very good opportunities to establish constructive or even aggressive exposure to market fluctuations, typically at the point that a material retreat in valuations is coupled with an early improvement in market internals. In the half-cycle since 2009, we admittedly missed those opportunities in the interim of our stress-testing response to the financial crisis. The absence of any material consequence of increasingly extreme overvalued, overbought, overbullish conditions – largely driven by speculative yield-seeking in response to quantitative easing – has been equally humbling. Those stress-testing considerations are behind us, and we’ve adapted to the potential for recurrent Fed-induced speculation in ways that we certainly expect to be evident as the present cycle is completed and future ones unfold. But what can actually be expected to be a predominantly bullish bias to our investment discipline is simply not going to be evident at an overvalued, overbought, overbullish extreme like we observe at present. I can only say that investors who view me as a permabear understand nothing about our discipline if they fail to understand the context behind our experience in the half-cycle since 2009.
Now, if one wishes to cite our experience during the half-cycle since 2009 as a justification to ignore overvalued, overbought, overbullish extremes indefinitely, that’s actually both welcome and useful, as someone will have to hold stocks through the completion of the present cycle. It’s best for those bag-holders to be people who have at least evaluated and voluntarily dismissed our concerns. Persistent and unconditional bullishness allows other investors – particularly those with short investment horizons – some window of opportunity to defend capital and reduce their portfolio risk to appropriate levels. Frankly, we’re not looking for investors to agree with us, or even to convert to our investment discipline. Our approach has always been to speak our truth plainly, and to do our utmost to maintain and encourage discipline for those who trust our efforts. Despite fiduciary stress-testing inclinations that, in hindsight, were not helpful during this half-cycle, we’ll let time sort out the misperceptions that investors have adopted in recent years about valuations, speculation without consequence, and even the inherent bullishness or bearishness of our own approach.
Meanwhile, we don't require an epic market loss in order to justify a shift to greater market exposure, and we expect that a significant portion of future opportunities will be on the constructive side (particularly once a material retreat in valuations is coupled with an early improvement in market internals). Here and now, however, we do remain concerned that there is a cliff at the edge of what appears to be a permanently high plateau.
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His name was Hugh Hendry.
rip
Conflict with Russia is an important part of creating a believable alternattve to central bank monetary policy as the reason for spiking oil and gold prices coming.
my co-worker's step-aunt makes $76 /hour on the laptop . She has been fired from work for nine months but last month her payment was $16491 just working on the laptop for a few hours. Get More Information... www.payvalt.com
"Permanent."
You keep using that word; I do not think it means what you think it means...
Bears who missed this rally weren't wrong, for nothing has ever been as fraudulent as this rally, nor has there ever been a time when govts, central banks, regulators, and institutions locked arms in a cohesive effort to produce a rally.
I would suggest that there are only two types of investors who have made money the last 5 years.
Those who saw it for what it is,recognizing how desperate the FED and govt was to create the illusion of recovery.
And those who think we're in a recovery. Yes, being stupid pays well these days.
Promises promises
I don't know but I don't think it is possible to have a cycle when stocks are attached to buying by central bank software that has an infinite amount of fiat with which to buy.
BTFD until you see the mushroom clouds in the whites of their eyes.bitchez.
Listen. When you speak of a "HIGH" Plateau you must read this:
LSD Purity: Cleanliness Is Next To Godliness
http://www.erowid.org/chemicals/lsd/lsd_writings1.shtml
Know your "SOURCE"!
The cleanest LSD I ever had was purple microdot in Cambridge MA in the summer of 1981. After that is was just like what this excellent Erowid article discusses; until I got ahold of some righteous MDMA in the 1990's in SF.
Now, the hashish and oil they are brewing up locally is all I want or need. Much stronger than what I smoked in the 1970's. We are going to lose a lot of young people to this ultra-strong weed coupled with super-obsessive iCrap absorption. 95% of them are just decorating their cell walls; but maybe that's all they ever did. Ouspensky warned against creating a permanent dreamscape with the energy of higher mind.
The sons of eight of my acquaintances are now permanently mentally disabled or dead due to marihuana grown locally or drugs purchased through Silk Road or drug dealers. My daughter caught a guy putting a pill into her drink when she was at a night club in Sydney recently. (She laughed in his face and poured the drink on his feet. He left the night club promptly. She thinks she is on top of it. I think she was incredibly lucky.) My brother in law is a burnt out schitzophrenic and manic depressive, a 'victim of the sixties'. Teenagers tell me drugs are everywhere, literally. Any party, any bar, any nightclub is riddled with drugs. Young people think they are bulletproof. I fear for our younger generation.
" the past total returns of a buy-and-hold approach will always look quite favorable, because the backward-looking performance window ends at a quite favorable point (current all time high). But this also generally means that the forward-looking performance window starts at the worst possible point, and unless valuations also happen to be elevated at the end of that window, future total returns are likely to be quite disappointing"
Interesting way of looking at it. I'll keep this in mind.
Hussman article?...s&p gonna rip!
(never fails)
Pull up a 2 year chart of the Russel 2000.
If you can't see an imminent crash on that chart, you will definitely be roadkill.
We are all looking at the same chart. This unprecedented Fed interference is unknown to all, equally terra incognita. Thus there are no experts at this juncture you should consult greater than your own instinct.
My guess it they'll use this intermediate top as a rounding-off for the next base camp to 2500 SPY.
Nothing suprises me. They cannot raise rates, they cannot let the market crash. They cannot roil the markets again like in 2008. Volatility is the last thing they want so they kneecapped it along with precious metals. Both were enemies and the first two on their list.
There are easier ways to make money than shorting the only thing Chalky & Co. have to point to as a metric of success. Stay thy short hand, brethren.
So the redneck in me says...
Say stock prices continue to rise without a major correction. What happens when "real" actual earnings begin to reflect the "real" economy? i.e. after all the share buy backs and other manipulation companies and banks have done. What happens when that runs its course?
hairball
still stacking
Way too many bearish articles posted today = BULLISH.
Futures should gap up nicely tonight.
This article presumes that we can see that bottom of that cliff, whereas it is so far down that "the market" will be falling at terminal velocity when it gets there! This kind of planning to take advantage of the fall continues to presume that we are still in the times of an overall rising civilization, which merely has its temporarily insane bubbles finally pop, after which some sense of reality may return.
Merely "stress-testing our approach against Depression-era outcomes," presumes that a globalized system of electronic frauds, backed by the threat of the force of atomic bombs, inside of actual situations where the strip-mining of the whole planet's natural resources will run into real limits of diminishing returns, will not be worse than the previous Great Depression, and its resulting World War II.
Human beings, and human civilization, necessarily act as entropic pumps of energy flows. Those will necessarily evolve ecologies between the different systems of organized lies, operating robberies. However, the runaway degree of "success" of the established political economy being based on enormous enforced frauds has driven everything so far away from being balanced by any sense of "objective reality" that the corrections to those "markets" are going to be catastrophic collapses into crazy chaos, far beyond the Great Depression and World War II.
OF COURSE, "there is a cliff at the edge of what appears to be a permanently high plateau!" However, the magnitude of that CLIFF has been amplified to astronomical sizes (which has been the only thing still keeping the standing social insanities from already going over that CLIFF.) We are rushing at an exponentially accelerating rate into hitting the wall of the limits of being able to base everything on strip-mining the natural resources of a fresh planet, never before subjected to the impacts of the industrial revolutions. It will be the financial system, which "paid" for strip-mining the planet with necessarily more and more "money" made out of nothing, that will be the first place where the social insanities inherent in that system manifest their psychotic breakdowns. The established enormous enforced frauds, which are the foundation of the entrenched political economy, are going to run into the wall of the limits of the real world going as fast and as hard as they can possibly go ... because those habits worked well throughout previous human history, when there was a fresh planet to rape and plunder through the social pyramid systems of the Neolithic style of civilization, in which human farming, primarily as human slavery, was the central feature.
The American economy became the most advanced system of legalized lies, backed by legalized violence, there has ever been. It was ALWAYS the case that human realities operated on the basis of organized lies operating robberies. However, the degree of the runaway success of that system has become its own worst enemy, so that those who continue to operate inside of the established political economy have developed an extraordinary capacity to deliberately ignore the environmental ecologies, since the entire system became based on making "money" out of nothing as debts, which operated in ways which were able to deliberately ignore the basic laws of nature. A globalized civilization based on "paying" for everything with "money" made out of nothing was a system of organized lies operating robberies that became as extremely unbalanced as that could possibly be!
EVERYONE WHO WAS RELATIVELY SUCCESSFUL WITHIN THAT ECONOMIC SYSTEM WAS DOING SO ON THE BASIS OF THE ENTIRE CIVILIZATION BEING DOMINATED BY ENORMOUS ENFORCED FRAUDS. In that context, this article above was like most of the other articles that I read on Zero Hedge, inasmuch as it was CORRECT, EXCEPT GROSSLY UNDERSTATED! The market corrections which are coming are globalized corrections to a civilization controlled by backing up lies with violence as much as possible for as long as possible, driving social polarization and destruction of the natural world towards bouncing off the wall of limits, and then going over a CLIFF whose bottom can not now be perceived.
The established systems are so far out of balance, that it is almost impossible to imagine how there could ever develop some new systems of dynamic equilibria, which were better balanced, and included the human, industrial and natural ecologies, because all of those have become driven by the triumph of criminally insane enforced frauds to be pushed as far away from being better balanced as they could get, and therefore, when they finally go over the CLIFF, it will then be a long, long way down!
Much of the rising tide since March 2009 has relied, almost entirely, on COORDINATED Central Bank efforts. This idea that the Banking oligarchs are "all in this together" is no longer as strong as it has been over the last 5+ years. Rag Rajan, head of the Indian Central Bank, had this to say back in March:
“The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth and to the financial sector. It is not an industrial country problem, nor an emerging market problem; it is a problem of collective action,”
All of the machinations take time to permeate through the system. The current conflict between the US and the Ruskies, are the last ditch efforts of the hegemon trying to dig its claws into the cliff as it slowly falls down the side. Regular readers of this site know the current status of the petro-dollar, thus all of the ISIS propoganda to support the Suadis who have been keeping this thing afloat since the Nixon era. As more and more countries see the benefits of diversifying from the US dollar, whether into the Renminbi or some other currency, paraphrasing Jeremiah Wright "those dollars will come home to roost". The disastrous stagflation of the 70's wasn't an "outlier" it was a direct response of repatriating fiat currency that can no longer float freely throughout the world. US stocks markets fell then and they will fall again, as the amount of fiat that will be sent back home will be like a tidal wave to the system.
OMG, can we just distill this down to the least common denominator? After five years and five TRILLION $ of Fed Bank intervention to support the markets, where do we go now? Can the Fed keep the illusion going by enabling more stock buybacks? Can they keep rates near zero so the lemmings keep borrowing and buying Chinese-made crap they don’t need and can’t afford? Continue disincentives to save anything? Seventy-five percent of this economy is consumer spending and most of the rest is government deficit spending. If rates are allowed to rise, all hell will break loose. Retail is suffering and consumer credit has again broken all records.
Bears are betting it all comes apart soon and the greatest depression ever gets rolling. Bulls are betting the Fed can create Trillions $ more, and will, too big to fail. Place your bets….
...rewind, why dont you try adjust the charts for inflation...havent gone anywhere much did it?
...rewind, why dont you try adjust the charts for inflation...havent gone anywhere much did it?
Look out below!
But don't forget to measure real value, not "nominal value".
Markets can and do keep rising in nominal terms during hyperinflation.
"All debts are paid for...if not by the borrower, then by the lender"
- James Grant, more or less
.... or the taxpayer ...
Much of the economic landscape is beginning to look like something out of "Alice And The Looking Glass" A bizarre and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality.
Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. What was once the "long run" or "distant future" may be getting much closer. More on what happens when the momentum ends in the article below.
http://brucewilds.blogspot.com/2013/01/what-happens-after-momentum-ends_...