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Interviewing John Hussman: "The Market Is Overvalued By 100%"
Submitted by Adam Taggart via Peak Prosperity,
John Hussman is highly respected for his prodigious use of data and adherence to what it tells him about the state of the financial markets. His regular weekly market commentary is widely regarded as one of the best-researched, best-articulated publications available to money managers.
John's public appearances are rare, so we're especially grateful he made time to speak with us yesterday about the precarious state in which he sees global markets. Based on historical norms and averages, he calculates that the ZIRP and QE policies of the Fed and other world central banks have led to an overvaluation in the stock market where prices are 2 times higher than they should be:
John Hussman: What's interesting here is that if you think about equities, they're not a claim on next year’s prediction of earnings by Wall Street analysts. A stock, in fact any security, is a claim on any long-term stream of cash flows that investors can expect to be delivered to them over a very long period of time.
When you look at equities you can calculate something called duration. It's essentially the effective life of a security over which you are collecting cash flows in return for the amount you pay. For the S&P 500 the duration is about 50 years. In other words it is a very, very long-term asset. The only reason you would want to price that asset based on your estimate of next year’s earnings is if you were convinced that next year’s earnings are actually representative of the very, very long-term stream -- and I'm talking 50 years or so of earnings that you're likely to get -- that those earnings are in a sense accurately proportional to the whole long-term stream.
What's amazing about that is that is it has never been true. It has never been true historically. If you look at corporate profits and especially corporate profit margins, they're one of the most cyclical and mean-reverting series in economics. Right now, we have corporate profits that are close to about 11% of GDP, but if you look at that series you will find that corporate profits as a share of GDP have always dropped back to about 5.5% or below in every single economic cycle including recent decades, including not only the financial crisis but 2002 and every other economic cycle we have been in.
Right now stocks as a multiple of last year’s expected earnings may look only modestly over valued or modestly richly valued. Really if you look at the measures of valuation that are most correlated to the returns that stocks deliver over time say over seven years or over the next 10 years the S&P 500 in our estimation is about double the level of valuation that would give investors a normal rate of return.
So right now, we've got stocks valued at a point where we estimate the 10 year prospective return on the S&P 500 will be about 1.6 to 1.7% annualized -- talking right now with the S&P 500 at 2032 as of today’s close.
Chris Martenson: I guess 1.6 or 7% doesn’t sound bad if you are getting 0% on your risk-free money, I guess. But this says that any move by the Fed to normalize -- which means rates have to go up -- any move to drain liquidity from the system is going to have its own impact. If we held all things equal, a normalization effort is going to then basically expose that the stock market is roughly overvalued by 100%.
John Hussman: 100%, yes. I actually think the case is a little bit harsher than that; in fact, quite a bit harsher than that.
The idea that well, "1.7% isn’t so bad" or "1.6% isn’t so bad" ignores the fact that really in every market cycle and economic cycle we have had a point where stocks were fairly valued or undervalued.The only cycle in which we didn’t see that was actually the 2002 low where stocks actually ended that decline at an overvalued level on a historical basis. But valuations were still relatively high on a historical basis in 2002. They got slightly undervalued in 2009, but not deeply.
On a historical basis, what's interesting is that if you look at measures of valuation that correct for the level of profit margins, you actually get about a 90% correlation with subsequent 10 year returns. That relationship has held up even over the past several decades. It has held up even over the past 5 years where the expected return that you would have forecasted based on time-tested valuations turned out to be pretty close to what you would have forecasted 10 years earlier.
Right now, like I say, we are looking at stocks that have been pressed to long-term expected returns that are really dismal. But more important than that, in every market cycle that we've seen with the mild exception of 2002, we've seen stocks price revert back to normal rates of return. In order to get to that point from here, we would have to have equities drop by about half.
This is one of the highest-quality and deepest-diving podcasts we've recorded in the 3-year history of our series. Part 1 is publicly available below. Part 2 can be accessed here (enrollment required).
Click the play button below to listen to Part 1 of Chris' interview with John Hussman (26m:29s):
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shhh....Too many newletter hawkers, blogsters, and con men will be put out of business if those they sell theirs to get wind of this.
You are looking for a momentum indicator. Try RSI.
The most reliable way to predict short term stock prices is to be a club member insider who manipulates them.
http://www.youtube.com/watch?v=40FjQH3Xw0M
Tom Waits - Time
Besides market rigging, the WHO Ebola death numbers went from exponential growth a few weeks age before the election to no new statistics numbers since. If I didn't trust the government, it would sound manipulated and fake....wait, just remembered I don't trust them. Rigging of all government numbers is a given.
Joke::
What do you call an honest government statician?
Answer:: Unemployed, in prison, or a suicide.
How did the Titanic sink? Slow at first...
I believe the most common description for anything massive "going down" is-
Slow at first, then all at once.
Tyler - can you take down Bill Gross' ad pop-up? It's unsettling.
S&P to 1000?
I don't get that!
Either the SYSTEM is broken; aka the US capitalist system now dominant via petrodollar and WS hegemony, is TERMINALLY broken OR it is "sort of fixable"; aka we can still achieve "debt jubilee" amongst th warring Oligarchs once the rewind begins, without Armageddon engulfing the whole world...
I don't see this in-between scenario : of a rewind down to S&P to 1000 and then every body picking up their marbles to continue the games, as the prevalent MINDSET of TPTB plus their TBTF banksta crony incestuous buddies pleads the contrary based on irrefutable current facts.
These guys want it all, come what may.
So how does the system "auto-stabilize" at 1000 without imploding, given the prevalent debt leverage to sustain artificial levitation?
Having said that, for those who believe that the capitalist world has never been greater and the sky is blue for the ongoing 1% wealth bonanza, here are some interesting projections :
http://www.swfinstitute.org/fund-rankings/ (Pecking order of sovereign wealth funds). Total value 7 Trillion $.
http://www.lemonde.fr/argent/article/2014/11/10/gestion-d-actifs-des-enc...
(Pecking order of private wealth funds currently at 76 trillion $ and rapidly growing, expected to reach 100 trillion $ by 2020).
And, lastly but not leastly, who consistently power brokers these deals as middle man between the private wealth stashed in Caymanista Paradiso and all siphoned without impunity from the public sector of developed world, an irreprochable scion from the crony baloney political world :
http://www.businessinsider.com/tony-blair-contracts-with-saudi-oil-compa....
With outstanding friends of democracy and free world like that who needs enemies of the ISIS or heretic doomer crisis ilk ?
Bitcoin welcomes all market manipulation. Bring it on pansy ass bitches.
So let's say it dropped 100% what would happen? We'd be right back to this bullshit in no time. 100% is nowhere near the reset button.
Few people seem to understand the parallels with the stock markets of Zimbabwe, Iran, Venezuela, ....stocks are expensive, but today the markets respond to QE (QE) rather then to PE. Stocks are REAL ASSETS and a lot safer than fiat paper money of digital-monye you have in the computer of some bank !
This may not be the best site to discuss squaring price and time.
to infinity and beyond
:)
The $64 trillion question is can the markets continue to be distorted forever? Does the new technology of the day trump what has always in history been a reversion to the mean? When you have governments printing money to buy stocks as a price insensitive "investor", that in itself is a bit of a game changer. Unlimited government checkbooks can last a long time. Or can they? Is there a factor outside current view that will bring it all down? If the governments are going to go all-in this crazy, it would seem a better plan to just print money and give it to the citizens to spend. After all, that money ends up back in the hands of the business owners and business builders, and banks, doesn't it? The key difference is that money creates something along the way. The current strategy just injects the money at the very highest level, and it stays there, never making it down into the sustaining roots of the economy. If you are going to implement an economic stimulus plan, it is best to inject that stimulus as low into the economy as you can. "Trickle-up" will then occur to the rest of the economy. "Trickle-down" never has and never will work.
A last word on pumping the market to astronomical heights and it's lack of effect. There are 1000 reasons why this doesn't work in the long run, but let's just consider one. You are only benefitting most those who were in the market before you started your artificial ramp. As you move up, new money is buying more and more expensive stocks. The trajectory of the market will eventually fall off benefitting all less and less. For example, the S&P is currently up only 1/3 as much as it ramped last year. And what did a three times larger ramp last year get us in this year's economy. Not a heck of a lot. So, unless you are crazy enough to triple-down and attempt a 30 percent market move up every year, eventually it's going to peak. After all, how much is a stock going to be worth. There is a limit. This action only brings forward future gains. And all those future gains we brought forward last year didn't get us a whole lot. This kind of activity should only be attempted for very short durations to provide an initial spark. If it becomes ongoing policy, you know it isn't working and you are in effect killing the patient.
So, it does come down to how long things can be manipulated. Hussman takes the effects of ZIRP and QE into account in his analysis as well as can be done. However, if goverments open the checkbooks and start buying stocks hand over fist, we will all be through the looking glass at that point anyway. That would be a paradigm shift that would throw analysis out the window. It would also be insane as Japan will soon find out. All the vapor paper wealth that would be created out of thin area would make most things meaningless. Kind of like that Z country, What was it? Zimbabwe?
There are some serious structural issues with the world's economies. The central banks know it, and they also know that ZIRP and QE are not working and are not the answer. Every central bank retiree in recent times who is now free to speak, including "The Maestro" has acknowledged that these monetary policies do not work and are not effective for what ails the economy. And they are a nightmare to unwind.
Hi i have an important things i want to discus with you
Thanks Rose
roselyne_robert@hotmail.fr