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"You've All Gone Mad" - The S&P Is More Than Double Its Historical Valuation Norms
Excerpted from John Hussman's Weekly Market Comment, via The Burning Platform blog,
Time for our weekly reality check with John Hussman.
Fact #1
Meanwhile, the S&P 500 is more than double its historical valuation norms on reliable measures (with about 90% correlation with actual subsequent 10-year market returns), sentiment is lopsided, and we observe dispersion across market internals, along with widening credit spreads. These and similar considerations present a coherent pattern that has been informative in market cycles across a century of history – including the period since 2009. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.
The market is overvalued in the extreme. The vitriolic response towards anyone who points out this FACT proves it is accurate. Wall Street is run by liars, thieves and shysters. They would sell your grandmother for a buck.
For now, our concerns about market risk are as severe as they were at the 2000 and 2007 peaks, and these concerns are equally dismissed and reviled, which is oddly encouraging.
The fact that you were right in being bullish during the early 1990’s, called the 2000 collapse, and called the 2008 collapse is meaningless to the sycophants on Wall Street and frequenting the cheerleading entertainment shows on CNBC and Bloomberg. The record low ratings of these worthless Wall Street propaganda shows tells the whole story. Hussman has been right and will be right this time.
Equally important, I know exactly the conditions under which our approach has repeatedly been accurate in cycles across a century of history, and in three decades of real-time work in finance: I know what led me to encourage a leveraged-long position in the early 1990’s, and why were right about the 2000-2002 collapse, and why we were right to become constructive in 2003, and why we were right about yield-seeking behavior causing a housing bubble, and why we were right about the 2007-2009 collapse. And we know that the valuation methods that scream that the S&P 500 is priced at more than double reliable norms, and that warn of zero or negative S&P 500 total returns for the next 8-9 years, are the same valuation methods that indicated stocks as undervalued in 2008-2009.
The toady faux journalists working for the corporate mainstream media regurgitate corporate press releases, government manipulated statistics, and Wall Street crapola disguised as investment reports. The paragraph below explains why Wall Street has reported record profits and pays themselves billions in bonuses, while grandmothers slowly starve to death.
As an important side note, the financial crisis was not resolved by quantitative easing or monetary heroics. Rather, the crisis ended – and in hindsight, ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned mark-to-market rules, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The decision by the FASB gave banks “significant judgment” in the values that they assigned to assets, which had the immediate effect of making banks solvent on paper despite being insolvent in fact. Rather than requiring the restructuring of bad debt, policy makers decided to hide it behind an accounting veil, and to gradually make the banks whole by lowering their costs and punishing ordinary savers with zero interest rates, creating yet another massive speculative yield-seeking bubble in risky assets at the same time.
Remember 2000? Internet stocks were off the charts overvalued. You could actually find bargains in large cap value stocks. Today nothing is undervalued. The entire stock market is overvalued. Bonds are overvalued. Real estate is overvalued. The entire world is overvalued.
The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme.
Based on valuation metrics that are about 90% correlated with actual subsequent returns across history, we estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years. At this point, the suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk.
John Hussman and a few other honest fact based analysts who are not captured or beholden to Wall Street are the only rational people left in the world. Everyone else has gone completely mad.
As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad.
The smart money has been exiting. Time is growing short. Those who think this can go on for years are badly mistaken. The global economy is deteriorating rapidly. The American consumer has propped up the world economy for decades. They are exhausted and broke. There is no one to step into the breach. Central bankers have printed trillions and have only delayed the ultimate collapse. Decide now whether you can withstand a 50% decline in your portfolio.
Internal dispersion continued to show subtle signs of growing risk aversion last week, particularly Friday when yields on Treasury debt and other issues perceived as “default free” plunged, while commodity prices also plunged across the board, junk bond yields rose, and the number of individual issues setting new 52-week lows shot higher despite major indices near record highs. This market action and internal dispersion suggests growing perceptions of either a negative shock to global growth or concerns about fresh credit risk (not that those two are separable given the size of global debt burdens). With regard to the U.S., we don’t observe recession warnings yet – the usual sequence features a slowdown in real sales and consumption first, then production, then personal income, and employment (a clear lagging indicator) much later. Still, we’re keeping watch on our recession warning composites, as a recession in Japan, a slowdown in China, and emerging weakness in Europe are all likely to have an impact on U.S. activity.
More broadly, the main thing I encourage is for investors to understand the actual depth of market declines that have been part and parcel of market cycles across history (the risk is not 5-10%, but 30-50% and occasionally more, depending on the level of valuation at the peak). These must be anticipated and accepted as a part of passive investment strategies.
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It's a Madhouse.....a maaaadhouse! Right Charlton?
Just to get in the spirit of things, I spun up an old 45rpm record: They're Coming To Take Me Away, Ha Ha!
This stuff keeps up much longer, the funny farm will be the least insane place one can be.
They may have gone mad, but it seem the mad people who have held long for almost 6 years now have made a lot of money in their madness.
You just defined a ponzi scheme. And they can all exit at the same time, right? lmao.
Oh I'll bet you TPTB are exiting very cautiously right now. Once they're all in short, you can bet the exits will become a very popular place. ;-)
Goddamn Apes!
IT'S A MAD MAD MAD MAD WORLD!!!
http://www.youtube.com/watch?v=Sla845GW9YM
A madhouse run by people with the intelligence of apes?
We should be so lucky.
"They'd sell your Grandmother for a dollar"; / "The Entire World is overvalued"--. Gotta love this guy; I definitiely love the way he thinks. I agree completely. So refreshing a break from the clueless, well, if it goes up, it might go up, and if it goes down, it might go down crowd. Fact Based. I just love it. I'm really going to enjoy shorting this bit ch again. I lost 1885$ the last time around; now I'm about even on my Stockmarket shorting; maybe $1500 behind, net-net; something like that. But I'm going to laugh when t his stupid bitch of a market blows up in mr. Jones' face.
"The smart money has been exiting, time is growing short". Agree, completely. It'll never make it to the end of February.
Worthless blabla in the whole article. The only thing I see is the market is going up. There is a difference in being right and and having a goal. I am done with people who only want to be right. Clear case here.
Well, who is left that is really in a position to sell? Corrupt markets don't die, they just fade away as people seek to exchange goods and services elsewhere.
Same as it ever was.
Yeah, t hat's right, they fade away; like Sept. 1929; or the .com crash in 2002; just a calm orderly sort of fading. WTF are you talking about ?
The central banks weren't pumping back then. The algos and computers didn't have full control back then
earnings almost double historical average
regression to mean on tap
regression to mean.......and some.
Markets always overshoot; badly on t he downside; it's just part of what they do; completelyl verified by all studies of market history.
earnings or earnings PER SHARE?
big diff for the overall economy...
http://rt.com/news/210307-russia-national-defence-center/
Divergence between commodities and SPX is insane
http://bullandbearmash.com/pending-stock-market-train-wreck-deflation-pi...
good job yellen
I don't know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first you've got to get mad. You've got to say, 'I'm a HUMAN BEING, God damn it! My life has VALUE!' So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, 'I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!' I want you to get up right now, sit up, go to your windows, open them and stick your head out and yell - 'I'm as mad as hell and I'm not going to take this anymore!' Things have got to change. But first, you've gotta get mad!... You've got to say, 'I'm as mad as hell, and I'm not going to take this anymore!' Then we'll figure out what to do about the depression and the inflation and the oil crisis. But first get up out of your chairs, open the window, stick your head out, and yell, and say it: "I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!" [/Howard Beale]
I'm still hoarse from yelling "It's my money and I need it now!" out the window earlier.
After I'm done watching the Kardashians, I'll give it consideration. Hope there's no squirrels or anything to distract me....
The market is not overvalued relative to ZIRP.
Not only can investors find nowhere else to put cash, but companies can borrow money at less than their nominal growth rates and buy back their own stock, boosting stock values. When ZIRP ends this unwinds somewhat, but the differential interest/growth bonus remains.
If you think ZIRP is about to go away, well, then I dunno. Do you?
The Fed can do what it does forever but....how long will the major producers be willing to give up commodities and labor for dollars? They will continue to use dollars as a medium of exchange...no problem...it works fine in that role...so does the euro...The problem is that everyone has stopped using the dollar as a store of value. When the manifeatation of that collective decision become apparent then we will see a whole different, ugly scenario play out.
The Fed can buy up shitty assets all day and not cause too much trouble. When the dollar and it's derivatives are rejected the collapse could come HFT fast.
Gold could cause some headaches too. The 6 month GOFO is negative. Those who understand that are already panicked.
You should panic too....buy gold bullion.
Just keep telling yourself that and everything will be fine. LOL.
Holy crap! Putin just fu@#ed Washington and the EU in the a$$:
http://rt.com/news/210511-russia-turkey-gas-pipeline/
Eh eh eh!
That guy is awesome.
Hmm, wonder if these two are related somehow...
http://www.foxnews.com/politics/2014/12/01/us-turkey-reportedly-close-to...
MAD
1. crazy, insane, demented, nuts, deranged, out of one's mind, bonkers, lost one's marbles.
and this is a problem?
"The paragraph below explains why Wall Street has reported record profits and pays themselves billions in bonuses, while grandmothers slowly starve to death."
Awww com'on.... it's not the wars, the printing, the spending, marking to fantasy, or ZIRP, rehypothecation or deficits,,, everyone (especially the millennials) know it's grandma's fault for collecting $600 mo SS. ///s on
Fuck yeah. Olde Granny needs to be hanging (eurhanized) at the end of the proverbial rope in order that SS remain intact before the bankers can dip their dingalings in it, too. (All figuratively, of course)
Thanks to the FED, there is no where else to put your money. Real estate is looking bubbly too...
how much longer till they start jumpin' out of the windows.
and my sidebar pop up has Warren Buffet holding up a credit card with the Tagline BEST 5 Credit cards with no interest to help you get out of debt. lmfao....Holy fuck. What a concept.
It goes along with the extreme measures the Federal Reserve is doing to enrich the banksters. Zimbabwe's stock market kept hitting historic highs as well.
It's QEing and treasury buying to infinity, Print until there's a currency crisis. The Federal Reserve is stuck and there is no way out.
It's the Zimbabwe economic plan. First Japan, then the US. All from the same script.
Keep complaining about divergences and overbought conditions. The BofJ,ECB, and Yellen don't give a crap.
They will run the market up till the republicans take office in January. Then they'll let go and blame the fall on them.
V BS R,
You hit it on the head. Been this way for three quarters of a century. Screw it up, fix it up, screw it up, fix it up. You know who's doing which. Only problem is every cycle sinks the entire situation even deeper, until now it is barely recognizable. Good call!
The market is just a little high right now. Everyone on ZH was moaning about low volatility, so Janet let it go for a few days and the Dow tanked 1400 points so Janet kicked it in the ass and it went back up 1600 points, but that's above targets so we need a quiet two weeks ending up around 17500 and you can take that to the bank.
Meanwhile She Who Must Be Obeyed now has to deal with gold, silver, copper and oil. Oh, a Fed chairman's work is never done.
More like 17,350ish, where Sept support was.
Code
Everything must be MANAGED properly. Back when we had 'markets' and muscle cars and tube TV it was different. Now we just need to go to work and let THEM do god's work....and don't ask questions eh?...
We really need a good War. The blood of our soldiers has no price valuation and the MIC never has a recession.
the market is the only reflection of the inflation in the system. it is the the value of the market in inflated dollars.
Even though I don't like it, it's actually not as bad as we'd think given that there has also never been this amount of money printing (inflation). All that printed money has to go somewhere.
Hold on... We still have 15% to hit 2000's peak valuation?
Bullish!!!!!!!!!
Market thoughts for this week:
www.thecrucible.us
Price and value are disconnected. In a free market that would correct itself (and actually never get to this point).
I thought Central Banks were buying Equities.....
Today nothing is undervalued. The entire stock market is overvalued. Bonds are overvalued. Real estate is overvalued. The entire world is overvalued.
Guns and ammo are historically cheap. More fun than bullion, too.
GAAP S&P earnings are 25, NOT 20 LIKE PROPAGANDA CNBS MACHINE SAYS ! Shiller/Crestmont/adj p/e of inflation/mean interest rates, is THIRTY (30) ! 2nd highest in history, FUCK CNBC!
FUCK CNBC AND ALL THEIR ELITE JACKARSES, ESPECIALLY ****KERNEN**** ! biggest idiot ever allowed on tv
In addition to manipulation by the government-financial complex other forces are converging to further distort and disconnect Wall Street from the American economy. Why American equities continue to rise is very important, more is at force here than the usual causes which might include a pre-election and post-election rally. This is more than the continuation of a double down and let it ride mentality that has been ratcheting the market higher while reenforced by media hype.
Most analysts agree that money from countries with weakening currencies is flowing out of the troubled areas and the U.S. is receiving most of the benefit. The Japanese as well as many Chinese and Europeans know with so much money floating around and few safe harbors America is becoming the most comfortable option for temporary investing their money. More on why this should be viewed as a sign of massive instability rather than a reason to celebrate in the article below. Thing could turn ugly very fast.
http://brucewilds.blogspot.com/2014/11/why-american-equities-are-rising.html
Also I might add, it would be wise to question the quality and sustainability of the profits companies claim to be making. Without super low interest rates and easy money auto sales would fall like a stone.
Fahk, I would take $.50 for my mother in law.
I guess in a free market economy, supply and demand really puts downward pressure on prices..
Screw Hussman.
He has not even made a return equal to the 10yr Treasury.
Protecting investors from gains for years has been his result.
His stopped clock will one day be chime at the right time. The only problem is that it will be years behind in returns.
Hussman is bang on when he states that Americans have gone stark raving mad, insane, loopy, nuts, nukin' futs, wacko, full retard, schizophrenic, and downright fucking crazy with economic risk. I'm the type of guy that mumbles to God every now and then whilst shaking my fist at him from the trench of economic hell that I live in and I can honestly say that I constantly say...."God, they have gone completely fucking nuts and they are insane" whenever I read the articles on this website. Hussman is so right and we are all so fucked I just can't believe this lunacy can continue beyond Q2. I have been watching the economy all of my life and the stress levels that I am witnessing are beyond the blowout phase. The flatlined economy has counterforces
of social unrest that cannot be controlled past a certain point of no return. By spring of 2015 there will be rioting from the discontented masses of serfs that will no longer be able to tolerate serfdom anymore. This conundrum has a shelf life that is fast approaching IMHO.
Yes, ironically, the Hussman quote is a lie, yet he calls Wall. St theives and liars? Let's look at the FACTS, instead of hypoerbole and BS. Market is 25% above historical mean/median Market is 68% above historical Schiller PE10 http://www.multpl.com/