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A Who's Who Of Awful Times To Invest
Excerpted from John Hussman's Weekly Market Comment:
Unless we observe a rather swift improvement in market internals and a further, material easing in credit spreads – neither which would relieve the present overvaluation of the market, but both which would defer our immediate concerns about downside risk – the present moment likely represents the best opportunity to reduce exposure to stock market risk that investors are likely to encounter in the coming 8 years.
Last week, the cyclically-adjusted P/E of the S&P 500 Index surpassed 27, versus a historical norm of just 15 prior to the late-1990’s market bubble. The S&P 500 price/revenue ratio surpassed 1.8, versus a pre-bubble norm of just 0.8. On a wide range of historically reliable measures (having a nearly 90% correlation with actual subsequent S&P 500 total returns), we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks. Advisory bullishness (Investors Intelligence) shot to 59.5%, compared with only 14.1% bears – one of the most lopsided sentiment extremes on record. The S&P 500 registered a record high after an advancing half-cycle since 2009 that is historically long-in-the-tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000 on the S&P 500 (across all stocks, current median price/earnings, price/revenue and enterprise value/EBITDA multiples already exceed the 2000 extreme). Equally important, our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors. An environment of compressed risk premiums coupled with increasing risk-aversion is without question the most hostile set of features one can identify in the historical record.
...
Recent weeks mark the first time in history that our estimates of prospective 10-year returns on all conventional asset classes have simultaneously declined below 2% annually. We don’t expect a portfolio mix of stocks, bonds and cash to achieve any meaningful return over the coming 8-year period. The fact that the financial markets feel wonderful right now is precisely because yield-seeking speculation and monetary distortions have raised security prices today to levels where they are likely to stand years from today – with steep roller-coaster rides in the interim.
...
The chart below shows historical instances where overvalued, overbought, overbullish conditions matched current extremes, and where bubble-tolerant overlays (based on measures of market internals and credit spreads) were also unfavorable, and where the S&P 500 had established an all-time high. On less stringent criteria, there would also be additional instances shown in 2010 and 2011.
As I’ve noted before, if one thing was truly different about the yield-seeking speculation induced by QE in the recent half cycle, it is that QE reduced the overlap between overvalued, overbought, overbullish conditions and periods of deteriorating market internals. The current set of overextended conditions is the most severe variant that we define, and unlike several instances in the half-cycle since 2009, we do not have indications from market action and credit spreads that these extremes are likely to be tolerated for long.
Extremes in observable conditions that we associate with some of the worst moments in history to invest include:
- Aug 1929 (with the October crash within 10 weeks of that instance),
- Aug-Oct 1972 (with an immediate retreat of less than 4%, followed a few months later by the start of a 50% bear market collapse),
- Aug 1987 (with the October crash within 10 weeks),
- July 1999 (associated with a quick 10% market plunge within 10 weeks),
- another signal in March 2000 (with a 10% loss within 10 weeks, a recovery into September of that year, and then a 50% market collapse),
- July-Oct 2007 (followed by an immediate plunge of about 10% in July, a recovery into October, and another signal that marked the market peak and the beginning of a 55% market loss),
- two earlier signals in the recent half-cycle, one in July-early Oct of 2013 and another in Nov 2013-Mar 2014, both associated with sideways market consolidations, and the present extreme.
It’s notable that while these extremes sometimes occurred at the exact market high, other instances were only proximal to those highs, resulting in brief retreats and a final push higher. We don’t know whether the current instance will have consequences similar to the 1929, 1972, 1987, 2000 and 2007 ones, but suffice it to say that these conditions were more notable for their outcomes over the completion of the full market cycle than they were for their immediate outcomes.
* * *
We’re quite aware, and slightly entertained, by critics who offer me as a poster-child against evidence-based market analysis or markedly unconventional views – half-way into a market cycle, with prices at record highs, and with reliable valuation measures at obscene levels. These will be great fun to save for later, as they were in 2000 and 2007. It should be obvious that our challenges in this half-cycle began with my 2009 decision to stress-test our methods against Depression-era data, having correctly anticipated the tech crash, the financial crisis, both of the associated recessions, having moved to a constructive outlook early in the intervening bull market, and when the long-term benefits our discipline were rather indisputable. Given an incomplete half-cycle at speculative extremes, my sense is that assessments of our discipline will change considerably by the completion of this cycle.
* * *
When investor preferences are risk-seeking, overly loose monetary policy can have a disastrous effect by promoting reckless speculation and enhancing the ability of low-quality borrowers to issue debt to yield-starved investors. This encourages malinvestment and financial distortions that then collapse, as we saw following the tech and housing bubbles. Those seeds have now been sown for the third time in 15 years. All of this has been in pursuit of what is in fact a nearly nonexistent cause-effect relationship between monetary policy and economic activity.
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To be honest that chart appears to show a genuine breakout regardless of the insanity propelling it upward.
Bearish chart looks bullish!
PE ratios are just the inverse of the interest rates of the lowest risk bonds. NIRP equals INFINITE PE!
Just divide by zero. Its simple. Don't listen to those foolish math nerds who say its not allowed.
Bearish, Bullish, it doesn't make a difference when you print $20 Trillion Currency Units....
This is exactly correct. When a CB is willing to print to manipulate asset prices, any stock market valuation is possible for any duration of time. It goes down when Mr. Yellen('s owner) wants it to go down & it goes up when he wants it to go up. Please stop wasting your life analyzing policy, profits, revenue, solvency, forward guidance, accounting honesty, etc because none of it really matters in a centrally-planned Fugazi.
FORWARD!
yeah, just like late '72. that worked out real nice.
Not lke '72, like '81...just need a retest and we would have an almost perfect replication of the 60-70's market pattern.
See N. Kondratiev for details.
I had the same thought. Make no mistake, this is the tangible result of the global CB bubble being blown. However, I think this run still has legs, because it's going to take a global disillusionment with CB QE, and money printing to infinity and beyond, to crack this trend.
Things always go on longer and get crazier than any rational person can believe. Remember 2007? Largest one day drop in Dow history, and then? Months of zooming right back up, unless you adjust the charts from that time for the inflation caused by Bush telling the Fed to throw everything but the kitchen sink at the market to try to stave off the collapse until he was out of office. But anyone who tried to short during that time got their head handed to them.
The music isn't going to stop just yet, even though it eventually will and when it does, the longer the madness has gone on, the more severe the carnage will be when it finally comes.
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1991-92
1999-2001
2008-09
Like clockwork, every 7 to 8 years.
I want to see no bears left to squeeze, then pull a Burry reverse neutral slam on the BTFDers .
"like clockwork"
the paradox: what's really going to bake your noodle later on is, would the Fed have prevented the crash if TruthInSunshine and others hadn't discerned the pattern?
over the last 7 years the Fed has intervened every time the market started turning deflationary, why would it stop now?
my edumacated guess is, the crash is going to happen when the Fed fails to recognize a deflationary pattern in a heavily leveraged fringe sector of the economy, one it doesn't constantly have its eyes on.
"one it doesn't constantly have its eyes on.", right, such as...
For fuck's sake man, they just let the oil patch take a beating and the whole fucking world runs on the stuff...
This time is different. no really, it is. Vapor ramping bitches...
Token rate increases are coming (cleanest dirty shirt and all..), the market will ramp until debt can no longer be rolled over.
Oh, yes this time is also different because it is a global collapse of all fiat.
hedge accordingly.
Lost me at the outset with "material easing in credit spreads" Is that a breakfast condiment or an impolite reference to C. Lagarde's thighs?
BELIEVE !!!!!!!!1
Logic is useless, allow the bull to assimilate you.. bad is good, good is good, dow 400k in sight!!!
Greece needs to steal all the pension funds money and dump it in the DOW. They would make a killing since it can only go up from here.
Sit back and enjoy the blissful ride to 30,000!
The entire Syria proxy war is dirty. She had proof and they killed her.
New Anonymous op as White House still ignores murder of American reporter Serena Shim in Turkey
Dr. Hussman is right!
"the present moment likely represents the best opportunity to reduce exposure to stock market risk that investors are likely to encounter in the coming 8 years."
This is calling a top? or, just the best chance you'll have in the next eight years to dump your shit.
It always amazes me When someone says that the "smart money" is bailing out while the markets continue to soar.
How would that be possible?
http://finance.yahoo.com/news/why-smart-money-bailing-bull-110000874.html
Insiders don't care what happens to their companies, they care about getting rich. What your link describes, how they do it, is called "pump and dump"...
"In this cycle, stocks have been powered higher by debt-fueled share buyback programs which, as any corporate finance textbook will tell you, increases the 'gearing' or operating leverage of a company. That means that not only could the economy be pulled down by the drop in earnings, but stocks could be more sensitive to the drop in profitability because of the higher fixed costs associated with servicing all that new debt."
They teach it to wanna-be CEOs in Harvard Business, I guarantee. Pump your stock using debt, sell your stock, quit, and viola! The company is left holding the bag while you are being pursued by headhunters for you next gig. Then rinse, repeat at another firm...
I think this Blondie classic line captures this fervent moment in time . . . .
' The Tide is high but i'm holding on . . '
why would you want to sell anything now when you can just wait and sell it later at higher prices?
Seriously every CB, corporate board and government in the world is backing the long side, you can't lose.
check out the damage central banksters are causing to the DAX - up 30% in five months
http://bullandbearmash.com/german-dax-374-months-thought-markets-central...
One of these things is not like the other,
one of these things just doesn't belong,
can you tell which thing is not like the other, by the time I finish this song.
Tyler said
...first time in history that our estimates of prospective 10-year returns on all conventional asset classes have simultaneously declined below 2% annually.
Could it be the Fed inflation target of 2% was misdirected? Read this.
http://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens
Thanks
Tyler said
...first time in history that our estimates of prospective 10-year returns on all conventional asset classes have simultaneously declined below 2% annually.
Could it be the Fed inflation target of 2% was misdirected? Read this.
http://michaelekelley.com/2015/02/11/fed-inflation-target-is-abnormal/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens
Thanks
15 years ago when the nasdaq composite hit 5000 the forward PE was 100
Today the forward PE is 20.
The difference is the general repo rate for collateral then was 7%
Today it's .375%
Imagine what would happen if the repo rate went to 2.5 ????
The present value of forward earnings would be equivalent to 2000 --
It is quite likely going that way--- just remember where you heard it first!!!
15 years ago when the nasdaq composite hit 5000 the forward PE was 100
Today the forward PE is 20.
The difference is the general repo rate for collateral then was 7%
Today it's .375%
Imagine what would happen if the repo rate went to 2.5 ????
The present value of forward earnings would be equivalent to 2000 --
It is quite likely going that way--- just remember where you heard it first!!!