Hussman Predicts Massive Losses As Cycle Completes After Fed Warns Markets "Vulnerable To Elevated Valuations"

Tyler Durden's picture

Buried deep in today's FOMC Minutes was a warning to the equity markets that few noticed...

This overall assessment incorporated the staff's judgment that, since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets...


According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.


According to one view, the easing of financial conditions meant that the economic effects of the Committee's actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted.

Roughly translated means - higher equity prices are driving financial conditions to extreme 'easiness' and The Fed needs to slow stock prices to regain any effective control over monetary conditions.

And with that 'explicit bubble warning', it appears the 'other' side of the cycle, that Hussman Funds' John Hussman has been so vehemently explaining to investors, is about to begin...

Nothing in history leads me to expect that current extremes will end in something other than profound disappointment for investors. In my view, the S&P 500 will likely complete the current cycle at an index level that has only 3-digits. Indeed, a market decline of -63% would presently be required to take the most historically reliable valuation measures we identify to the same norms that they have revisited or breached during the completion of nearly every market cycle in history.

The notion that elevated valuations are “justified” by low interest rates requires the assumption that future cash flows and growth rates are held constant. But any investor familiar with discounted cash flow valuation should recognize that if interest rates are lower because expected growth is also lower, the prospective return on the investment falls without any need for a valuation premium.


At present, however, we observe not only the most obscene level of valuation in history aside from the single week of the March 24, 2000 market peak; not only the most extreme median valuations across individual S&P 500 component stocks in history; not only the most extreme overvalued, overbought, overbullish syndromes we define; but also interest rates that are off the zero-bound, and a key feature that has historically been the hinge between overvalued markets that continue higher and overvalued markets that collapse: widening divergences in internal market action across a broad range of stocks and security types, signaling growing risk-aversion among investors, at valuation levels that provide no cushion against severe losses.

We extract signals about the preferences of investors toward speculation or risk-aversion based on the joint and sometimes subtle behavior of numerous markets and securities, so our inferences don't map to any short list of indicators. Still, internal dispersion is becoming apparent in measures that are increasingly obvious. For example, a growing proportion of individual stocks falling below their respective 200-day moving averages; widening divergences in leadership (as measured by the proportion of individual issues setting both new highs and new lows); widening dispersion across industry groups and sectors, for example, transportation versus industrial stocks, small-cap stocks versus large-cap stocks; and fresh divergences in the behavior of credit-sensitive junk debt versus debt securities of higher quality. All of this dispersion suggests that risk-aversion is rising, no longer subtly. Across history, this sort of shift in investor preferences, coupled with extreme overvalued, overbought, overbullish conditions, has been the hallmark of major peaks and subsequent market collapses.


The chart below shows the percentage of U.S. stocks above their respective 200-day moving averages, along with the S&P 500 Index. The deterioration and widening dispersion in market internals is no longer subtle.

Market internals suggest that risk-aversion is now accelerating. The most extreme variants of “overvalued, overbought, overbullish” conditions we identify are already in place.

A market loss of [1/2.70-1 =] -63% over the completion of this cycle would be a rather run-of-the-mill outcome from these valuations. All of our key measures of expected market return/risk prospects are unfavorable here. Market conditions will change, and as they do, the prospective market return/risk profile will change as well. Examine all of your investment exposures, and ensure that they are consistent with your actual investment horizon and tolerance for risk.

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gmonius's picture

Shouldn't the picture of the roller coaster be on the downward trajectory.

Blue Balls's picture

The Fed is waiting on Goldman to finish dumping on retail investors.

The Cooler King's picture

Is this the same 'Hussman' who tests for Jewish Genetic Diseases?


or is it another 'Hussman' who just wants to tell me what to do with my money... You know, to HELP me & all because he cares 'DEEPLY' about my economic well being?

fx's picture

Hussman is a smart guy and he will, of course, be right, eventually. Only that until then markets may double or even triple from current levels before a monster crash will happen. Batting down the hatches right here right now may be prudent. But still, it may not be the best strategy. Ride this bull until a visible break of trend and/or momentum. I suspect theree are still huge gains to come, as the best-buying stocks go from very much overvalued to off the charts overvalued (NFLX, TSLA, AMZN etc.). And the still very cheap go to fairly valued.

Swampster's picture

massive losses for the goyim, not for the 'nazi jew

The Cooler King's picture

"Batting down the hatches right here right now may be prudent. But still, it may not be the best strategy. Ride this bull until a visible break of trend and/or momentum. I suspect theree are still huge gains to come, as the best-buying stocks go from very much overvalued to off the charts overvalued (NFLX, TSLA, AMZN etc.). And the still very cheap go to fairly valued"


So basically, I need YOU telling me what to do with my money instead...


mosley & Raffie think I should BTFD on bitcoin.


How can I possibly sleep tonight with these albatross 'life changing' decisions weighing on my mind?


FFS ~ yesterday, mosley (paraphrasingly) said I'd live a life of poverty if I wasn't careful about this.

DavidC's picture

It's not 'batting down the hatches', it's 'battening down the hatches'.


Mikeyyy's picture

Exactly.  Look at the way the bond market reacted to the minutes.  The Fed was even more wishy-washy about the economy and inflation going forward.  The odds of a December rate hike dropped to 39%.  

LawsofPhysics's picture

Bullshit. The Fed will continue to enrich it's owners. What/who the fuck is going to try and stop them now?

"Full Faith and Credit"

pound the vix's picture

Let the games begin

Rainman's picture

Excellent article ... now onward to Dow30k !!!

NugginFuts's picture


finametrics's picture

but isnt gartman also bearish? .... mmm.. tough call

gravenewworld's picture

Signal to go short and make even more money on the way down.  Pump is primed.  Shmucks with 401ks can't short.  Toast.  Trump is then toast as well.

Turin Turambar's picture

Wrong.  This is the signal for the sheep to go short, so the big boys can pull off one last short squeeze for another all-time high, blow-off tip.  I'm looking to go short after the end of the first week of September.  I think the middle two weeks of September are prime for a large correction.  However, there's a rather large assumption here that the PPT let's it happen.  Good luck with that!  SMH

gravenewworld's picture

interesting.  How the hell did you come up with "end of the first week of Sept."?

Turin Turambar's picture

Hmm, actually, I need to edit that comment.  Looking at the 1987 market action it appears that it was the last week of August that began the downturn with a 4% loss through the 3rd week of September.  Then there was about a 50% retracement (2%) from there into the end of September.  The fun really began in the first week of October when there was a precipitous drop of almost 18% over the following two weeks.  I'll be adjusting my bets accordingly.

OpenThePodBayDoorHAL's picture

Hussman has one phrase that is 100% correct and he doesn't even know it:

"Nothing in history leads me to expect...".

Bingo. In "history" we never had the entities that manufacture money side-by-side as "market" participants.

If this thing starts to drop they'll just Ctrl-P again, moar, bigger than ever

ReturnOfDaMac's picture

Bullish!   Stocks always climb a "wall of worry" ...

wcvarones's picture

If you think the Dirty Fed is going to allow the S&P to go to "three digits," you're on glue.

3-digit S&P would cause a Depression, widespread bank insolvency, mass state and municipal bankruptcies, and immediate pension implosions.

You think the Fed would actually let that happen when they can easily Ctrl+P and buy a few trillion in bonds or even ETFs?

The Fed wants to slow the rate of increase of asset prices. It does not want them to collapse.

itstippy's picture

There is very little the Fed can do if it becomes indisputably clear that the underlying corporations are bleeding money.  The only reason many corporations here and abroad are avoiding insolvancy is through extremely low capital costs and fuzzy "non-GAAP" accounting.  They've already slashed payroll, eliminated pensions and benefits, eliminated Research & Development, eliminated travel and expense accounts, and taken every other step they can think of to cut costs.  

The next big economic downturn will be a doozy.  There's no corporate fat left to cut anywhere except stockholder dividends, stock buyback programs, and executive compensation.  The prevailing corporate "growth" model is not designed to withstand a prolonged period of retracement.  "Grow or die" has been the mantra for corporate planners for decades, and global corporations are so thoroughly leveraged at this point that they simply aren't robust enough to handle an economic storm.

wcvarones's picture

Perhaps, but all that could be true and the Fed could still print enough to keep nominal asset prices up.

itstippy's picture

Yes, they could, by outright buying stock ETFs like Bank Of Japan does.  Perhaps that's inevitable.

Which of these statements by (then) Fed Chair Ben Bernanke was a lie?: 

"We will never be Japan."

"We will never monetize Government debt."

"Unorthodox measures will be brief, limited, and targeted."

Currently the Fed finances the Working Group on Financial Markets (Plunge Protection Team. or PPT).  The PPT steps in and buys stock options when necessary to game the system, particularly the algos, into thinking there is market liquidity and upward momentum.  The PPT never exercises these stock options, they just let them expire.  This is possible because the Fed provides an unlimited source of funds for the PPT to use.

If (when) it becomes obvious to all that major corporations are bleeding money and are insolvent losers, no amount of gaming will save stock valuations.  At that point either the Fed steps in and buys stock ETFs outright (an announced and transparent "Fed Put"), or all Hell breaks loose in the financial markets.

Holy Roller Empire's picture

If it means Trump goes, then ya the fed will do it.

MrSteve's picture

Sir, you mention the " Depression, widespread bank insolvency, mass state and municipal bankruptcies, and immediate pension implosions" as if these conditions aren't already in the rearview mirror. If you are waiting for some august body of duly deputized accountants, CPAs, geniuses, scholars and financial seers to make some official pronouncement, you are sadly misinformed. One-third of the American work force is idle, half the country's households can't scrape up $400 if they had to, Europe is flooded with millions and millions of refugees and migrants on the dole, the PIGS banks are bust and every pension in America is pumping bogus return expectations to avoid real nasty write-downs. The price of oil, the lifeblood of the economy, is down under half of what it was. The debt collapse is happening now. Adding more zeroes will not make things really better. Good luck, we're all gonna need it.

tinfoilhat's picture

Hussman is a smart guy, and his plan makes a lot of sense. That said, his returns suck donkey balls. The real question is when does the global central bank cartel support get pulled? Figure maybe 500-1000 well-connected people in the whole world know the answer to that one, and Hussman isn't one of them.

wcvarones's picture

Hussman doesn't get that the Fed is way more powerful now (QE) and way more desperate to keep asset prices elevated than it ever was during the long period of his backtest data.

taketheredpill's picture



The big issue for the Fed is letting the air out of Equities slowly.  Thats what they want to do.  Then as the sell-off picks up speed they will talk back the hikes, talk back the QT etc.

Maybe it will work.  But if it doesn't it should be amusing:


“From time to time, I open a newspaper. Things seem to be proceeding at a dizzying rate. We are dancing not on the edge of a volcano, but on the wooden seat of a latrine, and it seems to me more than a touch rotten. Soon society will go plummeting down and drown in nineteen centuries of shit. There’ll be quite a lot of shouting.”

Gustave Flaubert 1850

tinfoilhat's picture

Deflate equities slowly like they did in 2008 just before the Presidential election you mean?

Stormtrooper's picture

NO, NO, NO, NO!!!!!!!!!!!  This time is DIFFERENT!!!!!!!!  Nothing can overcome funny money printed from thin air as long as all humans are trained to accept it like dogs conditioned to expect treats after doing a trick.

Clowns on Acid's picture

Have the Stalingrad and Poorsky Index "correct" 10% over a few months...driving everybody into bonds....while Stalingrad and Poorsky are "correcting" that would he a good time to secretly begin tyhe Tapering....probably could get rid of 300 - 500 Billion oif USTs, the Fed will never sell the MBS back into market. Just sit on them until maturity.... 

assistedliving's picture

Hussman and the there's too Market prognisticators for ya

assistedliving's picture

prognosticators.  double bad

wheres f#*king spell check when i need it

Batman11's picture

If today's Central Bankers had been around in 1600s Holland they would have been propping up the Tulip Bulb market.

The neo-liberal fantasy is that real wealth can be created by pumping up asset prices.

They are keeping the fantasy alive for now.

Batman11's picture

“We know what we’re doing; stock prices can only go up” 1920s bankers

“We know what we’re doing; house prices can only go up” 2000s bankers



roadhazard's picture

The Fed = always behind the curve.

Vinividivinci's picture

Breaking bad...DC-style.

govtsucks's picture

The thing is, crashes don't need a black swan in order to occur. The two largest crashes of all time, 1929 and 2000, had no triggering event. The market simply went down because it ran out of suckers.

govtsucks's picture

The thing is, crashes don't need a black swan in order to occur. The two largest crashes of all time, 1929 and 2000, had no triggering event. The market simply went down because it ran out of suckers.

ludwigvmises's picture

Hussy is down 50% over the last couple years. Follow his analysis at your own peril.

silverer's picture

No problem. Every average American became very well off while Obama was president. The TV said so. So I'm sure every average Joe will come out rich on this one, even after their losses. lol