"Like A Wrecking Ball..."

Excerpted from John Hussman's Weekly Market Comment...


What the “low interest rates justify high valuations” mantra has really done is to ensure that all asset classes are now priced at levels that are likely to generate dismal returns in the coming years. The chart below shows our best estimate of 12-year prospective nominal total returns on a conventional portfolio mix invested 60% in the S&P 500 Index, 30% in Treasury bonds, and 10% in Treasury bills. The red line shows actual subsequent 12-year returns on this mix. The current estimate is only about 1% annually, with the Treasury bond and T-bill components responsible for virtually all of that return, as the expected return on the S&P 500 component is close to zero.


What’s often missed in the “low interest rates justify higher valuations” argument is that this proposition assumes that future cash flows and growth rates are held constant. If instead low interest rates emerge as a consequence of low expected nominal growth, valuation multiples should not be affected at all, yet prospective returns will still be lower anyway (you can demonstrate this to yourself by reducing both r and g equally in a basic dividend discount model). To elevate valuation multiples in this situation is to drive prospective returns down twice; a mistaken form of double-counting.


The pendulum of speculation has swung far and has grown increasingly grotesque in order to reach this point. It will be a wrecking ball when it returns to earth.

It came in like a wrecking ball!
Did not expect that margin call!
(apologies to Miley Cyrus)


I’ve periodically framed market action from the perspective of Didier Sornette’s model of log-periodic power-law bubbles (see my recent comments in Fair Value and Bubbles: 2017 Edition). Our current best-fit to this structure is presented below. Based on recent market dynamics, I’ve refined the date of the “finite-time singularity” in this model. That “critical point” is not necessarily the date of a peak or the beginning of a crash, but what Sornette describes as “an inflection point from self-reinforcing speculation to fragile instability.” It’s also worth remembering that the “catalysts” associated with sharp market losses have often been fully recognized only after the fact, if at all. As Sornette observes, “The collapse is fundamentally due to the unstable position; the instantaneous cause of the crash is secondary.”

There’s a Wall Street aphorism that one can talk about time, and one can talk about price, but never about both. For that reason, feel free to take the following chart with a grain of salt. From our perspective, we would be inclined to take far more salt if our own measures of valuations, market internals, and overextended conditions were not so hostile as well. As conditions stand, the overall analysis contributes to our general view that the speculative pendulum is dangerously overextended.

In any event, the estimate that best fits recent market dynamics would place the critical point in the first week of August, within less than 2% of current levels. Indeed, the 30-day crash probability that we estimate from this particular model is rising vertically, and will continue to do so with every market advance from this point. In practice, based on a much broader set of historically reliable evidence, we already view the market as highly vulnerable to steep, abrupt losses.

There will be no avoiding the completion of this market cycle for investors in aggregate.


b-sugar CPL Mon, 07/17/2017 - 15:20 Permalink

It's like the guys saying how much they can't wait soros to die. Have you done research? His offspring have hatched and will take the torch...Same with those, their replacement are fresh from the mold. It's the system that allows this person, not the other way around.

In reply to by CPL

Full Court Lug… Mon, 07/17/2017 - 15:23 Permalink

People who argue that we can avoid a crash indefinitely by blowing a bigger bubble are like the ones who say we can overcome the inevitability of Peak Oil by drilling even faster...

economessed Mon, 07/17/2017 - 15:27 Permalink

Could the author please update this post with a backdating of the last graph?  I'd like to know how his carefully-fitted model operated from the period 2004-2010.   I suspect that there is a reason the earlier period was not shown to us.

Pollygotacracker Mon, 07/17/2017 - 15:31 Permalink

John Hussman is probably right on this one. Nobody could have predicted the length of time this would go on. Nobody could have predicted the shenanigans and outright fraud the CB's would engage in. Be warned.

youngman Mon, 07/17/2017 - 15:35 Permalink

Its funny but I have this strange feeling that when the crash happens....everyone will run into cryptocurrencies....and then they will go poof....and it will all be gone....just an electron in the night....then what do we /they do......

MrPalladium ludwigvmises Mon, 07/17/2017 - 15:58 Permalink

His theoretical market model is sound, but then the idea of shorting the market against the momentum trend is foolish. You go to cash rather than lose your butt. I have been waiting in cash for over a year and contrary to sell side propaganda, my cash has been accreting value as the profitibility of shorts it will ultimately collateralize keeps heading north. At times like this, cash is opportunity.

In reply to by ludwigvmises

Consuelo Mon, 07/17/2017 - 15:47 Permalink

  Hussman's problem for the past ~10-odd years is that he's decided to remain in the real universe, as opposed to the parallel one the Fed teleported us into, long about 2008.

alpha-protagonist Mon, 07/17/2017 - 17:23 Permalink

"What goes up must come downSpinnin' wheel got to go 'roundTalkin' 'bout your troubles it's a cryin' sinRide a painted pony let the spinnin' wheel spinYou got no money and you got no homeSpinnin' wheel all aloneTalkin' 'bout your troubles and you, you never learnRide a painted pony let the spinnin' wheel turnDid you find the directing sign on theStraight and narrow highwayWould you mind a reflecting signJust let it shine within your mindAnd show you the colors that are real..."

ChinaWildMan Mon, 07/17/2017 - 19:33 Permalink

  "My frustration and disillusionment with a world gone mad has begun to affect my mental state. I’m losing my sense of outrage which has driven me to write for the last nine years. It isn’t worth the expended energy when it will change nothing. I’m resigned to the inevitability of economic collapse. It’s just a matter of when."