Three Massive Bubbles In 17 Years: When Will This One Bust? A 60% Decline Coming?

Authored by Mike Shedlock via,

John Hussman’s presents a message no one wants to hear because nearly everyone is too busy believing for the third time in 17 years that “It’s different this time”.

Last week Hussman wrote about Valuations, Sufficient Statistics, and Breathtaking Risks. This week it’s more of the same with his post Behind the Potemkin Village.

The markets are so overvalued now that Hussman expects a 60% decline from here.

There’s an apocryphal story that in 1787, during the journey of Empress Catherine II to Crimea, Prince Grigory Potemkin, the governor of the region, erected fabricated villages along the Dnieper River, which would be disassembled after she passed by, and rebuilt again downstream overnight.


When one examines the collapses of the tech bubble and the housing bubble, it’s evident that one of the central elements of those collapses was the gradual recognition by investors that the overvalued pieces of paper they were holding were actually little Potemkin Villages; temporarily glorious and impressive on the surface, but backed by much less than investors had imagined was there. What sort of “catalyst” is needed for a Potemkin Village or a Ponzi scheme to disappoint? Only the gradual or sudden discovery of the reality behind it: the recognition that there is no “there” there.


Market returns don’t just emerge from nowhere. They are driven by the sum of three factors: growth in fundamentals, income from cash distributions, and changes in valuations (the ratio of prices to fundamentals). For example, the 10% annual total return of the S&P 500 since 1960 also derives from growth in S&P 500 revenues averaging 5.7% annually since the 2000 peak, dividend income averaging about 3.0% annually, and a much steeper increase in the S&P 500 price/revenue ratio contributing 1.3% annually (taking the current price/revenue multiple to the same level observed at the 2000 market peak).


Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%.


Here are the facts: over the past several decades, due to a combination of demographic factors and persistently slowing productivity growth, the core drivers of real U.S. GDP growth have declined toward just 1% annually, with a likely decline below that level in the coming 10-12 years. Indeed, in the absence of any recession, U.S. nonfarm productivity growth has averaged just 0.8% annually since 2010 and 0.6% over the past 5 years, while the U.S. Bureau of Labor Statistics estimates labor force growth of just 0.3% annually in the coming years (which would be matched by similar growth in employment only if the unemployment rate does not rise from the current level of 4.3%). Add 0.6% to 0.3%, and the baseline expectation for real GDP growth is just 0.9%. Nominal growth is likely to be similarly weak.


While S&P 500 earnings growth has slightly outpaced revenue growth over the past two decades because of rising profit margins, recent record profit margins have now stagnated and have begun to retreat, resulting in the likelihood that earnings growth will match (at best) or even lag, overall economic growth in the years ahead. At the same time, the valuation measures we find most reliably correlated with actual subsequent S&P 500 total returns now average between 150-170% above historical norms that they have approached or breached by the completion of every market cycle in history. For a review of the historical reliability of these measures and popular alternatives, see the table in Exhaustion Gaps and the Fear of Missing Out


Let’s be clear. It has taken the third financial bubble in 17 years to bring the total return of the S&P 500 since the 2000 peak to just 4.8% annually, all of which we expect to be wiped out over the completion of the current market cycle. Even if investors are lucky, and valuations reach yet another bubble extreme 10-12 years from today, the annual total return of the S&P 500 between now and then is likely to be even lower than the 4.8% return since 2000, because the underlying economic drivers have deteriorated further. In my view, it’s substantially more probable that investors 10-12 years from now will find the S&P 500 Index at a lower level than it is today, with the average portfolio struggling to get back to zero from deeply negative interim losses.

What If?

It’s very difficult to present a fresh look each week on the same topic. I salute Hussman for his ability to do just that.

Even if he is only half-right on the duration and strength of the decline, public union pension plans in states like Illinois will be broke.

State of Denial and Hubris

In his article, Hussman present a total of seven charts to make a compelling case.

Most people ignore Hussman because they don’t like his message. Certainly, it’s not the message Wall Street wants you to hear. Importantly, Wall Street can repeat its message way more than those in the Hussman camp.

Some know full well the stock market is in a bubble but they expect they will get out on time. A few might manage. In aggregate, it’s impossible.

“Don’t Worry There is No Bubble”

Many of my readers think the “Fed won’t allow another major stock market decline”. But if the Fed could prevent bubbles from popping why did we have two crashes already?

That’s the message Wall Street wants people to believe. It’s also the message people want to believe.

I don’t know when this bubble will burst, nor does anyone else. But the bigger the bubble the louder the pop.

Related Article

Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble


junction Tue, 09/12/2017 - 08:20 Permalink

Good times.  Bring it on!And what happened to the high water trucks that were supposed to be in South Florida to assist in recovery efforts.  There seem to be none, based on recent news footage there.

overbet Manthong Tue, 09/12/2017 - 10:38 Permalink

I can only see a 60% decline in my dreams. The printing presses would be fired up and holding a bid that further devalued the dollar which would add even more to higher price of dollar based stocks. Maybe a 60% decline would be possible if they agreed to bail on the dollar as reserve curreny which is a long shot pipe dream. 

In reply to by Manthong

Manthong overbet Tue, 09/12/2017 - 11:21 Permalink

  Oh, F me… The entire financial system is a scam…… The moment that your hard earned paycheck hits the bank, it is their money… an unsecured loan from you to them…. and the way the law has been written by your trusted representatives in .gov you have no actual right to it. If you have a “safety deposit box” at the “bank” …. same thing….everything within their doors is theirs. In 1933 FDR confiscated all the gold in every bank and safety deposit box and made the ownership of monetary gold illegal for US citizens.  Fed notes used to have gold redeemable value at Fed banks... an oh, I still have a couple of souvineer "silver certificate" Fed notes in a drawer somewhere.  Fed notes are Fed notes... worth only what the Fed feels like at the time. Trump can’t get away with that today (and few citizens own any significant amounts of gold except maybe Jamie Dimon and Lloyd Blankfein) but he can revalue it and depreciate the dollar. He will do that to the alleged 8,000 tons of gold or gold plated tungsten that is in Fort Knox, West Point and whatever the Fed claims to have in NYC. 

In reply to by overbet

GunnerySgtHartman _RRR_ Tue, 09/12/2017 - 08:44 Permalink

since the most crowded trades are all LONG it maybe closer than we thinkAgreed, this reminds me of when everyone was piling in just before the NASDAQ crash in 2000 - only this time it is a lot larger and will fall a lot further, a lot faster.And just like he said back in 2000, Jim Cramer is saying "this time is different!" course, he also said that there was no crash in the offing back in 2000, that we should buy buy buy!: used to equate him to a carnival barker, but that's being mean to carnival barkers.

In reply to by _RRR_

Treason Season GunnerySgtHartman Tue, 09/12/2017 - 09:51 Permalink
  • Lehman Brothers. Cramer recommended this stock on 10/17/05 at $55.18 per share. On 9/5/08 with the stock trading at $16 per share, on CNBC, Cramer selected Lehman as a "screaming buy" and said things couldn't get any worse for the company. The firm went bankrupt and the stock trades for pennies per share for more than a 99 percent loss for Cramer.

In reply to by GunnerySgtHartman

khnum GunnerySgtHartman Tue, 09/12/2017 - 12:06 Permalink

The current Fed  Enron which started in 2008 makes history,charts,financial analysis and the concept of a market quaint historical items the fundamentals he discusses aren't necessarily prime drivers any more, anyone could be a billionaire in this market if they like Icahn or Buffet had virtually unlimited access to virtually free money,sacking employees and buying your own shares are also 'fundamentals'to improve stock prices,yes there will be a 60 per cent down turn but only when the bastards who run the show decide to pull it and short the bastard to the bottom.

In reply to by GunnerySgtHartman

drgizmo GunnerySgtHartman Tue, 09/12/2017 - 15:53 Permalink

Something needs to be said. We are against the existence of irredeemable paper currency... central banking and central planning, cronyism... socialized losses and privatized gains... counterfeit credit... wealth transfers and bailouts...welfare both corporate and personal... all this means is ... “The world will soon wake up to the reality that everyone is broke... and of can NOT collect...from the bankrupt... who are owed unlimited amounts by the insolvent... with an unacceptable and worthless currency... against defaulted and "hypothicated-rehypothicated"...collateral...too which nobody is sure who holds title or its worth.”- RGR777... The government has always lied about every "financial crisis," including what's happening in Europe right now. And it'll certainly lie about the next one, too.

In reply to by GunnerySgtHartman

sickavme (not verified) junction Tue, 09/12/2017 - 08:26 Permalink

Whats even worse is they are treating trump like the unicorn... And they will condemn him like one too... Poor bastard... Maybe he can keep the fire burning till the end of whatever term... I would... But then again, you wouldn't see me run for president in this environment...

In reply to by junction

TuPhat junction Tue, 09/12/2017 - 08:37 Permalink

junction, most rescues in Houston were done by private people with their own boats, trucks etc.  The news constantly showed footage of police and other government orginizations making preps with boats, jet skis, and trucks but very few actual rescues.  They only want more grants from FEMA to buy more equipment.  They did interview one cop who said they couldn't actually help with rescues because they had to be prepared for law enforcement response.  They didn't talk to anyone else after that who actually told the truth.

In reply to by junction

chestergimli yogibear Tue, 09/12/2017 - 10:48 Permalink

Apocalypse 16:21

And great hail like a talent, came down from heaven upon men: and men blasphemed God for the plague of the hail: because it was exceeding great.

A talent in the time of John was money. Since hail is ice crystals, this passage must indicate that all forms of money are going to fall or fail if you will.

Incidentally, in the Catholic Douay Rheims bible, Armaddon in the footnotes advises: in other words-hill of robbers. Will the (((bankers))) and all of their ilk be fighting over this money?

In reply to by yogibear

taketheredpill Tue, 09/12/2017 - 08:21 Permalink

Best chart I've seen in weeks is US Household Net Worth and Nominal GDP back to 1990 (referenced to 1990 values).  The Dot Com and Housing Bubble stand out, as does the relative Biglyness of the current Disaster-in-Waiting. 

Overleveraged_… Tue, 09/12/2017 - 08:26 Permalink

I beg to differ. The fact is these markets are observed 24 hours a day by folks who have their finger on the "buy" trigger with unlimited bullets. As long as stock markets are measured in Dollars, Euros and Yen then they will keep going up. The people in charge of creating Dollars, Euros and Yen are creating them constantly and using them to pump up the stock market. There will be no crash as one is no longer possible.The reason crashes happened in 00 and 08 is because we were not printing infinitie amounts of money and pumping it into the market. Back then we did not as closely monitor the day to day prices with fingers on the "buy" buttons.The sky is the limit. I am still predicing 3000 S&P500 print by year end and 4500 by 2019. These times ARE different.

TuPhat Overleveraged_… Tue, 09/12/2017 - 08:48 Permalink

I have the same thoughts myself.  The markets are not the bubble, central bank control and fiat printing is the bubble.  The markets, bonds, stocks, etc will not fail until the whole system collapses.  Hussman, Mish and others have made a career of figuring out the markets and prognosticating about the ups and downs.  They don't understand that it is different this time.  The difference is that there is no real market.  It will drop when the elite are ready to profit from the drop and it will totally collapse when the ruse quits working.  I pulled my 401k out of stocks and bonds four years ago and put it in bank CDs.  I have missed the historic rise but told myself the money was safe.  Now I think it isn't safe anywhere.  There is no other choice but put it in the markets or suffer losses from inflation.  Even if everyone thinks Hussman is right there is nothing they can do.  It is different this time and most investors know it, but have no choice.

In reply to by Overleveraged_…

OverTheHedge TuPhat Tue, 09/12/2017 - 10:29 Permalink

Something has to give. If stock values are not allowed to go down, in dollar value, then the dollars they are measured in will go down. We all know that Weimar stock values went through the roof, as the Mark went through the floor.My personal, unprovable theory is that the plan is to inflate "carefully" so as to pay down the debt, without crashing the world economy or $. By carefully, I am thinking around 10%pa until the debt to GDP ratio looks more sensible. How the hell they manage to do this, I have no idea, but this is why they went to expensive economics schools - to do just this sort of clever manipulation.So, if it all goes well, then steady "gentle" inflation for years. If it doesn't go well, either a monumental crash, or print till your ears fall off and hyper-inflate to infinity and beyond. If we are really lucky, first one, and then the other.Either way, real people with real lives are not going to have much fun. 

In reply to by TuPhat

JohnGaltUk Overleveraged_… Tue, 09/12/2017 - 09:16 Permalink

Do you really think currency debasement has not been tried before? The hallmark of a society which is in collapse  is the debasement of their currency. The Romans tried it, the Japanese tried and many other societies and with out doubt, they ALWAYS fail. It is a confidence game and the state is losing.Folks do not like to see ordinary folks getting ticketing for litter or having a brake lightout while crooked banksters walk off with fraudulent millions. It highlights how crooked our politicians are and demonstrates how politicised our Police Force is. Why has law enforcement not taken the initiative, because they have been told to stand down. When things get this bad it becomes them (the state) against us ( the producers of wealth) State employees will not give up their free lunch easily like the monsters do not want their swamp drained. TBH this will end up on the streets with pitch forks.

In reply to by Overleveraged_…

taketheredpill Tue, 09/12/2017 - 08:29 Permalink

Greenspan....Feck Off. What happens during QE?  Stocks rise.  Govie Bonds (Prices) fall. What will happen to Stocks when QE is reversed (QT)?  Stocks will fall.  Govie Bonds (Prices) will????? 

tiwimon Tue, 09/12/2017 - 08:41 Permalink

Ripley:  "Did IQs just drop sharply while I was away?" C'mon it IS different this time - they are full on printing - and a regular joe won't stand a chance between bail ins as a safety net and increasing taxes and fees to keep the illusion going that all is well - be damned about dropping pay and rising costs - eat cake

Byrond Tue, 09/12/2017 - 08:43 Permalink

They just need one year's distance from the election. Because there is a massive, awkward bubble, and they will pop it if it doesn't roll on some sharp stuff and pop on its own. And as others realize, Trump will be left holding the busted balloon like a wimpy kid at a birthday party gone horribly wrong. 

buzzsaw99 Tue, 09/12/2017 - 08:49 Permalink

-60%?  don't make me laugh.  some of us have been waiting a long god damn time for a measly 10% pullback which as yet has failed to materialize.  -20% would be a gift from heaven.