Sunday, January 5, 2014

Bubble Update! It Gets WORSE!

From Dr. John Hussman's weekly market update today:

Surprise! High consumer confidence is a contrary indicator! 

Selected quotes from Dr. Hussman's commentary today:
“Wall Street remains exuberant about economic prospects. Last week brought a 6-year high in consumer confidence, evidently supporting the idea that the consumer remains strong and the economic expansion remains intact. Unfortunately, if you examine the data, you'll quickly discover that consumer confidence is a lagging indicator, well explained by past movements in GDP, employment, and capacity utilization. Worse, for the stock market, it's a contrary indicator. This is a fact that I've noted at both extremes, not only in early 2000 when new highs in consumer confidence supported a defensive position, but conversely in the early 1990's, when new lows in consumer confidence supported a leveraged position in stocks. High levels of economic optimism are regularly observed at the peaks of both U.S. and foreign economic expansions. This includes the general consensus of individuals, businesses, politicians, central bank officials and notoriously – economists. That shouldn't be surprising. It's the very nature of a peak that it can't be produced except by unusual optimism.” 

 "The deeply unfortunate part of this story is that since early 2013, these strenuously overvalued, overbought, overbullish, rising-yield conditions have been observed not only in recent weeks, but also in May 2013, with a close call as early as February 2013. No material market weakness has emerged during this period, which encourages investors to ignore the risk altogether, rather than consider the likelihood that this risk is increasing, despite being unrealized to-date." John Hussman PhD

What Dr. Hussman is saying is that with the market so bullish, market participants increasingly IGNORE the risks, taking greater and greater risk, thus creating MORE risk. The more bullish they become, the more likely an exogenous event will occur that will crash the market.

 " Rudiger Dornbusch once said, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'"

 "I continue to believe that quantitative easing has no mechanistic relationship to the economy or the financial markets beyond creating a purely psychological discomfort with zero interest rates, and encouraging a reach for yield in speculative assets that has already set reckless extremes in median stock valuations, margin debt, and "covenant-lite" lending. Want to know the cause-and-effect mechanism that links QE to the economy? As FOMC governor William Dudley observed last week, so does the Fed." 

 "... worth noting is that in historical data since 1871, there is only a single month prior to the late-1990's bubble when valuations were richer than they are today." Dr. John Hussman

He's saying that only one other time, for a single month, were stocks so OVERpriced as they are today.

"...strong economic, speculative and monetary enthusiasm has historically been quite a contrary indicator for stocks."

 "I expect little, if any of the market’s gains since 2010 to be retained by investors over the completion of this market cycle."
"I should note that we now estimate negative prospective total returns for the S&P 500 on every horizon of less than 7 years. "
John Hussman, PhD