Posted on 2nd June 2014 by Administrator in Economy |Politics |Social Issues


Market tops don’t happen on a particular day. They won’t be ringing a bell. Market tops occur because valuations become extreme and overconfidence, delusional thinking, and unrealistic expectations combine to produce a crash. The 3rd crash in the last 14 years is imminent. All of the gains since 2010 will be purged. The general public will again be shocked and flabbergasted. Hussman lays it all out. I’ve included the chart of doom and a few pertinent passages from his weekly letter. Maybe this time will be different. 🙂

“It’s instructive that the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bills – all the way back to May 1996, while the 2007-2009 decline wiped out the entire excess return of the S&P 500 all the way back to June 1995.  Overconfidence and overvaluation always extract a terrible payback.

It may also be helpful to remember that market peaks are a process, not an event. In the presence of a broad range of reliable valuation metrics uniformly at more than twice their historical norms, coupled with the most severe overvalued, overbought, overbullish, rising-yield syndrome we define, it is instructive how shorter-term action has evolved near those points. Outside of today and 1929, the other two instances are, not surprisingly, 2000 and 2007. The chart below provides a more granular reminder that market peaks are often a broad process and can involve hard initial downturns and swift recoveries. The ultimate follow-through provides some insight regarding the full scale of our concerns.”

It is Informed Optimism To Wait for the Rain – Hussman Weekly Market Comment 3/10/14

“From a valuation standpoint, we estimate that the S&P 500 Index would have to fall to the 1000 level to bring prospective 10-year nominal total returns toward their historical norm of about 10% annually. With the exception of the 2000-2002 bear market, valuations have typically been lower, and prospective returns higher, at cyclical troughs throughout recorded history (even in data prior to the 1960’s when interest rates were similarly depressed).

Other considerations that have historically been important would persist independent of our various concerns about profit margins, Fed-induced yield-seeking, covenant-lite leveraged loan issuance, equity margin debt, economic deceleration, and so forth.

In my view, investors should be thinking very seriously about the extent of potential market losses over the completion of the present market cycle. It is the wrong question to ask “where else am I going to put my money with short-term interest rates near zero?” The problem with that question is that it carries the implicit assumption that the expected return on stocks is even positive or adequate given the prospective risks. At present, the better question is “do I prefer a zero loss to the prospect of a 40-60% interim loss in a market that is strenuously overbought and overbullish, and has returned to valuations that are more than double reliable historical valuation norms?”

On Friday, our estimate of prospective 10-year S&P nominal total returns set a new low for this cycle, falling below 2.2% annually. This is worse than the level observed at the 2007 market peak, or at any point in history outside of the late-1990’s market bubble.”

Read John Hussman’s Full Letter

  1. Administrator says:

    Pimco’s Keynesian Fool Returns—-Blithering About Minsky Moments And Free Money Forever

    by David Stockman • June 2, 2014

    The single most dangerous meme now extant among the Cool-Aid drinkers is that we already had something called the Minsky Moment in 2008—so six years on its still too early for another. Fittingly, CNBC trotted out one of Pimco’s retired bond peddlers, Paul McCulley, to explain this, and why it is therefore safe to load up on bonds. That is, bonds which Bill Gross has already bought and which McCulley now invites the mullets to bid higher.

    After all, in a world of monetary central planning appearing on bubblevision to egg on the mullets is what bond fund economists do for a living:

    ‘We don’t have to be worried about the Big One. We had the Big One, and you don’t have another Big One after you have had the Minsky moment,’ he said.”

    Now lets see. Either the last Big One came crashing into Wall Street on the tail of a comet from deep space—in which case we need to consult the astronomical charts about the timing of the next one— or it was enabled, fueled and cheered on by the denizens of the Eccles Building. If the latter, then it is obvious that they have done nothing differently in the last six years and, in fact, have actually doubled down and then some on Greenspan’s housing bubble maneuver.

    Indeed, the Fed has pegged interest rates in the money markets at essentially zero for the past 66 months—a condition that has never before happened during the history of modern financial markets. That makes Greenspan’s 24 month experiment with 1% money during 2003-2005 pale by comparison. Yet free or nearly free funding to the carry trades always and everywhere has the same effect: it incites massive leveraged speculation in the financial markets as gamblers seek to capture easy profit spreads between zero cost liabilities and “risk assets” which generate a positive yield or appreciation.

    Now deep into year six of a monetary policy that is the mother’s milk of financial bubbles, there are warning signs everywhere. Margin debt reached historic peaks a few months ago; momentum driving hysteria of dotcom era intensity afflicted the bio-tech, cloud and social media stocks until they rolled-over recently; the Russell 2000 is trading at 85X reported income–a wobbly metric which has only grown fitfully and episodically among its constituent companies; junk bond issuance is at record levels and cov lite loans and booming CLO issuance–the hallmarks of the 2007-2008 blow-off top—have made an even more virulent reappearance; the LBO kings are busy strip-mining cash from portfolio companies already groaning under the weight of unrepayable debt via the device of “leveraged recaps” –another proven sign of a speculative top; and now the LBO houses are furiously buying and selling among themselves what have become permanent debt-mule companies by scalping cash from buyers who then reload more of the same debt on the sellers.

    In short, the financial system is saturated with ticking time bombs waiting for a catalyst. Yet some Keynesian clown who has the audacity to proclaim himself an economist shows up on CNBC to deny these patently obvious realities by reference to an academic theory that is laughable.

    We are supposed to believe that a Minsky Moment is rooted deep in the irrational interior of capitalism’s “animal spirits”. Accordingly, it is not the consequence of central bank policy, but actually the reason we need central banks to come in after the fact with massive liquidity infusions to stabilize the system and “heal” the damage.

    Yes, the Minsky Moment is the ultimate ruse of Keynesian central banking; it turns cause and effect upside down. It puts one in mind of the young man who brutally butchered his parents and then threw himself on the mercy of the court on the grounds that he was an orphan!

    Perhaps one of the CNBC interviewers might have been alert enough to ask McCullley to riddle this: Why were there no Minsky Moments during the entire 58-year span between October 1929 and October 1987 when the stock market had its first spectacular meltdown? The answer is that for the most part the central bank was in the hands of sound money men—-Mariner Eccles, William McChesney Martin, Paul Volcker—- and institutional arrangements—the Bretton Woods system—-that precluded the lunacy of zero rates in the money markets.

    So forget the Minsky Moment and all the rest of the neo-Keynesian gibberish which goes with it. Its just another content-free, made-up slogan that is being desperately peddled by Wall Street Keynesians in order to keep their customers in the game and therefore squarely in harms way.

    Actually, the Minsky Moment ploy is even more insidious. Self evidently the Fed has destroyed the government bond market and turned giant funds like Pimco into front-runners who make money primarily by pimping for the Fed. So we are now entering the next phase of this destructive game in which the new regime will eventually be 2% money market rates in a 2% inflation world—and for as far as the eye can see. That is, free money in real terms forever.

    And that folks is why you should invest with Pimco. The reality soon to be officially acknowledged is that Janet and her band of money printers have sentenced the millions of savers in America to forever earn nothing on their capital or to turn it over to crony capitalist con men like Paul McCulley and Bill Gross.

    And ultimately we had to get to this point where the marketplace broadly defined – all asset classes are accepting that risk-free cash trades at par – you get it back tomorrow – should not provide a real rate of return. It’s preservation of capital – period. If you want to have a real rate of return you have to be in assets. So we’re having a once-in-a-lifetime revaluation of assets. I think it’s kind of cool.”

    Well, cool for him and his buddy Bill.

    .May 29 – CNBC: “Investors should not fear any of the kind of catastrophic ‘Minsky moments’ that fed the recent financial crisis, despite the reappearance of easy credit in the home mortgage markets, [Paul] McCulley said. McCulley is credited with inventing term ‘Minsky moment’ to describe a sudden crash in asset values, usually following a period of extreme speculation using borrowed money… ‘We don’t have to be worried about the Big One. We had the Big One, and you don’t have another Big One after you have had the Minsky moment,’ he said.”

    Paul McCulley, May 29, 2014, appearing on CNBC: “I don’t think the world is upside down. I think the world is pricing in and coming to grips with the fact that post the ‘Minsky Moment’ – which was 2008 – and post five years’ worth of healing in the economy and in the financial markets and in the banking system – that we’re on the cusp of emerging from a liquidity trap. And that the Fed and other central banks around the world are going to be exceedingly low on short-term interest rates. This is a brand new regime. We are calling it here (Pimco) the ‘New Neutral’ and I love the phrase; I’ve been writing about it for ten years. And ultimately we had to get to this point where the marketplace broadly defined – all asset classes are accepting that risk-free cash trades at par – you get it back tomorrow – should not provide a real rate of return. It’s preservation of capital – period. If you want to have a real rate of return you have to be in assets. So we’re having a once-in-a-lifetime revaluation of assets. I think it’s kind of cool.”


    2nd June 2014 at 1:12 pm

  2. Maddie's Mom says:

    “I think it’s kind of cool.”

    I think it kind of stinks.”


    2nd June 2014 at 5:33 pm

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