Since most of you are too lazy to read Hussman’s brilliant analysis every week, I’ve picked out the key paragraphs from this week’s letter. For the really lazy, I’ve bolded the key sentences. The lemmings on Wall Street are still confident as they march in lockstep towards the cliff.
“A group of lemmings looks like a pack of individualists compared with Wall Street when it gets a concept in its teeth.”– Warren Buffett
I had very vocal concerns about valuation during the tech bubble and the housing bubble, well before they burst. But it was a specific combination: extreme valuation coupled with fresh deterioration in market internals – the same combination we observe presently – that provided us with timely evidence that market conditions had shifted to urgent risk at what in hindsight turned out to be the very beginning of the 2000-2002 and 2007-2009 collapses. Those collapses wiped out the entire total return of the S&P 500 – in excess of Treasury bills – all the way back to May 1996, and June 1995, respectively, despite aggressive Fed easing in both instances. Don’t imagine that the current bubble will avoid a similar completion.
At present, the S&P 500 is an average of 114% above the historical norms of the most reliable valuation measures we identify (and the importance of using historically reliable measures can’t be overstated). Even this obscene overvaluation might not be of urgent concern, however, were it not for the fact that our measures of market internals and credit spreads also remain unfavorable at present – as they have been since late-June of last year (see Market Internals Suggest a Shift to Risk Aversion). Notably, the broad market – such as the NYSE Composite – has been in a low-volume sideways distribution pattern since then. In the absence of a jointly favorable shift in market internals and credit spreads, my impression is that the best characterization of market conditions at present is as a broad but possibly incomplete top formation, after a nearly diagonal half-cycle advance, and preceding a potentially violent retreat over the completion of this cycle.
As we observe conditions at present, market internals and credit spreads continue to suggest a subtle shift toward risk aversion. In that environment, awful outcomes occur more often than not. They may not happen immediately, but they tend to happen quickly. The late MIT economist Rudiger Dornbusch characterized the process well: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
About 8% of market history falls into the present set of market conditions (essentially characterized by extreme overvalued, overbought, overbullish conditions that are coupled with deterioration in market internals or credit spreads on our measures). To the extent that air pockets, free-falls and crashes have reasonably identifiable commonalities, this 8% of history captures what we view as the essential features.
In any event, present conditions are not favorable (or even flat) on our measures, and despite week-to-week variation, the average outcome of present conditions has been wicked.
Read all of Hussman’s Weekly Letter
Are Stocks Heading For a 1929-Type Crash?
Submitted by Phoenix Capital Research on 04/12/2015 16:35 -0400
In the early 2000s, Alan Greenspan was worried about deflation. So he hired Ben Bernanke, the self-proclaimed expert on the Great Depression from Princeton. The idea was that with Bernanke as his right hand man, Greenspan could put off deflation from hitting the US. Indeed, one of Bernanke’s first speeches was titled “Deflation: Making Sure It Doesn’t Happen Here”
The US did briefly experience a bout of deflation from late 2007 to early 2009. To combat this, Fed Chairman Ben Bernanke unleashed an unprecedented amount of Fed money. Remember, Bernanke claims to be an expert on the Great Depression, and his entire focus was to insure that the US didn’t repeat the era of the ‘30s again.
Current Fed Chair Janet Yellen is cut of the same cloth as Bernanke. And her efforts (along with Bernanke’s) aided and abetted by the most fiscally irresponsible Congress in history, have recreated an environment almost identical to that of the 1920s.
Let’s take a quick walk down history lane.
In the 1920s, most of Europe was bankrupt due to after effects of WWI. Germany in particular was completely insolvent due to the war and due to the war reparations foisted upon it by the Treaty of Versailles. Remember, at this time Germany was the second largest economy in the world (the US was the largest, then Germany, then the UK).
Germany attempted to deal with the economic implosion created by WWI by increasing social spending: social spending per resident grew from 20.5 Deutsche Marks in 1913 to 65 Deutsche Marks in 1929.
Since the country was broke, incomes and taxes remained low, forcing Germany to run massive deficits. As its debt loads swelled, the county cut interest rates and began to print money, hoping to inflate away its debs.
When the country lurched towards default, US and other banks loaned it money, doing anything they could to keep the country from defaulting on its debt. As a result of this and the US’s relative economic strength compared to most of Europe, capital flew from Europe to the US.
This created a MASSIVE stock market bubble, arguably the second largest in history. From its bottom in 1921 to its peak in 1929, stocks rose over 400%. Things were so out of control that the Fed actually raised interest rates hoping to curb speculation.
The bubble burst as all bubbles do and stocks lost 90% of their value in a mere two years.
Today, the environment is almost identical but for different reasons. The ECB first cut interest rates to negative in June 2014. Since that time capital has fled Europe and moved into the US because 1) interest rates here are still positive, albeit marginally, and 2) the US continues to be perceived as a safe-haven due to its allegedly strong economy.
This process has accelerated in 2015.
· Globally, there have been 20 interest rate cuts since the years started a mere two months ago.
· Interest rates are now at record lows in Australia, Canada, Switzerland, Russia and India.
· Many of these rates cuts have resulted in actual negative interest rates, particularly in Europe (Denmark, Sweden, and Switzerland).
· Both the ECB and the Bank of Japan are actively engaging in QE programs forcing rates even lower.
· All told, SEVEN of the 10 largest economies in the world are currently easing.
Because the US is neutral, money has been flowing into the country by the billions. A lot of it is moving into luxury real estate (particularly in LA and York), but a substantial amount has moved into stocks as well as the US Dollar.
As a result of this, the US stock market is trading at 1929-bubblesque valuations, with a CAPE of 27.34 (the 1929 CAPE was only slightly higher at 30. And when that bubble burst, stocks lost over 90% of their value in the span of 24 months.
Another Crash is coming… and smart investors would do well to prepare now before it hits.
Looks like crash time here on Main St. as well. I’ve not seen it this slow in our small business. Seems people are flat broke.
It’s going to be impossible for main st. To ever recover as the currency is being diluted every month.30 years of commercial fishing in central jersey and costs are at of control.
When enough dominoes fall we will have Wall st reality.