The MSM puppets declared the stock market plunge last week was caused by the threat of the fiscal cliff. Bullshit!!!
The market is falling because we are in a recession, corporate earnings are declining, stocks are overvalued, Europe is about to implode, China is slowing, Japan is a bug in search of a windshield, Obamacare is going to crush small businesses and increase unemployment, and the same idiots who’ve been in charge for the last four years are still in charge. John Hussman points out a fact you will never hear on CNBC or from any Wall Street shyster. Treasury bills have outperformed stocks for the last 14 years. Stocks for the long run, my fat ass. John Hussman is telling you this may be the worst time in the history of investing to be in the stock market. Danger of a 30% decline is extreme. You’ve been warned.
Lopsided Risks
John P. Hussman, Ph.D.
In mid-September, our estimates of prospective market return/risk dropped to the lowest figure we’ve observed in a century of market history (see Low Water Mark). That week turned out to be the high of the recent bull market, though it’s certainly too early to establish whether that was the ultimate peak. During the recent correction, I’ve noted a modest improvement in our return/risk estimates – which focus on a blended horizon looking out from 2-weeks to about 18-months. However, last week, the stock market experienced some significant damage to internals (breadth, leadership, price/volume measures, etc). As a result, our estimates of prospective return/risk have plunged lower again, to what is now the second most negative figure we’ve observed in a century of data – the September 14, 2012 weekly close of 1465.77 continues to mark the most negative estimate.
My intent in these weekly comments has always been to share what I am looking at, and what our analysis of the economy and financial market suggests – based on extensive historical data and every analytical tool we can bring to bear. There is no need to present the case as any better or worse than it is, but the simple fact is that our return/risk estimates for stocks dropped into the most negative 1% of historical data way back in March of this year, and the estimates we’ve seen since September have been even more extreme.
The S&P 500 has now underperformed Treasury bills for nearly 14 years, including dividends. The cycle since 2007 has been extraordinary in its economic, monetary and fiscal characteristics, not to mention the need to contemplate Depression-era data along the way. It’s undoubtedly easier to dismiss my present concerns as the rantings of a permabear than to understand the narrative of this particular market cycle. But for the benefit of those who do, I want to share my view that the statistical risk of severe market outcomes, given present observable data, has almost never been worse.
That’s not to say that we should necessarily expect market losses matching profound declines such as 2008-2009, 2000-2002, 1973-1974 and so on. There is a difference between the component of market returns that can be considered “predictable” ex-ante (before the fact), and actual market returns, which contain both that “predictable” component and a much larger random component. So to say that the “expected” return is among the most negative in history is a statement about the smaller predictable component, and it doesn’t follow that the full ex-post return will also be among the most negative in history – though we can’t really rule it out.
Also – and this is important – these concerns are based on the data that we observe at present. Could that data shift? Absolutely, and we would respond to more favorable return/risk estimates accordingly. It’s just that we don’t see that yet, and we generally don’t observe such abrupt shifts at rich valuations. Our approach is always to align ourselves with the return/risk estimate that we observe at each point in time.
It’s tempting to assume that last week’s market weakness was nothing more than a post-election letdown for Wall Street, or a transitory focus on the “fiscal cliff.” But that perspective would ignore the months of extreme indicator syndromes that were in place well in advance of the recent weakness. As for immediate catalysts, Germany reported a significant miss in industrial production the day after the election, and the European Union downgraded its expectations for 2013 growth. Given the clear indication of European recession, the weakness in the “backstop” country significantly complicates the prospects that Germany will continue to bail out its neighbors or embrace the monetary equivalents of those bailouts. Here in the U.S., forward revenue guidance from companies was very weak in the most recent quarter, and leadership from a number of growth darlings has deteriorated abruptly (see the notes on exponential revenue growth in Release the Kraken for my views on the inevitability of such disappointments). Given our continued view that the U.S. is already in an unrecognized recession that began in the third quarter of this year, the “recognition” risks remain significant, and extend well beyond concerns about the fiscal cliff.
As I emphasized in September, the negative expected return/risk estimates we observe at present can’t be traced to some single extreme factor. For example, though corporate profit margins remain at the highest level in history, which make valuations look misleadingly reasonable, valuations are certainly less extreme today than they were in 2000 or even 2007. Bullish advisory sentiment has backed off from recent highs, and is certainly nowhere near its historic peak. The intermediate-term overbought condition of the market has also eased in recent weeks, and is nowhere near historic extremes. So again, our concerns are not based on some obvious, extreme indicator. Rather, these concerns are driven by the entire ensemble of indicators we use, taken together.
The present list of concerns includes rich (but not singularly extreme) valuations, coupled with unfavorable market action and a breakdown in market internals and trend-following measures, coming immediately after a seemingly endless series of hostile indicator syndromes (e.g. overvalued, overbought, overbullish). We call these syndromes “Aunt Minnies” – combinations of market conditions that may not be terribly important when observed individually, but that have almost always been followed by a specific outcome in subsequent market data when all of the conditions are observed simultaneously (see for example the October 8 comment Number Five).
In March, when the market was at higher levels than today, I called the growing procession of warnings an Angry Army of Aunt Minnies. But the constant anticipation of further monetary policy announcements from the European Central Bank and the Federal Reserve made the intervening period miserable for us for a while (at least until the hope for further “announcement effects” was removed when the Fed and ECB went all-in with QEternity). In our view, the likelihood of anything but transitory benefit from further QE is limited (see What if the Fed Throws a QE3 and Nobody Comes?). Meanwhile, that sequence of overvalued, overbought, overbullish, technically exhausted setups – followed by a clear technical breakdown – is of greatest concern here, because we often observe that sequence at the beginning of deep and extended market losses.
In practice, we don’t think in terms of “bull market” and “bear market” distinctions, but instead focus on the prospective return/risk profile of the market at each point in time. That is because bull and bear markets can only be identified in hindsight, while prospective return/risk can be estimated at each point in time based on observable data. It’s possible that present conditions will resolve to more favorable return/risk estimates without a full-on bear market, and we’re open to a flexible outlook that moves with the prevailing evidence. To do so today, however, would require those improvements to swim against what we view as an unrecognized global recession in progress.
We can hardly wait for the point – invariably observed in prior market cycles – where depressed or at least moderate valuations are joined with an emerging firming of market internals. We seem to be 180 degrees from that point today.
Lopsided Risks
In the stock market, our ensemble models are comprised of dozens and dozens of individual “learners” – models that are each based on different subsets of indicators and random subsets of historical data. Every week, we examine the consensus of those learners (the proportion that are positive and negative), the dispersion of those learners (the variation across models), and the overall return/risk estimate that is produced by those learners. Consensus tells us something about how robust our conclusions may be – the greater the consensus one way or another, the more confidence we have that similar conditions in the past have resulted in a positive or negative outcome, as the case may be. Dispersion tells us something about uncertainty. Though it is related to consensus, it is more concerned with the overall “spread” between individual estimates. A large spread tells us that the outcome is uncertain – that prevailing market conditions have resulted in widely different outcomes depending on what historical period we examine, or what subset of indicators we consider. A narrow spread tells us that present conditions have produced fairly uniform outcomes regardless of what period and indicators we select.
It is really here where my greatest concern lies, because while our overall return/risk estimate for the stock market is the second most negative in history, that estimate also reflects relatively low dispersion, and the single most lopsided consensus (97% of individual learners negative) that we’ve observed in the historical data set. That means that based on our analytical metrics, the present syndrome of market conditions – taken in its entirety – has regularly and throughout history been associated with some of the worst investment outcomes on record. Again, I am most concerned about the combination of unfavorable valuation and unfavorable market action, including the breakdown in market internals and trend-following measures, immediately following an extended period of overvalued, overbought, overbullish conditions and other hostile syndromes.
Stocks certainly appear short-term oversold here, but the historical record doesn’t give much support to the idea of trading stocks for positive short-term mean-reversion in the face of such decidedly negative return/risk estimates. Then again, the “predictable” component of short-term market movements is small relative to the variation, so these comments shouldn’t be taken as a prediction of near-term outcomes, other than to emphasize what I see as unusual danger more broadly.
Administrator says:
Japan’s economy shrinks 0.9% in July-September
LOS ANGELES (MarketWatch) — Japan’s economy shrank sharply in the third quarter, the first such contraction of the year, the Cabinet Officer reported early Monday. Gross domestic product fell 0.9% during the July-September period, or 3.5% on an annualized basis, with weakness for exports — particularly for cars and computer chips — reportedly helping drive the drop. A Reuters survey of economists had tipped a 0.9% drop during the quarter, while Dow Jones Newswires reported expectations for a 1% fall, after GDP rose 0.2% in the April-June period. On an annualized basis, Reuters had projected a 3.4% fall, while Dow Jones Newswires had expected a 3.9% decrease. Singapore-traded futures for Japan’s Nikkei Stock Average (TYO:JP:100000018) added to their losses following the data, extending a 0.3% drop to a 0.7% deficit. The yen saw less reaction, with the dollar (ICAPC:USDJPY) holding around the ¥79.47 level.
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11th November 2012 at 7:48 pm
Davos says:
MSNBS CNBS if you can handle the truth go to the Burning Platform Bitchez!
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11th November 2012 at 7:51 pm
Stucky says:
Serious question.
There MUST be some stocks that will make a killing when TSHTF. Right? Was EVERY stock down during the Great Depression? I doubt it.
Toilet paper makers seems life a safe bet, especially as people shit in their pants seeing how fucked they are. Seriously.
Booze stocks. A cheap way to kill your sorrows. Booze stocks will probably make a killing.
What else?
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11th November 2012 at 9:51 pm
Reverse Engineer says:
Smith & Wesson seems like a good bet.
RE
http://doomsteaddiner.org
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11th November 2012 at 10:27 pm
crazyivan says:
Primers and powder.
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11th November 2012 at 11:54 pm
Bruce says:
Reverse Engineer,
A half dozen Mr. Smith and Wesson’s stuffed in belt’s, boots, and holsters might become a fashion trend in the near future. Good pick.
Here is the DANGER summed up quite well with some wild eyed entertaining expressions and little bit of religious seal. It’s covers what everyone here at TBP already knows but laid out clear as a bell. Go here…. http://barnhardt.biz/ to see Ann Bernhardt before the PTB puts her in a re-education facility. She seems to being doing everything possible to provoke the bastards. The second term is in and people like her will not be tolerated much longer.
We are so damn doomed.
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11th November 2012 at 1:29 am
Mikey says:
@Stucky
Just as a rising tide floats all boats, so does a falling tide sink all boats.
if the US economy is tanked, then so to are all US stocks. Sure, entertainment and luxury goods commodities may relatively speaking, hold a higher value, but their prices will have dropped as well. I say entertainment and luxury goods based on a 30 second overview of what stocks were hurt the least 12, 24, and 36 months after the crash in 1929.
Nowdays I’d put my money on well capitalised, big branded multinationals that produce physical products that are in global demand and buy the shares from a non-US dominated exchange. Those corporations are already positioned with multiple ‘flags’ in multiple sovereign districts, minimising their sovereign risks in case any one (or even several) countries become hostile to them. Stay out of resource stocks, or any manufacturing that is based on demand and consumer discretionary spending such as Apple, steel, aluminium, or most other large industries, as well as out of most resource stocks, and as many major ‘financial’ organisations as you can. If the economy slows down, they cop it in the neck.
Companies such as Coca-Cola Amatil, Nestle, McDonalds, Pepsico, Pfizer, Colgate-Palmolive, Simplot Foods (though that’s a tad to US centric for my comfort level), etc. There’s been enough research to show that people won’t by a new gadget when they’re broke, but they’ll ‘treat’ themselves to a Coke, and will still buy toothpaste even if they’re having trouble buying fuel.
Only two ways to keep the purchasing power of your capital – don’t keep it in the US, or keep it in physical items that will hold their value.
If you’re trying to keep it out of the US, you’ll have to lose your US citizenship as the US Government has the power to unilaterally seize the assets held by any US Citizen, without that person’s knowledge, regardless of where in the world they are held. All foreign “financial entities” (whatever that means – it’s deliberately not defined) are required to report to the US govt *all* transactions made by anyone that is a US Citizen “or that are suspected of being” a US Citizen. (from memory it’s under Title 2 of Dodd-Frank, but no, I haven’t read the 6,000 odd pages of it. I’ve been informed by people that have that deal with international finance that it’s “… seriously fucked up … “)
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11th November 2012 at 2:05 am
Mikey says:
sorry – it’s Title 7, with the additions of the Volker Rule (an ammendment to Title 6), Collins Amendment, and the way it links with the Credit Rating Agency Reform Act – 2006
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11th November 2012 at 2:15 am
Reverse Engineer says:
“We are so damn doomed.”-Bruce
True enough, but as long as it is Full Doom and not Uber Doom I can live with it. Or at least a tiny subset of the population of Homo Sapiens can live with it anyhow.
Time to Pay the Piper for 10,000 years of Ag Civilizations. 4th Turning to the 20th power, Something like that anyhow.
GTFO of Dodge and then Lock & Load.
RE
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11th November 2012 at 4:45 am
Administrator says:
Stuck
Gun maker stocks are soaring. I’m guessing funeral companies will do well when TSHTF.
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11th November 2012 at 7:52 am
Mr. Happy says:
Ann Barnhardt.
Bruce: Thanks for the Ann Barnhardt videos….BRILLIANT, BRILLIANT, and BRILLIANT. If you have ever hesitated on Barnhardt, you never will again after viewing this 2 1/2 hour presentation. My God has she found her calling…fastest 2 1/2 hours ever. She does mix in religion but it works and coming from an atheist that says a lot. At the last video (8) when she quotes from St. Peter.. “Quo VADUS, where are you going? I’m going to Rome to be executed”…the tears were streaming down my face…I kid you not…and this a presentation on Global financial destruction. Barnhardt has immense presentation skills that she mixes seamlessly between education, politics, law and faith…truly powerful and clear. I learned a huge amount.
This is a woman of extreme courage who puts her money where her mouth is as you will see if you watch the presentation. When she takes off on an issue like Corzine or Morgan it becomes great theatre. The last video is simply powerful.
I’d classify Ann Barnhardt now as a national treasure. If I was a believer I’d pray for her because she needs it for reasons that are quickly understood. What the hell, I’ll pray for her anyway.
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11th November 2012 at 8:17 am
Administrator says:
BUG JUST MET WINDSHIELD
Japan Plunges Into Deep Recession; GDP Shrinks 3.5% Annualized; Japan Current Account Turns Negative First Time in 30 Years; Watch the Yen
The global economy took another turn for the worse as Japan plunged into recession following two consecutive quarters of growth.
Please consider Japan’s economy shrinks annualized 3.5%.
Japan’s economy shrank an annualised 3.5 per cent between July and September, the steepest decline since the earthquake-hit first quarter of 2011, as exporters suffered big falls in shipments to key markets such as China and Europe.
Prime Minister Yoshihiko Noda described the gross domestic product figures as “severe”, while Seiji Maehara, economy minister, said Japan had possibly entered a “recessionary phase”.
In a speech on Monday, Masaaki Shirakawa, Bank of Japan governor, said there was “no question that the [central bank] should exert every effort to enhance its easing effects as much as possible”. He said domestic demand was “unlikely to increase at a pace that will outperform the weakness in exports”.
The Japanese government’s monthly survey of “economy watchers” – which includes barbers, hoteliers, car dealers and others who deal with consumers – has recorded six falls in a row since April. Last month the index stood at a level little better than that of April 2011, in the immediate aftermath of the quake.
Japanese manufacturers from Nissan to Shiseido have reported steep falls in sales of their products in China, following a wave of demonstrations against Tokyo’s nationalisation of some of the islands in mid-September.
Japan’s top seven automakers have cut their projections for Chinese sales by a fifth, for the fiscal year to March, according to calculations by the Nikkei newspaper.
Japan Trade Deficit Largest in History
As Japan spirals out of control, please recall Japan trade deficit hits record as relations with China poisoned.
Japan registered its biggest-ever trade deficit for a half of a fiscal year, in a sign that the sovereign debt crisis in Europe and the strained relationship with China over a territorial dispute have eroded Japanese exports, government data showed today.
For the first half of fiscal 2012 through September, Japan logged about USD 40.6 billion (3,219 billion yen) in goods trade deficit, up 90.1 percent from a year earlier and the biggest since the Finance Ministry began recording in 1979.
In September alone, the deficit stood at 558.6 billion yen, the third straight month of red ink and the largest for the month of September, the ministry said in a preliminary report, augmenting fears that violent anti-Japan rallies and boycotting of Japanese products in China have weighed on the exports to the biggest trading partner.
Exports to China fell 8.2 percent to 5,921.1 billion yen in the first half and slid 14.1 percent to 953.8 billion yen in September, sharper than the 9.9 percent fall in August. It was the fourth consecutive month of deficit as various products, ranging from auto and auto parts to steel and semiconductors, declined notably.
The balance showed Japan suffered the biggest September deficit with China of 329.5 billion yen, as imports gained 3.8 percent to 1,283.3 billion yen.
Resentment in China has accelerated since the Japanese government decided last month to nationalize part of an island group in the East China Sea, also claimed by Beijing and Taiwan.
Japan Current Account Turns Negative
The trick for Japan is how to finance its national debt, now at a majorly unsustainable 235% of GDP.
Japan was able to do so for years on account of its current account surplus, of which trade is typically the largest component.
You can now kiss that surplus goodbye because Japan Current Account Turns Negative
The world’s third-largest economy has run a surplus in its current account, a measure of trade in goods, services and investments, for several decades—meaning it’s earning more from exports and investments abroad than it spends at home. In fact, Japan the world’s biggest creditor nation.
The surplus has been in the spotlight recently, since Japan also has the developed world’s biggest debt load, now nearing a quadrillion yen ($12.5 trillion)—more than double its gross domestic product. As long as the current account surplus remains, economists say, Japan is in little danger of a Greek-style crisis, since its debt is largely being funded by household savings.
While that remains the case, Japan reported Thursday that the seasonally adjusted current-account was in deficit in September—for the first time in more than 30 years. The sudden surprise drop has some economists warning that Japan’s ability to generate wealth is eroding faster than expected, and its fiscal situation could be more fragile than many had thought.
The Finance Ministry says Japan won’t slip into a structural current-account deficit very easily, since deficits in the trade of goods and services will be offset by huge surpluses in what the country earns on investments in overseas assets such as U.S. Treasury bonds.
But the Japan Center for Economic Research argues a structural deficit in could be as close 2017, noting fuel-import levels are likely to stay high if most nuclear plants stay off.
The Japan Research Institute, another think tank, says a structural deficit could start in 2022 if crude oil prices keep rising. Hideki Matsumura, an economist with the institute, said it could come earlier if the current strong-yen trend, which hurts Japan’s ability to sell overseas, continues.
“Many countries are catching up with Japan in the manufacturing field,” he said. “If they can produce similar products for a cost 20% to 30% less than Japanese do, Japan will soon find no demand for its products.”
Bug in Search of Windshield
As my friend John Mauldin suggests, Japan is a bug in search of a windshield. I highly doubt Japan can make it 2022 or even 2017 before it runs into serious issues.
Actually, Japan has extremely serious issues already, it’s just that the market is ignoring them for now. If interest rates rise by a mere 2% or so, interest on the national debt will consume 100% of Japanese tax revenue.
Global imbalances are mounting. I suspect within the next couple of years (if not 2013) Japan will resort to the printing press to finance interest on its national debt and the Japanese central bank will start a major currency way with all its trading partners to force down the value of the yen.
Mike “Mish” Shedlock
Read more at http://globaleconomicanalysis.blogspot.com/#r3Rp8wcoYVitzoEf.99
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11th November 2012 at 8:26 am
Eddie says:
Slowly, the beginning of the end begins. It’s still not time to short the long bond, though. Not even the Japanese long bond. All this process takes a long time to play out. Much longer than I would have thought if you had asked me a few years ago.
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11th November 2012 at 8:56 am
Kill Bill says:
FriedmanCare [libertarian] toHeritageCare [repub] to ClintonCare [dem] to RomneyCare [repub] to Obamacare [dem]
Even Nixon was on the bandwagon:
Mandated health insurance has been coming for some time now. Do you really think our jelly kneed politicians are going to now reverse the huge profits handed over to private health insurance bigs?
Hell no. It is also why the Scotus didnt overturn it and every politician that says they will is gutless as a Thanksgiving Turkey.
~~~
Has the 4T Crisis began yet?
~~
I would buy stocks in antibiotics and drinking water
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11th November 2012 at 10:13 am
DaveL says:
I suggest you look at articles (what little you can find) on TPP. The Trans-Pacific Partnership.
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11th November 2012 at 4:13 pm
Master Of The Obvious says:
@Stucky
Try some resource stocks too. Eventually people will need to buy raw materials to keep the wheels turning.
Homestake Mining – one of just a few publicly-held mining companies – saw its stock price go from $80 in 1929 to $495 in 1935. It also eventually paid out as much as $56 per share in dividends by 1935, including several monthly special dividends.
Oil companies probably fall in that category too.
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11th November 2012 at 6:14 pm
TJF says:
Oil Production is up!
Not only is this story pure fantasy, but read some of the comments to see how easily fooled many people are.
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11th November 2012 at 7:48 pm
Administrator says:
TJF
We’re saved!!!!!
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11th November 2012 at 7:58 pm
Administrator says:
TJF
The story says that we import only 20% of our needs. I find that fascinating. We consume 18 million barrels per day. We import 11 million barrels of oil per day. According to my handy dandy calculator, that equals 60%.
These douchebags then spin the story to 20% because we process the oil in our refineries and then resell it to the rest of the world because our 5 year recession has left us with lower and lower demand.
What these idiots fail to state is that we couldn’t resell jack squat unless we imported the 11 million barrels of oil in the 1st place.
But, lets not let facts get in the way of a good story.
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11th November 2012 at 8:06 pm