John Hussman asks whether you choose the blue pill or the red pill.
In the 1950’s, Stanford psychologist Leon Festinger developed the theory of cognitive dissonance, describing the psychological conflict that results from holding two opposing beliefs or attitudes at the same time. When subjects were asked to convey or act on information that they knew was untrue (and were provided only weak justification for doing so), the resulting “cognitive dissonance” actually led them to change their own beliefs and attitudes to be consistent with the untrue information. It is difficult to hold opposing beliefs simultaneously. Festinger later showed that people typically respond in two ways to cognitive dissonance. Either they try to preserve their current understanding of the world by rejecting or ignoring conflicting information, or they abandon their existing beliefs to reduce the conflict.
Several years of persistent yield-seeking speculation provoked by zero-interest rate monetary policies have created a fertile ground for cognitive dissonance. On one hand, any observer with historical perspective knows not only that the overvaluation from this kind of speculation inevitably ends in tears, but also that the heavy issuance of new speculative and low-quality securities during the bubble finances and enables unproductive malinvestment that leaves the economy far worse off in the end. We should recognize that this same narrative was observed in the late-1920’s bubble-crash, in the tech bubble-crash, in the housing bubble-crash, and will be remembered painfully, but in hindsight, as the QE bubble-crash. On the other hand, prices have been advancing.
It’s difficult to entertain both of those facts at once. One must simultaneously hold in mind reckless yield-seeking speculation, hypervaluation that rivals the 1929 and 2000 equity market peaks (see Yes, This is an Equity Bubble), zero interest rates, low prospective long-term returns all around, and persistent malinvestment that poses increasing systemic risks for the entire global economy, plus one fact that encourages us to forget it all: prices have been going up. Cognitive dissonance tempts us to reconcile this tension by ignoring one part of the story or another.
For bulls, this cognitive dissonance creates the temptation to ignore the speculative risk and to dispense with valuation concerns by citing measures that have weak or zero historical relationship with actual subsequent market returns. The result is a stream of justifications for why stocks are reasonably priced and likely to advance without interruption. For bears, this cognitive dissonance creates the temptation to ignore the rising prices – to plant the valuation flag, knowing that a century of evidence on reliable valuation measures supports the strong conviction that market returns over the coming decade will be dismal (most likely negative over horizons of 8 years or less), and that the likelihood of a market loss on the order of 40%, 50% or even 60% in the next few years is quite high.
Read the rest of Hussman’s Weekly Letter
Hussman makes things more complex than need be, IMHO. Basically what we have is “mark to fantasy” phoney baloney numbers being reported by both the government and corporations. The idea of basing any investment decisions on any of this is nonsense, period.
Oh but, no!
There isn’t a correction coming, nor needed, nor baked in the cake.
A Reserve Currency Government can print/go in debt as much as is needed with NO effects on the value of currency or standard of living for the people.
All those with inflated stock portfolios and pensions/401ks are investing GENIUSES!
Even if the market fails, it is going to bounce right back, just like in ’88, just like in ’10, just like the Depression. Oops, that took 24 years or so but hey, it still came right back!
I’ve been hearing/reading more and more of this investing genius crap this New Year.
That alone tells me that Hussman is right and a whole bunch of greater fools will soon be shown the door.
Of course the question is when/if the market will come back, which then leads to will it be worth anything if it does?
That is secondary for the millions that are nearing retirement, or that will need that “investment” money to pay their mortgages/feed themselves. They won’t have the time nor diversification to wait for a “come back.”
Just because over 85% the first two trading days of the year determine the direction for the rest of the year should in no way be a thought used to confirm or deny Hussman’s opinions.
USA! USA! USA!
Funniest thing is that even if our fiat becomes worthless and the market continues to levitate – or even grow dramatically with highly inflated cash values – the “investing geniuses” have NO clue that Zimbabwe’s, and Argentina’s, markets flew high too long past the time the people were hungry.
Right up until the day the connected were informed to cash out and the “investing geniuses” were left with paper and no market to sell it in.
Gotta give it to Hussman. No matter how many attack him or call him names, he sticks to his beliefs and continues to try and inform. Just like you Admin.
It ain’t much but I know you all are right. At least there is that.