More by the Same Author
2012-12-04 How to Build a Time Machine by John P. Hussman of Hussman Funds
With industrial production, capacity utilization, real disposable income, real personal consumption, real sales retail and food service sales, and real manufacturing and trade sales uniformly declining in their latest reports, coincident economic indicators having generally peaked in July are now following through on the weakness that weve persistently observed in leading economic measures. We continue to believe that the U.S. economy joined a global economic downturn during the third quarter of this year.
2012-07-16 The Third Law of Randomness by John P. Hussman of Hussman Funds
Proper investing doesn't rule out randomness and unpredictability, particularly when it comes to individual events. It instead diversifies against randomness both across holdings at each point in time, and across time by repeatedly acting on the basis of averages instead of individual forecasts.
2012-07-09 What if the Fed Throws a QE3 and Nobody Comes? by John P. Hussman of Hussman Funds
When we look around the globe, we find that the impact of quantitative easing is rarely much greater than the market decline that preceded it. Investors seem to be putting an enormous amount of faith in a policy that does little but help stocks recover the losses of the prior 6 month period, with scant evidence of any durable effects on the real economy.
2012-07-02 Anatomy of a Bear by John P. Hussman of Hussman Funds
The unusually bad outcomes of similar historical precedents help to convey why we retain such a durable sense of doom, even after last weeks scorching risk on advance. A moderate continuation of constructive market action would likely be sufficient to move us to soften our presently hard defense by retreating from a staggered strike option hedge. At present, conditions remain aligned with those that have preceded some of the most negative consequences in market history.
2012-06-25 Enter, the Blindside Recession by John P. Hussman of Hussman Funds
The joint evidence suggests that the U.S. economy has entered a recession that will eventually be marked as having started presently. In recent months, our measures of leading economic pressures have indicated the likelihood of an oncoming U.S. recession.
2012-06-18 A Brief Primer on the European Crisis by John P. Hussman of Hussman Funds
Europe has repeatedly been successful at addressing its recurring liquidity crises with the help of other central banks, but its still an open question whether they can durably solve the solvency crisis without more disruption and more restructuring of both government debt and troubled banks. In my view, the hope for an easy solution is misplaced, and the likelihood of recurring disruptions from Europe will remain high.
2012-06-11 The Heart of the Matter by John P. Hussman of Hussman Funds
The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren't low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives. Lost in this debate is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.
2012-06-04 Run of the Mill by John P. Hussman of Hussman Funds
The awful behavior of the market in recent weeks is very run-of-the-mill in terms of how similarly unfavorable conditions have usually been resolved historically, and there is no evidence that this awful prospective course has changed much. Investors should expect no easy solutions to the fiscal and global challenges ahead. They should instead expect market valuations that adequately reflect the fact that there are no easy solutions. In my view, those valuations remain miles below present market levels.
2012-05-29 The Reality of the Situation by John P. Hussman of Hussman Funds
If one steps back from the trees to observe the forest, the reality of the situation is that Europe is already largely in recession, the global economy is slipping quickly toward the same outcome, and in my view, the U.S. is also entering a recession that will ultimately be dated as beginning in May or June of 2012 (i.e. now). The economic headwinds already in place are likely to make any meaningful budget progress virtually impossible in the Eurozone, and without meaningful budget progress, the likelihood of continued bailouts to peripheral European states is slim.
2012-05-21 Liquidation Syndrome by John P. Hussman of Hussman Funds
Presently, the market remains richly valued on normalized earnings, and is coming off of a speculative peak with an abrupt and persistent initial decline. All of this reflects what might be called a "liquidation syndrome" that is selective for awful drops that began in 1969, 1972, 1987, 2000, 2007, and the more moderate but still steep losses in 1998, 2010, and 2011.
2012-05-14 Dancing at the Edge of a Cliff by John P. Hussman of Hussman Funds
Our recession concerns remain intact, as do our separate concerns about extreme stock market risk. I've emphasized that our estimate of prospective market return/risk in stocks has slipped into the most negative 0.5% of historical data. Last week that estimate actually deteriorated, but I am reluctant to make comments on such a small sample, as the only more negative estimate in post-Depression history was on September 16, 2000. Even in the conditions that match the worst 2% of our return/risk estimates, the market has lost an average of 20-25% just in the following 6-month period.
2012-05-07 Unbalanced Risk by John P. Hussman of Hussman Funds
Maybe our present concerns won't amount to as much downside as we expect. But if investors were to choose a point to test the hypothesis that this time will be different and risk will be well-rewarded, I hardly think a worse moment could be found.
2012-04-30 Release the Kraken by John P. Hussman of Hussman Funds
The problem for the stock market is that the 13-year journey of underperforming T-bills - with wicked collapses and break-even recoveries - is most probably not over.
2012-04-23 Run, Don't Walk by John P. Hussman of Hussman Funds
One way to gauge your speculative exposure is to ask the simple question - what portion of your portfolio do you expect (or even hope) to sell before the next major market downturn ensues? Almost by definition, that portion of your portfolio is speculative in the sense that you do not intend to carry it through the full market cycle, and instead expect to sell it to someone else at a better price before the cycle completes. With respect to those speculative holdings, and when to part with them, my own view is straightforward. Run, don't walk.
2012-04-16 No... Stop... Dont by John P. Hussman of Hussman Funds
In the classic version of Willy Wonka and the Chocolate Factory, Gene Wilder watches one child after another ignoring every cautionary warning, with predictably bad consequences. His deadpan appeals become increasingly halfhearted and emotionless because he knows they won't listen anyway.
2012-04-09 Is the Fed Promoting Recovery or Merely Desperation? by John P. Hussman of Hussman Funds
What we've observed in the employment figures is not recovery, but desperation. Having starved savers of interest income, and having repeatedly subjected investors to Fed-induced financial bubbles that create volatility without durable returns, the Fed has successfully provoked job growth of the obligatory, low-wage variety. Over the past year, the majority of this growth has been in the 55-and-over cohort, while growth has turned down among other workers. All of this reflects not health, but despair, and explains why real disposable income has grown by only 0.3% over the past year.
2012-04-02 Too Little to Lock In by John P. Hussman of Hussman Funds
At present, investors have no reasonable incentive at all to "lock in" the prospective returns implied by current prices of stocks or long-term bonds.
2012-03-26 A False Sense of Security by John P. Hussman of Hussman Funds
As we examine the present evidence relating to both the financial markets and the global economy, the aspect that strikes us most is the extent to which Wall Street continues to emphasize superficially positive data in preference for deeper analysis, to extrapolate short-term distortions as if they were long-term trends, and to misconstrue freshly printed wallpaper and thin supporting ice as if they were solid walls and floors.
2012-03-19 An Angry Army of Aunt Minnies by John P. Hussman of Hussman Funds
The steepest market plunges on record (e.g. those following the 1973-74, 1987, 2000 and 2007 peaks, among others) have generally followed an overvalued speculative blowoff coupled with divergent interest rate pressures. This is why we take the "overvalued, overbought, overbullish, rising yields" syndrome so seriously. Indeed, the outcomes are usually negative on average even without rising yields, but the yield pressures tend to add immediacy. Notably, the emergence of this syndrome has provided accurate warning of oncoming losses both historically, and also as recently as 2010 and 2011.
2012-03-12 Do I Feel Lucky? by John P. Hussman of Hussman Funds
It seems to me that before entirely disregarding evidence that is as rare as it is ominous, you have to ask yourself one question. Do I feel lucky?
2012-03-05 Warning: A New Who's Who of Awful Times to Invest by John P. Hussman of Hussman Funds
Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. Importantly, the market is again characterized by an extreme set of conditions that we've previously associated with a Who's Who of Awful Times to Invest.
2012-02-21 Unusual Drawdown Risk by John P. Hussman of Hussman Funds
Presently, the investment opportunity set remains one of the most unfavorable in history - we estimate a 4.4% annual total return for the S&P 500 over the coming decade, corporate bond yields are now at just 3.3%, the 30-year Treasury yield is at 3.2%, the 10-year Treasury yield is at 2.0%, and Treasury bill yields are at 0.1%. We would view a significant change in the investment opportunity set as a very welcome development, but we remain unwilling to accept significant risk for insignificant or negative prospective return simply because of the temporary absence of better opportunities.
2012-02-12 Hot Potato by John P. Hussman of Hussman Funds
A hot potato has been repeatedly passed from speculatively overvalued, overbought, overbullish market conditions driven by massive central bank interventions, to credit strains and emerging economic weakness nearly the instant those interventions are even temporarily suspended. The same speculators who have historically accompanied major and intermediate market peaks have emerged, followed by the emergence of credit strains, economic pressures, and a flight to safe-havens. The market is in an extended game of hot potato which will be resolved by the eventual removal of both conditions.
2012-02-06 Notes on Risk Management - Warts and All by John P. Hussman of Hussman Funds
Presently, there seems to be an unusually wide gap between hindsight and foresight, both in the financial markets and in the economy. In both cases, forward-looking evidence suggests weak outcomes, but recent trends encourage optimism and risk-taking. Rather than sugar-coat these uncertainties and minimize the messy divergences in the data, I think the best approach is to review the evidence, warts and all, including economic risks, market conditions, and the strengths and limitations of our own investment approach.
2012-01-30 Warning: Goat Rodeo by John P. Hussman of Hussman Funds
We're observing an "exhaustion" syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo). Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. - despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels. Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo.
2012-01-23 Dodging a Bullet, from a Machine Gun by John P. Hussman of Hussman Funds
The interpretation best supported by the data is that recession risk remains very high based on the leading evidence and the typical outcomes that have resulted, but that the rate of deterioration has eased significantly, and it is simply unclear whether this is a temporary pause or a reversal. Rather than overstating the case one way or another, we remain strongly concerned about recession risk, but recognize the recent stabilization and the potential for a low-level continuation of that.
2012-01-17 Dwelling In Uncertainty by John P. Hussman of Hussman Funds
When unseen states of the world have to be inferred from imperfect and noisy observable data, there are a few choices when the evidence isn't 100%. You can either choose a side and pound the table, or you can become comfortable dwelling in uncertainty, and take a position in proportion to the evidence, and the extent to which each possible outcome would affect you.
2012-01-09 Leading Indicators and the Risk of a Blindside Recession by John P. Hussman of Hussman Funds
The balance of leading evidence continues to indicate a very high likelihood of an oncoming recession. We respect the various marginal improvements in the data in recent months, which do take the probability to less than 100%, but that is a far cry from suggesting that recession risk is anywhere close to being "off the table." Recession is not a certainty, but it remains the most probable outcome at present.
2012-01-03 The Right Kind of Hope by John P. Hussman of Hussman Funds
We enter the year with great hope. But our hope is not for continued speculation and the maintenance of rich valuations (that only look reasonable because long-term cyclical profit margins are at a short-term peak about 50% above their historical norms). Our hope this year is for a return to a proper investment opportunity set - where saving is encouraged and rewarded by sufficiently high prospective returns, and the cost of capital is high enough to discourage high-risk, low-return investments and unsustainable fiscal deficits.
2011-12-27 Brief Holiday Update by John P. Hussman of Hussman Funds
As I noted last week, there is a typical "sentiment cycle" in economic surprises, which we would expect to roll over to an increasing number of economic disappointments in the weeks ahead, but we'll respond to the data as it emerges. Given that we're in a typically low-volume, slightly positive seasonal period, I expect that day-to-day movements over the next several sessions may be more influenced by those factors than by meaningful economic or international developments.
2011-12-19 When "Positive Surprises" Are Surprisingly Meaningless by John P. Hussman of Hussman Funds
How much importance should we put on the fact that economic data has delivered positive surprises in recent weeks? Don't all these surprises significantly short-circuit the risk of probable recession? As economist John Williams observes, "starting in October, a divergence developed: Whereas year-to-year change in BLS estimated payroll earnings continued at a more-or-less constant, positive level, tax receipts fell quite markedly. Where the Treasury numbers reflect full reporting, the BLS data are sampled..modeled and..revised...the BLS has overstated average earnings..in recent months."
2011-12-12 Hard-Negative by John P. Hussman of Hussman Funds
The present market environment warrants unusual concern, in my view. Based on a wide variety of evidence and its typical market implications over an ensemble of dozens of subsets of historical data, the expected return/risk profile of the stock market has shifted to hard-negative. This isn't really a forecast in the sense that shifts in the evidence even over a period of a few weeks could move us to adjust our investment stance, but here and now we observe conditions that have often produced abrupt crash-like plunges.
2011-12-05 Have We Avoided A Recession? by John P. Hussman of Hussman Funds
Recent U.S. economic reports have improved modestly from the clearly negative momentum that we saw in late-summer. Unfortunately, the underlying recessionary pressures we observe are largely unchanged. When we take the present set of economic evidence in its entirety, we see very little evidence of a meaningful reduction in recession risks. Indeed, the evidence from the rest of the world, both developed and developing, reinforce the expectation that the global economy is approaching a fresh contraction.
2011-11-28 Are Corporate Balance Sheets Really the Strongest in History? by John P. Hussman of Hussman Funds
At an aggregate level, corporate balance sheets look reasonable, but are certainly not "stronger than they have ever been in history." Cash levels are elevated, but this is at best a second-order factor (with excess cash representing only a few percent of total assets), while debt remains near record levels relative to total assets and net worth.
2011-11-21 Why the ECB Does Not Bail Out Distressed Debt by John P. Hussman of Hussman Funds
Investors are not likely to be treated with a "surprise" announcement that the ECB is going to expand its purchases of distressed European debt. Any significant ECB intervention would likely follow a formal revision of EU treaties that trades greater ECB flexibility in return for more centralized fiscal control.
2011-11-14 Hokey Pokey by John P. Hussman of Hussman Funds
Sound monetary policy requires sound fiscal policy, coupled with a habit of the private sector to allocate resources productively so that the government isn't forced to compensate for bad decisions. That's where the global economy has failed.
2011-11-07 Reduce Risk by John P. Hussman of Hussman Funds
Nearly every traditional asset class is priced to achieve miserably low long-term returns. Meanwhile, our leading economic measures are negative, and the global economy has already begun to show overt signs of a new downturn. We can understand that investors are inclined to hold off any concerns until an economic downturn can be seen and touched in actual (not just leading) U.S. data, but that inclination comes with the prospect of trying to reduce risk when a hundred million other investors suddenly become interested in doing the same thing.
2011-10-31 Whipsaw Traps by John P. Hussman of Hussman Funds
Current market conditions cluster among a set of historical observations that might best be characterized as a "whipsaw trap." Though last week's rally triggered several widely-followed trend-following signals, the broader ensemble of data suggests a high likelihood of a failed rally. In this particular bucket of historical observations, less than 30% of them enjoyed an upside follow-through over the next 6 weeks. So while the expected return/risk profile of the market remains negative here, we have to be somewhat more tentative about taking a "hard" defensive position.
2011-10-24 Penny Wise and Euro Foolish by John P. Hussman of Hussman Funds
The bottom line is a) Euro leaders will likely initiate a forced bank recapitalization within days; b) Greece will default, but the new hold-over funding may give the country a few more months; c) the EFSF will not be "leveraged" by the ECB; d) banks are likely to take haircuts of not 21%, but closer to 50% or more on Greek debt; e) much of the EFSF will go toward covering post-default capital shortfalls in the European banking system following writedowns of Greek debt; f) the rest will most probably be used to provide "first loss" coverage of perhaps 10% on other European debt.
2011-10-17 Europe: Just Getting Warmed Up by John P. Hussman of Hussman Funds
At present, the S&P 500 is again just 10% below the high it set before the recent market downturn began. In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.
2011-10-10 Talking Points for the "Occupy Wall Street" Protesters by John P. Hussman of Hussman Funds
The proper way to address the present economic imbalances is pursue policies that encourage the restructuring of bad debt, the allocation of public funds and private savings to productive investment and new research, the accumulation of education and labor skills ("human capital") to allow workers to capture a greater share of their own productivity, and the continuation of social safety nets to ease the economic adjustments that are necessary in a deleveraging economy. In my view this requires a number of steps which not everyone will like.
2011-10-03 Recession, Restructuring, and the Ring Fence by John P. Hussman of Hussman Funds
We are headed toward a recession because our policy makers never addressed the underlying problem in the first place, which was, and remains, the need for debt restructuring. This is an issue that I suspect will re-emerge to the forefront of public debate in the next year. Hopefully, the response of our policymakers will be at different. In Europe the only real option is to allow peripheral defaults; to allow distressed and insolvent countries to exit the euro; and then for those countries to redenominate their own national currencies and peg them to the euro at a gradually depreciated level.
2011-09-26 Not Over by a Longshot by John P. Hussman of Hussman Funds
Unless we observe a robust improvement in market internals from current levels, which appears doubtful given further confirmation of oncoming recession, the broad ensemble of data we observe doesn't offer much latitude to establish a constructive position based on, say, weak technical reversals or other scraps that the markets might toss out in the near term. The first 13 weeks of a recession are among the most predictably hostile periods for equities in the data. We'll take our evidence as it comes, but the primary risks - recession, default and global credit strains - continue to increase.
2011-09-19 Preparing for a Greek Default by John P. Hussman of Hussman Funds
The yield on 1-year Greek government debt ended last week at 110%, down slightly from a mid-week peak of 130%. Even with the pullback, the Greek yield structure continues to imply default with certainty. All the markets are really quibbling about here is the recovery rate. That figure was still hovering near 50% as of Friday, but was a bit higher than we saw a few days earlier. A bailout today does not avert default, but at best defers it to a later date, and squanders funds that could otherwise be used to stabilize the European banking system once that inevitable default occurs.
2011-09-12 Fed Policy: No Theory, No Evidence, No Transmission Mechanism by John P. Hussman of Hussman Funds
One of the main factors prompting a benign response to what is now a recession and virtually certain Greek default is the hope that the Fed will launch some new intervention. Many view the present weakness as a replay of 2010, however, the evidence tells a different story. While we have to allow for the possibility of a knee-jerk response in the event of further Fed intervention, it is also much clearer now than it was in 2010 that quantitative easing does not work. To a large extent, the only basis for further Fed action here is superstition in the absence of either fact or theory.
2011-09-06 An Imminent Downturn: Whom Will Our Leaders Defend? by John P. Hussman of Hussman Funds
The global economy is at a crossroad that demands a decision-whom will our leaders defend? One choice is to defend bondholders-existing owners of mismanaged banks unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.
2011-08-29 A Reprieve from Misguided Recklessness by John P. Hussman of Hussman Funds
Over the past three years, Wall Street and the banking system have enjoyed enormous fiscal and monetary concessions on the self-serving assertion that the global financial system will "implode" if anyone who made a bad loan might actually experience a loss. Because reversing this mantra is so difficult, policy makers are likely to continue fitful efforts to "rescue" this debt for the sake of bondholders. The justification for those policies will therefore have to be coupled with rhetoric that institutions holding these securities are too "systemically important" to suffer losses.
2011-08-22 Whack-A-Mole by John P. Hussman of Hussman Funds
What did I think of Rick Perry's comments about Ben Bernanke? Frankly, I thought they were unfortunate. Perry suggested that monetary intervention would be "playing politics," which implies that Perry believes the Fed actually has the power to benefit the Obama Administration by improving the economy with its interventions. We certainly differ on that point. In my view, QE2 was an economically baseless attempt to distort the financial markets and force the prudent into taking risk in hopes of substituting speculation for innovation. Perry gives Bernanke far more credit than I do.
2011-08-15 Two One-Way Lanes on the Road to Ruin by John P. Hussman of Hussman Funds
The reason we are facing a renewed economic downturn is that our policy makers never addressed the essential economic problem, the need for debt restructuring. There are two one-way lanes on the road to ruin, and these are unfortunately the only ones on the present policy map: 1) Policies aimed at distorting the financial markets by suffocating the yield on lower-risk investments, in an attempt to drive investors to accept risks that they would otherwise shun; 2) Policies aimed at defending bondholders and lenders who made bad loans, which they now seek to have bailed out at public expense.
2011-08-08 Recession Warning, and the Proper Policy Response by John P. Hussman of Hussman Funds
As of Friday the S&P 500 was below its level of November 2010, when the Fed initiated its second round of quantitative easing. Aside from a brief bump in demand that kicked the recession can down the road a bit, the U.S. economy is not much better off. Meanwhile, countless individuals in developing countries have been injured by predictable commodity hoarding and global price instability. The Fed has leveraged its balance sheet by over 55-to-1. As policy makers look to address the abrupt deterioration in U.S. , we should ask ourselves: Do we really long for more of the Fed's recklessness?
2011-08-01 More Than Meets the Eye by John P. Hussman of Hussman Funds
Our concerns remain focused on significant "core" issues facing the markets and the economy, including overvaluation, compressed risk premiums, over-reliance of investors on the maintenance of record profit margins, unresolved mortgage strains, and sovereign debt problems. Valuations remain rich on the basis of normalized earnings, market internals have deteriorated considerably, and recession risks are increasing. There are certainly various policy developments that are likely to provoke investor enthusiasm from time to time. What is important to us is the weight of the evidence.
2011-07-25 Simple Arithmetic by John P. Hussman of Hussman Funds
For most countries in Europe, government revenues typically run between near 40% of GDP, while government spending presently runs several percent ahead of that. In Greece, government debt now represents about 150% of GDP at interest rates between about 10% for very short and very long-maturity debt, to about 25% annually on 2-year debt. The overall average yield on Greek debt is close to 15%. The problem is that 15% interest on 150% of GDP works out to 22.5% of GDP in interest costs if the debt actually has to be rolled-over without restructuring it.
2011-07-18 Dabbling with Support by John P. Hussman of Hussman Funds
The market continues to have the look of a broad topping process, in which it's very common to see it's confined to a trading range of about 5-7% for 6-8 months. Near-term, tests of widely-recognized "support" are often met by a bout of short-covering, similar to what we observed two weeks ago. Given the moderate improvement in market internals produced by that rally, a retest of those lows that isn't overly hostile to market internals might provide some latitude for market exposure. Suffice it to say that constructive opportunities are likely to be limited, but not impossible to achieve.
2011-07-11 A Wile E. Coyote Market by John P. Hussman of Hussman Funds
Fridays employment report, showing an increase of 18,000 in non-farm payrolls and a jump in the unemployment rate to 9.2% was widely viewed as a "shocker" Frankly, I dont understand the surprise. Between February and April, weekly new claims for unemployment (4 week average) dipped below 400,000, which was associated with a few months of nice growth in non-farm payroll employment. Since then, weekly unemployment claims have moved higher, and have been running at an average near 425,000 new claims weekly. Historically, thats a level that's correlated to zero growth in non-farm payrolls.
2011-07-05 Chutes and Ladders by John P. Hussman of Hussman Funds
We are all playing a game of Chutes and Ladders where it is not at all clear which game-board is applicable. To believe strongly in a certain investment outcome is to imagine that there is only one correct model of the world, and that the correct model is in hand. Investors appear very eager to apply post-war norms to the economy, and to apply the elevated valuation norms of the past two decades to the stock market. I doubt that these models represent the correct view of the world, but our approach is to allow for these possibilities and dozens of alternate ones.
2011-06-27 Brief Update by John P. Hussman of Hussman Funds
Despite the brief reprieve of market concerns Thursday on tentative agreement over Greek aid, we saw little change in the value of Greek debt. While there is a great deal of short-term attention on day-to-day developments on this front, credit spreads effectively indicate expectations of certain default within a roughly 2-year window, but very small risk of near-term default. Until we observe a firming in market internals and in leading economic measures, we expect that enthusiasm about Greece may provoke short-lived market spikes and short-squeezes, but little of durable effect.
2011-06-20 Greek Yields: 'Certain Default, But Not Yet' by John P. Hussman of Hussman Funds
Either long- and intermediate-term Greek debt is a tremendous bargain here, or it is going to default. Unfortunately, the fiscal situation would almost inescapably require other European countries subsidize Greece for decades to come in order to avoid a debt restructuring. Taken together, the evidence surrounding Greece screams "Certain default, but not yet."
2011-06-13 Internal Injuries by John P. Hussman of Hussman Funds
We're seeing a measurable and potentially dangerous breakdown of market internals in an environment where risk premiums remain very thin. Short-term conditions are fairly compressed, which invites a rebound, but the expectations for that have to be tempered by the still-complacent sentiment of investors. Indeed, about the only areas where we see real concern is in measures where such concern is actually predictive (rather than being a contrary indicator). These include widening interest-rate spreads in peripheral European debt, and surging credit-default swap spreads for major U.S. banks.
2011-06-06 Handicapping QE3 by John P. Hussman of Hussman Funds
As disappointing economic news mounted last week, the attention of market participants immediately turned to policy responses - will the Fed embark on QE3? In my view, there are three central questions relevant to this issue. The first is simply this: Has QE2 been successful in a way that the economy should desire more of it? The second: How much scope for intervention does the Fed have left? The third: Is Bernanke so invested in this attempt at balance-sheet expansion that he will push forward an extension of the policy despite its economic ineffectiveness and speculative distortions?
2011-05-31 Small Windows in an Unfavorable Long-Term Picture by John P. Hussman of Hussman Funds
Last week, bullishness pulled back to 43% according to Investors Intelligence, but advisory bearishness also fell to 19.4%, with the remainder boosting the "correction" camp to 37.6%. That's not much of an easing in overall sentiment, but it was enough to give us a bit of latitude to allow us to vary our exposure between a tight hedge and a 10-15% exposure to market fluctuations. That's been of help, but mainly to offset a shallow correction in a few defensive sectors like health care. Our latitude to accept risk will vary in proportion to the average market return/risk profile.
2011-05-23 Scarcity, Usefulness, and Getting an Edge by John P. Hussman of Hussman Funds
While my sense is that many investors and institutions are holding a greater market exposure than is appropriate given present return/risk prospects, I should mention that there isn't a great deal of evidence that bears and short-sellers have a particular "edge" here either. Our own investment stance is defensive but also fairly neutral, and with a preference toward moderate, if transitory, positive exposure. At the point we see a greater deterioration of market internals the market environment will probably turn hostile in a more sustained way.
2011-05-16 Hanging Around, Hoping to Get Lucky by John P. Hussman of Hussman Funds
Despite the unique challenges of the most recent market cycle, I do expect that we will observe frequent opportunities to accept market risk in the coming years, even in an environment where valuations gradually work lower from a secular perspective. Even here, if we can clear some element of the hostile overvalued, overbought, overbullish, rising-yields syndrome that has characterized the market, we will be open to moderate, if transitory exposure to market fluctuations, provided that we maintain a line of index put option protection against any abrupt deterioration.
2011-05-09 The Menu by John P. Hussman of Hussman Funds
One of the ways investors can think about prospective return and risk is from the standpoint of the Capital Market Line, which lays out a menu of investment possibilities at various levels of return and risk. In theory, investors like to believe that this menu is always a nice, positively sloped line, where greater risk is associated with greater prospective return. And somehow, regardless of where market valuations are, investors often seem to believe that 10% is 'about right' for the prospective return on stocks. As it happens, valuations exert an enormous effect on the prospective returns
2011-05-02 Extreme Conditions and Typical Outcomes by John P. Hussman of Hussman Funds
As of Friday, the S&P 500 has advanced to a point where it is either within 0.1% or fully through its top Bollinger band on virtually every horizon. We can define an "overvalued, overbought, overbullish, rising-yields syndrome" a number of ways. The more general the criteria, the better you capture historical instances that preceded abrupt market weakness, but the more you also encounter "false positives." Still, as long as the criteria capture the syndrome, we find that the average risk profile for subsequent market performance is negative, regardless of the subset of history you inspect.
2011-04-25 Monetary Policy in 3-D by John P. Hussman of Hussman Funds
One of the most important factors likely to influence the financial markets over the coming year is the extreme stance of U.S. monetary policy and the instability that could result from either normalizing that stance, or failing to normalize it. It is not evident that quantitative easing, even at its present extremes, has altered real GDP by more than a fraction of 1%. Moreover, it's well established that the "wealth effect" from stock market changes is on the order of 0.03-0.05% in GDP for every 1% change in stock market value, and the impact tends to be transitory at that.
2011-04-18 Approaching the Eraser by John P. Hussman of Hussman Funds
Market conditions in stocks continue to be characterized by a hostile syndrome of overvaluation, overbought conditions, overbullish sentiment, and rising interest rates, which has historically been associated with a poor return/risk profile, on average, across a wide variety of subsets of historical data. Though I question the ability of the economy to "pass the baton" to the private sector as government stimulus effects run off in the coming 8-10 weeks, I should emphasize up front that our present defensive position is not driven by those economic concerns.
2011-04-11 Charles Plosser and the 50% Contraction in the Fed's Balance Sheet by John P. Hussman of Hussman Funds
Last week, an unusual event happened in the money markets that should not escape the attention of investors. The yield on 3-month Treasury bills plunged to less than 5 basis points. As I noted this past January in Sixteen Cents: Pushing the Unstable Limits of Monetary Policy, a collapse in short-term yields to nearly zero is a predictable outcome of QE2, based on the very robust historical relationship between short-term interest rates and the amount of cash and bank reserves (monetary base) that people are willing to hold per dollar of nominal GDP.
2011-04-04 Will the Real Phillips Curve Please Stand Up? by John P. Hussman of Hussman Funds
Much of the intellectual basis for the Federal Reserve's dual mandate "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" is based on the Phillips Curve. The curve, named after economist A.W. Phillips, is understood as a "tradeoff" between inflation and unemployment. The idea is so engrained in the minds of economists that it is taken as fact. High unemployment, is associated with low inflation risk, and in that environment, policy makers can pursue measures targeted at increasing employment, without consequences for inflation.
2011-03-27 QE2 - Apres Moi, le Deluge by John P. Hussman of Hussman Funds
As rules of thumb go, "the trend is your friend" historically performs better than "don't fight the Fed". While the market tends to perform better when both are true, the exception is the overvalued, overbought, overbullish, rising-yields syndrome, which is uniformly negative regardless of the random subset of historical data one examines. There is certainly a tendency for "unpleasant skew" featuring a persistent series of marginal new highs for some period of time, but on average, those are ultimately overwhelmed by steep and abrupt losses that finally clear this syndrome.
2011-03-21 This Is, Because That Is by John P. Hussman of Hussman Funds
The market action of the past two weeks contrasts with the generally uncorrected advance of recent months. I suppose it's possible for investors to characterize the recent decline as a "panic" if they press their noses directly against their monitors, but in that case, they really do have a short memory. The pullback has been negligible relative to the action of the past several months, and is indiscernible in the big picture. As of Friday, the market remained in an over valued, bullish, rising-yields syndrome that has typically been cleared much more sharply than anything we saw last week.
2011-03-14 Anatomy of a Bubble by John P. Hussman of Hussman Funds
Over the past decade, investors have seen near-parabolic advances in a variety of assets, followed by crashes. These have included dot-com stocks (which peaked and crashed well before the general market peak in 2000), technology stocks, housing, commodities, and stocks in a variety of emerging markets. These experiences have made investors somewhat more attuned to the destructive potential for speculative bubbles in various assets, but has also created something of a "casino economy" where a great deal of resources are directed in hopes of participating in these bubbles.
2011-03-07 Quantitative Easing and the Iron Law of Equilibrium by John P. Hussman of Hussman Funds
If you think about equilibrium, it helps to clear up all sorts of fallacies that people hold about the financial markets. For example, the currency and money market securities that are held by investors will - in aggregate - never "find a home" in any other form or market. If one takes their cash and tries to buy stock, they get the stock and the seller gets the cash. Nothing disappears, and nothing is created. The money-market securities held by investors is not a reflection of "liquidity looking for a home," but is a measure of how borrowers are on short-term sources of credit.
2011-02-27 Cash or Credit - Implications for the Financial Markets by John P. Hussman of Hussman Funds
From the standpoint of prospective investment returns, it is important to recognize that the main effect of quantitative easing has been to suppress the expected return on virtually all classes of investment to unusually weak levels. It's widely believed that somehow, QE2 has created all sorts of liquidity that is "sloshing" around the economy and "trying to find a home" in stocks, commodities, and other investments. But this is not how equilibrium works.
2011-02-20 December 2010 Semi-Annual Report by John P. Hussman of Hussman Funds
For the third time in a decade, the Federal Reserve has embarked on a policy that addresses structural economic problems by provoking speculation in asset prices. The first two attempts were ultimately followed by stock market declines greater than 50% each. As we enter 2011, the stock market remains in what we view as an already strenuously overvalued advance, which has driven our estimates for S&P 500 Index total returns to less than 3.2% annually over the coming decade. My expectation is that this attempt to create “illusory prosperity” will end no better than it has in the past.
2011-02-13 Rich Valuations and Poor Market Returns by John P. Hussman of Hussman Funds
At present, my view on monetary policy is that the inflation outlook following the completion of QE2 will be quite unstable, because small changes in interest rates are likely to induce very large changes in the willingness of individuals to hold base money. Any external upward pressure on interest rates beyond a fraction of a percent will have to be rapidly offset by a large reduction in the outstanding monetary base in order to avoid a deterioration in the value of money relative to goods and services (i.e. inflation).
2011-02-07 Misquoting Keynes by John P. Hussman of Hussman Funds
The famous quote attributed to John Maynard Keynes - "the market can remain irrational longer than you can remain solvent" - is a favorite of speculators here. Actually, I very much agree with this observation, provided that it is correctly understood. Solvency is always a function of debt, and it's extremely important for investors to recognize that when you take investment positions by borrowing on margin, you'd better use stop-losses, because the debt obligation stays intact even if the investment values decline.
2011-01-30 Mapping the Molecular Pathway of Autism by John P. Hussman of Hussman Funds
In recent years, much of the Hussman foundation's research has been centered on autism. Meanwhile, the finance research has been centered on "ensemble methods" to integrate the information from multiple data sets, and to better measure both risk and uncertainty*. As it happens, statistical methods can be adapted to approach difficult problems in both genetics and finance. So as we developed various approaches to integrate multiple data sets in our finance research, it was natural to extend those methods to deal with genetics data.
2011-01-23 Sixteen Cents: Pushing the Unstable Limits of Monetary Policy by John P. Hussman of Hussman Funds
Completing the Fed's planned purchases under QE2 will require a decline in 3-month T-bill yields to just 0.05% in order to avoid inflationary pressure. Otherwise, liquidity preference will not expand enough to absorb the addition to base money, even if we assume GDP growth at 4%. Given the extreme stance of monetary policy, the avoidance of inflationary pressures increasingly relies on a very persistent willingness by the public to hold the outstanding quantity of base money in the financial system. Small errors will have surprisingly large consequences. This is not a stable equilibrium.
2011-01-17 Borrowing Returns from the Future by John P. Hussman of Hussman Funds
It will come as no surprise that we continue to anticipate poor 10-year total returns for the S&P 500 over the coming decade. Our present estimate is about 3.3% annually, which includes dividends. That is about 1% less than the 10-year total return that we estimated just a few months ago, but this makes senses.
2011-01-10 "Illusory Prosperity" - Ludwig von Mises on Monetary Policy by John P. Hussman of Hussman Funds
Perhaps more than any other economist, Ludwig von Mises got the theory of money and credit right, because he made distinctions between various forms of money and credit that are often conflated by other theorists. The amount of real physical investment in the economy is, and must be, precisely equal to the amount of output not allocated to consumption but instead to savings. Unlike many other economists, Von Mises not only recognized this identity, but carried it through to what it implied for monetary policy.
2011-01-03 Setup and Resolution by John P. Hussman of Hussman Funds
One of the striking features of the market here is the extent to which large-cap, high-quality has underperformed speculative sectors of the market, creating what we view as a multi-year "setup" in favor of high quality issues.
2010-12-27 A Fed-Induced Speculative Blowoff by John P. Hussman of Hussman Funds
Why are Treasury yields rising despite hundreds of billions of Treasury purchases by the Federal Reserve? There are two possibilities in the current debate. One is that the Fed's policy of purchasing Treasuries has scared the willies out of the bond market on fears of higher inflation, and that the policy is a failure. The other is that the policy has been such a success at boosting the prospects for economic growth that interest rates are rising on anticipation of a better economy. From our standpoint, neither of these explanations hold much water.
2010-12-20 Things I Believe by John P. Hussman of Hussman Funds
1) Investors dangerously underestimate the risk of an abrupt and possibly severe equity market plunge. 2) Agreement among "experts" is not your friend. 3) Downside risk tends to be elevated precisely when risk premiums and volatility indices reflect the most complacency. 4) We did not avoid a second Great Depression because we bailed out financial institutions...
2010-12-12 Warning - An Updated Who's Who of Awful Times to Invest by John P. Hussman of Hussman Funds
In recent weeks, the U.S. stock market has been characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically been hostile to stocks. Last week, the situation became much more pointed. Past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word "warning."
2010-12-06 A Most Important Rule by John P. Hussman of Hussman Funds
A decline in bond prices has modestly improved expected returns in bonds, but not yet sufficiently to warrant an extension of our durations. Precious metals have become more overbought, and while we are sympathetic to the long-term thesis for gold, intermediate term risks are now elevated. Finally, we have observed a further deterioration in market conditions for stocks.
2010-11-28 House on Ice by John P. Hussman of Hussman Funds
If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, we would be quickly on the course to a sustained recovery. Unfortunately, however, we have built our house on a ledge of ice.
2010-11-22 Outside the Oval / The Case Against the Fed by John P. Hussman of Hussman Funds
Ever since the Bear Stearns bailout, I've been insistent that the Federal Reserve is increasingly operating outside of its statutory boundaries. Ensuring the legality of Fed actions is not a Democratic issue, a Republican issue or a Tea Party issue. Rather, it is about whether we want America to function as a representative democracy.
2010-11-15 The Cliff by John P. Hussman of Hussman Funds
We estimate that the S&P 500 is priced to achieve sub-5% returns, albeit with significant risk, for every horizon out to a decade. Treasury securities are clearly priced to deliver similarly low returns. It's possible that internals will improve sufficiently to shift the expected return/risk profiles we observe in stocks, bonds and precious metals. For now, we are tightly defensive.
2010-11-07 Bubble, Crash, Bubble, Crash, Bubble... by John P. Hussman of Hussman Funds
Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. By irresponsibly promoting reckless speculation and illusory "wealth effects," the Fed has become the disease. The economic impact of QE2 is likely to be weak or even counterproductive. Even though the S&P 500 is substantially below its 2007 peak, it is also strenuously overvalued once again.
2010-11-01 Lessons From a Lost Decade by John P. Hussman of Hussman Funds
If the past decade has a lesson for investors, that lesson should have two components. The first is that valuations matter. Although valuations often have little impact on short-term returns over periods of less than a few years, they are undoubtedly the single best predictor of long-term market returns. Moreover, high valuations are ultimately followed by far deeper periodic losses than emerge from low valuations. Put simply, greater risk does not imply greater reward if the risks that investors take are overvalued and inefficient ones.
2010-10-25 Bernanke Leaps into a Liquidity Trap by John P. Hussman of Hussman Funds
The belief that an increase in the money supply will result in an increase in GDP relies on the assumption that velocity will not decline in proportion to the increase in monetary base. Unfortunately for the proponents of 'quantitative easing,' this assumption fails spectacularly in the data - both in the U.S. and internationally - particularly at zero interest rates. Once short-term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity.
2010-10-18 The Recklessness of Quantitative Easing by John P. Hussman of Hussman Funds
With continuing weakness in the U.S. job market, Ben Bernanke confirmed last week what investors have been pricing into the markets for months - the Federal Reserve will launch a new program of quantitative easing, probably as early as November. Further attempts at QE are likely to have little effect in provoking increased economic activity or employment. This is not because QE would fail to affect interest rates and reserves. Rather, this policy will be ineffective because it will relax constraints that are not binding in the first place.
2010-10-11 No Margin of Safety, No Room for Error by John P. Hussman of Hussman Funds
Over the past 10 years, the S&P 500 has achieved a total return, including dividends, averaging -0.03 percent annually. Over the past 13 years, the total return for the S&P 500 has averaged just 3.23 percent. These poor returns were entirely predictable during the late 1990s based on the historical relationship between valuations and subsequent returns. What's more, current valuations suggest similarly poor returns over the next five to seven years.
2010-10-04 Economic Measures Continue to Slow by John P. Hussman of Hussman Funds
The latest evidence from a variety of economic measures continues to suggest deterioration in U.S. economic activity. Data coming in from the Institute for Supply Management and other surveys is a bit less negative than anticipated, but continues to deteriorate in a manner that is consistent with stagnation. Still, with the S&P 500 at a Shiller P/E of more than 21, and Hussman's own measures indicating an estimated 10-year total return for the S&P 500 in the low 5 percent area, it is clear that investors have priced in a much more robust recovery than is likely to occur.
2010-09-27 Not Yet Out of the Woods by John P. Hussman of Hussman Funds
While we know the Economic Cycle Research Institute data has deteriorated further since June, we won't have GDP figures for a while yet. Given the data in hand, it's clear that past growth downturns of the same extent have often gone on to become recessions. The bulk of the growth that we did observe coming off of the June 2009 economic low was driven by a burst of stimulus spending coupled with a variety of programs to pull economic activity forward. These synthetic factors are now trailing off, with little intrinsic economic activity to propel a recovery.
2010-09-20 Sequential Signals by John P. Hussman of Hussman Funds
The U.S. economy is still in a normal 'lag window' between deterioration in leading measures of economic activity and (probable) deterioration in coincident measures. Though the lags are sometimes variable, as we saw in 1974 and 2008, normal lags would suggest an abrupt softening in the September ISM report (due in the beginning of October), with new claims for unemployment climbing beginning somewhere around mid-October. If we look at the drivers of economic growth outside of the now fading impact of government stimulus spending, we continue to observe little intrinsic activity.
2010-09-13 Impulse Response by John P. Hussman of Hussman Funds
The next three months represent the most serious window for the U.S. economy and labor market. The typical 23-26 week lag between leading indicator deterioration and new unemployment claims deterioration suggests that we may observe upward pressure on new claims for unemployment beginning about mid-October. However, these lags can be somewhat variable, and the leading indicators tend to have a better correlation with price fluctuations in the securities market. By the time the coincident economic evidence is clear, securities markets have often completed a large portion of their adjustment.
2010-09-07 The Recognition Window by John P. Hussman of Hussman Funds
Over the course of the market cycle, one of the primary areas of risk for stocks (and conversely, one of the best periods for Treasury bonds) is typically the 'recognition window' where economic activity begins to deviate from the upward trend that is priced into the market, and investors begin to recognize that an economic downturn is, in fact, likely. The instant relief provoked by the manufacturing purchasing managers index and the employment report was an overreaction to data that is still very early in that window.
2010-08-30 Hussman Funds 2010 Annual Report by John P. Hussman of Hussman Funds
At present valuations, exposure to market and credit risk is not likely to be well-compensated over the long-term, and may be associated with substantial losses in the intermediate term. Recent advances may simply be the product of a fragile post-crisis bounce, similar to those following other historical credit crises in the U.S. and abroad. The quarters immediately ahead present the greatest risk of fresh credit strains and concentrated economic risk.
2010-08-23 Why Quantitative Easing Is Likely to Trigger a Collapse of the U.S. Dollar by John P. Hussman of Hussman Funds
A week ago, the Federal Reserve initiated a new quantitative easing program, purchasing U.S. Treasury securities and paying for those securities by creating billions of dollars in new monetary base. Treasury bond prices surged. With the U.S. economy weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse of the foreign exchange value of the U.S. dollar.
2010-08-16 A Fragile Economic Outlook Continues by John P. Hussman of Hussman Funds
The recent few quarters of economic expansion are the result of enormous fiscal and monetary stimulus, without much 'intrinsic' private sector expansion at all. Now that inventories are replenished and the fiscal stimulus is tapering off, the underlying and still uncorrected fragility in the economy is likely to reassert itself for a time. While the Economic Cycle Research Institute has expressed increasing economic concerns, however, it has not yet warned conclusively of a double-dip.
2010-08-09 Corporate 'Cash' - Cheering the Asset and Ignoring the Liability by John P. Hussman of Hussman Funds
There is a lot of apparent 'cash on the sidelines' because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It will remain on the sidelines until the debt is retired. The government debt has been issued to finance deficit spending. At the same time, a great deal of corporate debt has been issued over the past year apparently as a pre-emptive measure against the possibility of the capital markets freezing up again.
2010-08-02 Valuing the S&P 500 Using Forward Operating Earnings by John P. Hussman of Hussman Funds
It is impossible to properly estimate long-term cash flows based on a single year of earnings. It is also impossible to properly value the stock market based on a single year of earnings. If you are not looking at a 'valuation' methodology accompanied by long-term, decade-by-decade evidence showing that the valuation method is actually correlated with subsequent market returns (particularly over a horizon of say, 7-10 years), then you are not looking at the sound valuation work of an investment professional.
2010-07-26 Betting on a Bubble, Bracing For a Fall by John P. Hussman of Hussman Funds
Investors who will need to fund specific expenses within a short number of years - retirement needs, tuition, health care, home purchases etc. - should not be relying on a continued market advance. If your life plans would be significantly derailed by a major market decline, get out. In contrast, if you are pursuing a disciplined, long-term investment strategy, and you know from your own experience of the past decade that you are diversified enough to ride out periodic losses without abandoning that strategy, ignore my views (and those of everyone else) and stick to your discipline.
2010-07-19 Don't Take the Bait by John P. Hussman of Hussman Funds
Investors who allow Wall Street to convince them that stocks are generationally cheap at current levels are like trout - biting down on the enticing but illusory bait of operating earnings, unaware of the hook buried inside. We should be skeptical about valuation metrics built on forward operating earnings and other measures that implicitly require U.S. profit margins to sustain levels about 50 percent above their historical norms indefinitely. More sober and historically reliable measures of market valuation create a much more challenging picture.
2010-07-12 Misallocating Funds by John P. Hussman of Hussman Funds
The relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations, and is the main reason why American workers earn more than their counterparts in the developing world. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality.
2010-07-06 Implications of a Likely Economic Downturn by John P. Hussman of Hussman Funds
Instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding: the original debt, and a newly issued government security. What appears to be 'sideline cash' is simply the evidence of past spending.
2010-06-28 Recession Warning by John P. Hussman of Hussman Funds
Warning: the US economy appears to be headed into a second round of decline. Looking at lessons learned across countries and centuries, Dr. John P. Hussman argues that that ‘the economy is again turning lower, and that there is a reasonable likelihood that the U.S. stock market will ultimately violate its March 2009 lows before the current adjustment cycle is complete.’ The current argument that this outcome is ‘unthinkable’ is not evidence but rather reflects reliance upon incomplete data and narrow-minded perspectives.
2010-06-21 Cliffhanger by John P. Hussman of Hussman Funds
If one thinks of the data as telling a story, the picture here would be a cliffhanger - where our hero dangles from a steep precipice, clutching a rock of uncertain strength, and the evidence is not clear about which outcome will prevail. One possible outcome is continuity, and the other is abrupt change. It's possible that things will resolve well, but we have to consider the possibility that they will not. Investors should make sure that a significant market decline would not derail their financial security or future plans, or cause them to abandon their discipline after the fact.
2010-06-14 Born on Third Base by John P. Hussman of Hussman Funds
Wall Street seems to have no idea that every bit of growth we've observed over the past year can be traced to government deficit spending, with zero private sector expansion when those deficits are factored out. Unless the credit spreads, the S&P 500, or the yield curve reverse, a further decline in the Purchasing Managers Index to 54 or below would be sufficient to confirm a 'double-dip recession.' By itself, such a level might not be particularly troublesome. In concert with other evidence, however, it would be sufficient to complete the syndrome of risk factors.
2010-06-07 Extraordinarily Large Band-Aids by John P. Hussman of Hussman Funds
The fundamental problem with the global economy today is that we have not accepted the word 'restructuring' into our dialogue. Instead, we have allowed our policymakers to borrow and print extraordinarily large band-aids to temporarily cover an open wound that will not heal until we close the gap. That gap is the difference between the face value of debt securities and the actual cash flows available to service them. The way to close the gap is to restructure the debt. This will require those who made the bad loans to accept the associated losses.
2010-06-01 Oil and Red Ink by John P. Hussman of Hussman Funds
It's no longer reasonable to apply previous risk estimates even after we've observed a major disaster. Before the housing crisis, it might have been tempting to shrug off mortgage defaults as relatively isolated events, since the price of housing had generally experienced a long upward trend over time. Indeed, historically, sustained declines in home prices could be shown to be very low probability events. But as the bubble continued, investors made little attempt to assess the probability of a debt crisis.
2010-05-24 Don't Mess With Aunt Minnie by John P. Hussman of Hussman Funds
In medicine, an Aunt Minnie is a particular set of symptoms that is distinctly characteristic of a specific disease, even if each of the individual symptoms might be fairly common. Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications. Historically, we can identify 19 instances in the past 50 years where the weekly data featured broadly negative internals, coupled with at least 3-to-1 negative breadth, and a leadership reversal.
2010-05-17 Two Choices: Restructure Debts or Debase Currencies by John P. Hussman of Hussman Funds
Without a central taxing authority, the common European currency can only survive if participating countries strictly control their deficits. It should not be difficult to recognize that confidence in any currency is tied to confidence in the assets which stand behind it, and associated confidence in the restraint of fiscal and monetary authorities. The bureaucrats in both the U.S. and European central banks have chosen to betray that trust.
2010-05-10 Greek Debt and Backward Induction by John P. Hussman of Hussman Funds
Despite the potential for a short burst of relief, the broader concern about deficits in the euro area make it unlikely that global investors will be appeased by a large bailout of Greece, or will go forward on the assumption that all is back to normal once that happens. Looking at the current state of the world economy, the underlying reality remains little changed: There is more debt outstanding than is capable of being properly serviced. Hussman also comments on overbought equity markets, and the current market climate.
2010-05-03 Violating the No-Ponzi Condition by John P. Hussman of Hussman Funds
Greece has insufficient economic growth, enormous deficits (nearly 14 percent of GDP), a heavy existing debt burden as a proportion of GDP (over 120 percent), accruing at high interest rates (about 8 percent), payable in a currency that it is unable to devalue. This creates a violation of what economists call the 'transversality' or 'no-Ponzi' condition. Unless Greece implements enormous fiscal austerity, its debt will grow faster than the rate that investors use to discount it back to present value.
2010-04-26 Looking Back, Looking Forward by John P. Hussman of Hussman Funds
The market is strenuously overvalued, faces a syndrome of overextended conditions that has historically proved hostile, and relies to an incredible extent on the absence of further credit strains. Accepting a greater level of market exposure will require, at minimum, that we clear the present syndrome of overvalued, overbought, overbullish, rising-yield conditions. The quickest way to a more constructive investment stance would be a meaningful improvement in valuations (which would most likely be associated initially with a deterioration in market action), and no further credit strains.
2010-04-19 Earning More by Setting Aside Less by John P. Hussman of Hussman Funds
Overall, the current data presents at best a mixed picture of credit conditions. Investors should not be surprised by a significant second wave of credit strains. It seems unwise for investors to celebrate variations of a few basis points in delinquency rates, however. It seems equally unwise to celebrate 'favorable' bank earnings reports that are exclusively driven by reduced loan loss provisions, particularly when the volume of impaired loans has not declined proportionately.
2010-04-12 Extend and Pretend by John P. Hussman of Hussman Funds
A year ago, the Financial Accounting Standards Board suspended rule 157, which had previously required banks to mark their assets to market value when preparing balance sheet reports. The basic argument was that fair values were not appropriate because there was 'no market' for troubled assets, which was false even at the time. This 'extend and pretend' policy has created a gap between the reported value of assets and the value they would have on the basis of reasonable cash flows over the course of their maturity.
2010-04-05 Unpleasant Skew by John P. Hussman of Hussman Funds
Stock markets are overbought and overvalued, sentiment is too bullish, and yield trends are hostile. These high risk conditions tend to lead markets to successive but slight and marginal new highs. They also tend to invite nearly vertical drops of more than 10 percent over a period of weeks. The present conditions therefore recommend a defensive investment stance. The implied total return for the S&P 500 over the coming decade is just 5.7 percent annually, the lowest level observed in any period prior to the late 1990's met bubble.
2010-03-29 Possible Outcomes: A Typical Post-War Recovery, or a Perfect Storm by John P. Hussman of Hussman Funds
Credit data suggests two distinct possibilities for the future direction of the economy. The most likely outcome is that we will see serious credit strains in the months ahead, adding to overextended market conditions, and creating a 'perfect storm' with a great deal of potential risk. Alternatively, if we do not encounter fresh credit strains in the coming months, a typical 'post-war' recovery may be on the horizon. Regardless of what lies ahead, current conditions recommend a defensive stance.
2010-03-22 Zombies and Rube Goldberg Machines by John P. Hussman of Hussman Funds
The U.S. financial system is one big Rube Goldberg machine that obligates the public to huge bailouts. Meanwhile, the Financial Accounting Standards Board continues to allow banks substantial direction in valuing their assets, which risks creating a zombie banking system by allowing a growing gap to emerge between stated asset values and the probable stream of cash flows from loans. The ability to obscure valuations appears to be a primary reason for the growing gap between delinquencies and foreclosures, as well as the reluctance of banks to modify mortgages.
2010-03-22 An Update on Valuation and Forward Earnings Assumptions by John P. Hussman of Hussman Funds
The market's valuation looks overpriced based on widely tracked fundamentals. Price-to-normalized earnings, price-to-dividend multiples, price-to-book values and price-to-sales multiples all sit above long-term averages. Valuations based on forward operating earnings are also unfavorable. The long-term average P/E ratio based on forward operating earnings is about 12. The current multiple is 14.8, and this value assumes the continuation of near-record profit margins. Even a minor lowering of expected profits would cause the whole scale of the overvaluation to widen materially.
2010-03-15 Ordinary Outcomes of Extraordinary Recklessness by John P. Hussman of Hussman Funds
The recent credit crisis did not emerge as a surprise, but was the ordinary outcome of extraordinary recklessness. Overvaluation and reckless lending do not always translate into near-term market weakness, but they invariably haunt investors in the form of poor long-term returns. Significant damage in the stock market often takes place during the "recognition phase" where the troubling reality departs from optimistic expectations. Fundamental measures suggest that markets are currently overvalued, and recommend a defensive position for assets.
2010-03-08 The Rubber Hits the Road by John P. Hussman of Hussman Funds
If we are indeed at risk of a second wave of mortgage defaults and credit strains, it will first show up as a jump in 30-day mortgage delinquencies in data released over the next two to four months. A small initial round of resets, started in November 2009, is already in progress. A deleveraging cycle would likely establish a sequence of troughs, each at lower levels of valuation. It will still be possible, however, to trade within that range in proportion to expected stock returns. Fundamentals will take precedence over all other considerations.
2010-02-22 Notes on a Difficult Employment Outlook by John P. Hussman of Hussman Funds
The 4-week moving average for unemployment claims stands at 468,500. This suggests monthly payroll job losses of about 80,000. Census hiring should make a positive impact on short-term job growth. Debt burdens could produce credit strains if weak employment conditions continue. Hussman also comments on the current market climate for stocks and bonds.
2010-02-16 The Federal Reserve's Exit Strategy: Unlegislated Bailout of Fannie and Freddie by John P. Hussman of Hussman Funds
John Hussman of Hussman Funds says the U.S. Treasury and the Federal Reserve circumvented the need for Congressional approval and engineered a tacit government bailout of Fannie Mae and Freddie Mac. More than 60 percent of the U.S. foreclosure market falls under the umbrella of these two government-sponsored enterprises. He also examines other factors affecting the current market climate.
2010-02-08 Cautiously Pessimistic by John P. Hussman of Hussman Funds
Hussman notes that he foresaw the market decline in his comments a few weeks ago, and that it would be a mistake to attribute that decline to a single piece of news. His most significant concern is a “significant second wave of defaults,” and he says those concerns (other than issues pertaining to Greece) have not been the focus of analysts’ attention. Hussman believes the decline in the unemployment rate to 9.7% is an “anomaly,” and expects unemployment to rise to 11-12%.
2010-02-01 Reported Earnings versus by John P. Hussman of Hussman Funds
Hussman discusses the distortions in reported corporate earnings, arguing that the true measure of value is that used by Berkshire Hathaway: the growth in book value plus dividends. He concludes that, “As is true for a variety of similar measures of normalized value, the valuation levels we observe today are comparable with the highest levels achieved in history, except for the bubble period since the mid-1990's.” He also discusses an op-ed piece by Volcker in yesterday’s NYT.
2010-01-25 A Blueprint for Financial Reform by John P. Hussman of Hussman Funds
Hussman’s commentary falls into four sections: (1) an 8-step “blueprint” for financial reform, in response to Obama’s proposed bank regulations; (2) a tongue-in-cheek plan for how to spend $1.5 trilli
2010-01-19 Inflation Myth and Reality by John P. Hussman of Hussman Funds
It is in this context that we should consider inflation risks over the coming decade. At present, inflation risks are hardly considered to be problematic by Wall Street. From the standpoint of the nex
2010-01-11 Green Shoots, Weak Roots by John P. Hussman of Hussman Funds
2010-01-04 Timothy Geithner Meets Vladimir Lenin by John P. Hussman of Hussman Funds
2009-12-28 Brief Holiday Update by John P. Hussman of Hussman Funds
