Hussman shows a risk of 50-66% [US stock]market losses

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suomalainen
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by suomalainen » Wed Nov 14, 2018 10:36 am

[sarcasm off]@seppia and @unemployable Yeah, I was being sarcastic. But technically, you CAN profit from a downturn in a stock or market by buying puts/inverse etfs, if you price AND time it "correctly".

[sarcasm on] But if you're *really* smart, then sure, you'll be able to profit from the coming crash, no problem, by buying puts and/or inverse etfs. What could possibly go wrong? After all, you KNOW the market's going down right? You KNOW there's going to be a crash! Time to make mon-nay!

[sarcasm off]But, yeah, if you're not actually that confident, then maybe just shift your asset allocation to something you consider "safer".

Lucky C
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Lucky C » Wed Nov 14, 2018 12:12 pm

A couple hints:

When reducing market exposure early, you can be wrong for several years while the bull market still rages on but still beat the market, if the market ends up wiping out several years' worth of gains.

You can be wrong most of the time and still have a winning strategy, e.g. 60% of your bets are wrong with an average loss of 5% and 40% of your bets are right with an average gain of 20%.

suomalainen
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by suomalainen » Wed Nov 14, 2018 1:08 pm

Sure, sure. I just think it's funny when people say that they're certain of something, but their actions reveal that they're hedging their bets. I agree with hedging your bets! But I also admit I'm not certain about anything.

hojo-e
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by hojo-e » Thu Nov 15, 2018 9:47 am

Your worst nightmare. What if you retired at a stock market peak and continued to live off 4% a year?

https://www.youtube.com/watch?v=SwGu2Aj ... e=youtu.be
https://awealthofcommonsense.com/2018/1 ... rket-peak/


classical_Liberal
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by classical_Liberal » Thu Nov 15, 2018 11:44 pm

I'm not so worried about a 50% domestic (US) equity hit. I've set up my portfolio to minimize damage for this extreme vs a boglehead 60/40. I'm also OK with lagging the same portfolio in good years like 2017. I lagged a 60/40 by about 3% real. IOW I have planned for extremes and have zero problem with my strategy for these events.

However...An important lesson I've learned this year is I'm less ok with lagging a "standard" portfolio in a low return year. YTD I'm down about 4% real vs maybe 1-2% drop for a 60/40 with the same savings behavior/initial capital. This is not an eventuality I had considered when planning for the extremes. Over time, similar outcomes could be equally disastrous to shorter-term dramatic changes. I have some more learning, the real world is the best teacher.

classical_Liberal
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by classical_Liberal » Fri Nov 16, 2018 12:30 am

For some reason I feel the need to clarify my above comments a bit. My biggest concern is not one off event mean reversions. I'm prepared for that. Rather, a slow, arduous decade-long process of mean reversion to all of the inflated asset classes, which is then followed by long term reduced global growth due to resource depletion and/or improved sustainable behavior.

I don't believe the historical decade of stagflation is a good example of this nightmare because: a) There was a big initial mean reversion to equities, b) I don't think we will have inflation due to lack of demand/necessity, and c) Resource depletion will make the following upward trend (1980's) impossible.

I'd much prefer the Hussman prediction, a quick mean reversion in assets. Then my prediction of the future. A slow, more historical ROI, like 2-3% real over the long run.

Mikeallison
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Mikeallison » Fri Nov 16, 2018 12:53 am

Until recently I used to worry about this stuff.

I actually like MMM's perspective on this (very rare that I say that), which is basically to take the 50/50 part of Sun Tzu's proposition(know thyself). He riffs on Covey's circle of control, and says deal with shit that is in your power to influence, and don't worry about the rest. All well and good when you say "know your enemy" in regards to a human opponent or even an institution, but the markets are monsters. Very capable, experienced, intelligent men routinely get their asses handed to them thinking they have the game figured out, and playing in a long bull market like this just feeds into the arrogance found in so many high IQ individuals, tricking them into thinking they "know the enemy" (Newton and the south sea company).

I'm a man of middling to slightly above average intelligence, so I simply will not go "where angels fear to tread". I hold a chunk of gold, and follow a vanilla 50/50 bond/stock allocation after studying the advice for defensive investors found in "The Intelligent Investor". I also own a house and a cabin out right. But my true strategy lies in the same genius as Thoreau "my greatest skill has been to want but little".

Sun Tzu would have been wiser to say something like "the enemy and yourself are the same in life" in my humble opinion, and after watching multiple family members of significant means die, I've realized that worrying about the stock market should not hold a place too far up the ladder of concerns.

Given a long enough timeline

We all die
Nations and great powers fade away
Markets always crash

The Inscription said "Know Thyself", because honestly that is the only thing that helps you through it all, and keep in mind there is reason that Fortune is depicted wearing a blindfold.

TomPie
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by TomPie » Tue Nov 27, 2018 4:53 am

There's no inherent reason why investors can't choose to keep paper assets overvalued forever as long as it's universally agreed/believed that someone else will always buy them at the same or a higher price. It works for fiat money, so why wouldn't it work for equity securities.
Hmm, sounds like 'This time it's different' to me. There will be better (safer) opportunities how to earn 3% p.a. (gov. bonds?) so the investors will start shifting (sooner or later;).

Anyway, it's interesting that number of different indicators are blinking red - Dual momentum might switch to cash-like ETFs by the end of this month; Shiller's CAPE PE; inversed yield curve etc. So it seems like we're approaching the end of the cycle. Obviously, this information isn't very helpful, since we don't know the critical piece - WHEN.

So what to do about it?

I like the statement that 'There are times to sail and there are times to row'. Row = be more active. So if you are close to retirement and/or your withdrawal rate is >3% you might consider rowing. How?

1/ If you do buy and hold then make sure you're truly diversified (globally) and re-set your expectations for the next 10 years (~4% p.a.). Great episode on this is here - Meb Faber episode 129 - - return expectations; portfolio construction, practical market approaches

https://itunes.apple.com/sk/podcast/the ... NVdwe-cTR4

2/ If you want to be more hands on you can try Dual momentum to reduce your drawdown when SHTF.

3/ Start building your war chest.
People are usually thinking in black and white terms. It means either you're 100% in (stock market) or you're out (=100% in cash). The obvious problem here is to get the market timing right. Good luck with that. You actually can be 10/20/50/80 % in cash and have only the rest in invested.

oldtom01
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by oldtom01 » Wed Nov 28, 2018 11:39 am

jacob wrote:
Wed Nov 14, 2018 8:29 am
Lets return to the final piece of advice which was "avoid strategy creep" + that now is a good time to WRITE DOWN your investment reasoning so you can remind yourself when/if the market does go down^H^H^H^H^H^Hdoes something unexpected. I've prepared a brief statement that fits on an index (ha!) card and covers the beliefs of 95% of the FIRE community.
  • Stocks always go up in the long run.
  • Nobody can time the market.
  • Stockpicking is gambling.
  • John Bogle, Larry Swedroe, Warren Buffett, Burton Malkiel ... says ...
  • Therefore, everyone should regularly buy&hold highly diversified low fee index funds no matter what the market does.
Heh... I think about this quote from your blog all the time:
Hold your sword raised over your head. Remain calm. Don’t panic. As soon as your enemy commits to his strike, bring your sword down on him. Mutual suicide. At least you didn’t lose more than him. I call this the index investing method of sword fighting, but I digress …
On some level every move you make in the market is about timing the market. The idea that people cannot time the market when we have pretty good models of what bubbles and peaks look like + leading indicators has always seemed facile to me.

So, thinking about the current now, what do we think we know?
  • We're at a business cycle peak.
    Trump + Fed are creating headwinds.
    Unemployment is historically low. (typically an indicator of a cycle peak. certainly in my lifetime.)
    Leading indicators: Chemical Barometer Index, New Home Starts, and Architecture billings are still positive but all these are finally slowing down.
To my way of thinking if we know the things above it's not "timing" or "gambling" to start aggressively reallocating defensively, or at least making concrete plans to do so. But I know over at MMM I'd be shot into the face of the sun for suggesting this.

IlliniDave
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by IlliniDave » Wed Nov 28, 2018 6:31 pm

For the last ~20 years I've woke up every day knowing there was a risk of 50-60% declines in the stock markets. For 30 years I've discussed the topic of investing with people who spend their time constantly worried about an anvil falling on their head. In the end you get paid to put your money at risk of being lost to you. Don't bet aggressively with money you can't afford to lose irrespective of what the tea leaves and fortune-tellers are saying. FWIW, I am personally convinced the big risk to my financial well-being lies in the inevitable reversal of the political pendulum. The next two years should be gridlock in Washington which is okay. I might bail in late 2020 though.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by jacob » Fri Nov 30, 2018 8:02 am

oldtom01 wrote:
Wed Nov 28, 2018 11:39 am
On some level every move you make in the market is about timing the market. The idea that people cannot time the market when we have pretty good models of what bubbles and peaks look like + leading indicators has always seemed facile to me.

So, thinking about the current now, what do we think we know?
  • We're at a business cycle peak.
  • Trump + Fed are creating headwinds.
  • Unemployment is historically low. (typically an indicator of a cycle peak. certainly in my lifetime.)
  • Leading indicators: Chemical Barometer Index, New Home Starts, and Architecture billings are still positive but all these are finally slowing down.
I think we're on the same page. Just because we can't time a hurricane far enough in advance to sell the house, it doesn't mean we can't take prudent precautions like keeping a stash of plywood for the windows or packing the car, etc. in good time during hurricane season. OTOH, the common perception is that we can stay and just ride it out because we or the house has always survived all hurricanes in the past and thus will also survive this one and all future ones. The truth lies somewhere in between so I prefer to go somewhat more defensive when the red lights are on and perhaps cancel my trip to Disneyworld when evacuations are suggested. (Yes, I'd really like to get a piece of the FAANG action like the indexers, at least when they go up, not when they go down like last month, but I'm too chicken.)

Here is a tonne of doom indicators:
https://www.forbes.com/sites/jessecolom ... d6bb991b82
https://www.forbes.com/sites/jessecolom ... 86bad5600e

What concerns me the most is margin debt (dividing by GDP is a good way to remove the exponential part) + that the current situation is much wider (systemic) than the two previous ones (dotcom and real estate) which look like blip-dips in comparison. Basically, it's been ongoing since 2013. If it was normal, then the US should have had a 1 year recession back then (like say the problems in the EU at the time), but we didn't... instead we have this.

What is this thing? A few years is not enough to call it an "era" but it's beginning to feel like one...

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jennypenny
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by jennypenny » Fri Nov 30, 2018 11:44 am

jacob wrote:
Fri Nov 30, 2018 8:02 am
What is this thing? A few years is not enough to call it an "era" but it's beginning to feel like one...
Could you elaborate? Sorry, I'm not sure what you mean (to what you're referring).

SavingWithBabies
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USA Federal Reserve 2018 Financial Stability Report

Post by SavingWithBabies » Fri Nov 30, 2018 12:00 pm

What do you make of the this report -- more of the same? I saw it touted in the news as "first-ever financial stability report" from Federal Reserve.

https://www.federalreserve.gov/publicat ... 201811.pdf
This report summarizes the Federal Reserve Board’s framework for assessing the resilience
of the U.S. financial system and presents the Board’s current assessment. By publishing this
report, the Board intends to promote public understanding and increase transparency and
accountability for the Federal Reserve’s views on this topic.
Last edited by SavingWithBabies on Fri Nov 30, 2018 12:48 pm, edited 1 time in total.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by jacob » Fri Nov 30, 2018 12:11 pm

@jp - Historically these indicators only redline for 6-18 months before something happens. It's now been 5 years of redlining ...
This begets the question whether these indicators still make sense.

Kinda goes back to Hussman's fundamental problem: The market is no longer respecting his indicators. He did call the 2008 crash (and the 2000 crash), but he did not call the recovery from 2009 to 2017 as the market didn't go far (low, etc.) enough to trigger a long position.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Seppia » Fri Nov 30, 2018 5:31 pm

From the first Forbes article

"The reason for America's stock market and economic bubbles is quite simple: ultra-cheap credit/ultra-low interest rates."

So what should the markets in Europe and Japan be doing? CAPE 90?
Europe has been stinking for now two decades. The stoxx600 is lower now than it was in 1998.

Mister Imperceptible
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Mister Imperceptible » Fri Nov 30, 2018 9:04 pm

@Seppia

Slow-motion value extraction from the US dollar? “Resting on one’s laurels” doesn’t cut it- more like wringing the last drops from a sponge. Has the ECB ever enjoyed using its printing presses as an “exorbitant privilege” at the expense of foreigners like the US has, or just its own citizens? The US can only do it for so long tho....

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by black_son_of_gray » Sat Dec 01, 2018 4:21 pm

jacob wrote:
Fri Nov 30, 2018 12:11 pm
Historically these indicators only redline for 6-18 months before something happens. It's now been 5 years of redlining ...
This begets the question whether these indicators still make sense.
To re-phrase your question (tell me if I'm misrepresenting): "Why is the US stock market behaving as though there is still massive economic stimulus, even though the Fed is raising rates and QT?"

Answer: The Everything Bubble still hasn't popped because there is still air being blown into it. The US stock market is still receiving economic stimulus - it's just coming from other countries. Brent Johnson calls this the "Dollar Milkshake Theory": as other central banks stimulate their economies, the US sucks up their milkshake. We drink it up! (Full explanation here - Most relevant part starts about ~13 min mark)

Essentially, the gist is (TL;DW):
As the US raises rates, it sucks in capital from around the world, pushing US asset prices higher, which allows the Fed to keep raising, which makes a benign circle within the United States, and a terrifying circle outside the United States, which ends very very badly, but not yet. -Quoted from first minute here.
Previous bubbles (Tech, Housing/MBS) certainly had some global contagion but were mostly inflated domestically and popped when domestic extremes were reached. This time, the Fed started to bubble, then given the dollar's global influence, everyone else started helping inflate the US - now the non-US may be the only ones still pumping in air. And it'll pop when their limits are reached. The end game for this scenario is ugly: the parasitic US market kills its hosts then crashes itself.

Now, have historical indicators ceased to make sense? I guess that depends on whether those indicators take the effects of foreign stimulus into effect. If the indicator is myopically restricted to US numbers (e.g. only takes into account Fed policy but not ECB policy), then maybe the indicators aren't reliable in this case. Or at least aren't showing the full picture, and that's why they don't make sense. If the Dollar Milkshake Theory is true, it makes more sense to look at the health of the hosts than at the health of the parasite. Historical indicators for other countries are probably the place to look.

Not saying this argument is bullet-proof or anything (I'd love the hear how it is wrong actually), but it's the most cogent argument I've heard in recent weeks to explain the anti-gravity nature of the US Market.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by jacob » Sat Dec 01, 2018 6:00 pm

@bsog - True that some foreign central banks have been buying US equities (the Fed is not allowed to, but other CBs are). It's also the case that higher US returns have attracted foreign liquidity. Where I'm not convinced is that this has been going on for years. Japanese investors have been buying US treasuries for decades because they have a higher yield than Japanese long bonds. China is propping up US markets because they need some place to put all the USD they get from selling their stuff. What the videos are talking about is the short-end of the yield curve, but I don't see the dynamics of that as being any different than the long end beyond immediate liquidity concerns.

There are some great benefits in being the world's reserve currency. Of course this is partially paid for by also paying for the world's largest military. I see both of these as being aspects of running an empire.

It may well be that this just looks weird when the x-axis is time. ZIRP has existed far longer than it usually does. If plotted as a function of price volume (getting into the mind frame of an algorithm instead), they might look perfectly normal in compressed time.

The idea/hope that all that paper money will someday collapse into gold is an old one. It's not something I would bet on. Why not collapse into something else like farmland or luxury condos?

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by black_son_of_gray » Sat Dec 01, 2018 8:40 pm

jacob wrote:
Sat Dec 01, 2018 6:00 pm
Where I'm not convinced is that this has been going on for years. Japanese investors have been buying US treasuries for decades because they have a higher yield than Japanese long bonds. China is propping up US markets because they need some place to put all the USD they get from selling their stuff.
Agree, the timing is difficult to understand, and there are a lot of countries to consider. Coarsely, though, it is interesting that when the Fed balance sheet stopped growing (~2014), the S&P went sideways (comparison plot in the Forbes article you linked). Maybe one could argue this was the natural market top that should have materialized years ago. The market started going up again, however, in 2016 - precisely when the Fed started raising rates and in so doing provided a more attractive outlet for other countries (thinking Europe) who were still at ZIRP or NIRP. Conveniently, just before the Fed started raising rates, the ECB also started QE in March 2015, putting lots of hot-potato cash looking for yield into the system. Europe stayed flat, US took off again.

If Japanese investors have been buying and continue buying US treasuries, isn't that a background level of demand we can just cancel out? Whether accurate or not, I think of the Japanese economy as just a steady state. China, I admittedly know nothing about.
jacob wrote:
Sat Dec 01, 2018 6:00 pm
What the videos are talking about is the short-end of the yield curve, but I don't see the dynamics of that as being any different than the long end beyond immediate liquidity concerns.
I'm a little lost here. Can you unpack that a bit?
jacob wrote:
Sat Dec 01, 2018 6:00 pm
The idea/hope that all that paper money will someday collapse into gold is an old one. It's not something I would bet on. Why not collapse into something else like farmland or luxury condos?
Agree - I'm not trying to argue the rest of the video's thesis about gold vs. the dollar... just that the framework of "US sucking up the stimulus of other countries" sounds like a superficially logical explanation of the years-long bubble to a macro novice like me.

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