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

[Saltation]

@Steveo

I agree with you. I'll let those that think they can beat the market attempt to do that. My research has pointed to index funds as the most effective way to achieve market returns. Investing in a globally diversified stock index fund matches my investment policy statement and has significant data to indicate that it is not suboptimal. I'm really not interested in spending thousands of hours researching individual stocks to come up with a better plan that is statistically unlikely to beat the one I'm following in the long-term. Asset allocation is very important and as discussed previously in the thread: individuals that pick individual stocks do so for a variety of reasons which differ from the objectives of index fund investors. I'm certain there are many reasons to invest in individual securities one of them being the main risk factor for index investors: overall stock market risk.

This being said: I would be weary of the crowd that promotes the one fund for life motto "VTSAX for life". Clearly 30 years of data indicates this is an effective approach in some circumstances but at a certain point people are just turning their brain off and hoping for the past to repeat itself.

[SavingWithBabies]

Aren't you at all worried about the whole "who wags the tail" problem with index funds? I don't know the absolute numbers off hand but index funds owned maybe 25% of the market a decade ago and today it's at or approaching 50%. If you have a constant incoming stream of investments into index funds from payroll deductions the funds have to buy more and more. To add another euphemism, it's like someone having a finger on the scale. At some point, won't the demand from the funds be strong than the non-fund market demand and what happens then? Has that already happened? Also isn't there a chance that the amount of investable funds (invested in passively managed funds) will exceed the realistic value of the entire index?

I googled after writing the above and this is the article I read about the ownership percentage: Passive investing automatically tracking indexes now controls nearly half the US stock market. That was as of March, 2019, which is getting close to 3 years ago. If anyone has up to date data or another source for this data (article says their source is "Bank of America Merrill Lynch"), I'd be curious.

Oops, I think my somewhat rhetorical question was addressed in the first post of this thread. For the record, I do worry about this but I also hold index funds as a very large amount (~50-60%) of my portfolio.

[Campitor]

@Steveo73

I guess I did a poor job expressing my thought. I don't think indexing is an un-wise investment strategy but most laypeople adopt it because it has become a meme; this doesn't mean its a bad choice or sub-optimal investment strategy.

What I intended to express is that most people are unwilling to learn how to invest intelligently in order to do something beyond indexing. The knowledge and effort required to beat the S&P500, consistently over many years, is not something the average investor would cultivate.

When you factor in the fees charged to have an actively managed portfolio, indexing is a superior strategy in most cases. The only active management financial services that I'm aware of, that beat the index consistently, over many decades, and offer good returns that outweigh the fees, have a minimum entry cost of hundreds of millions of dollars.

[steveo73]

What I intended to express is that most people are unwilling to learn how to invest intelligently in order to do something beyond indexing. The knowledge and effort required to beat the S&P500, consistently over many years, is not something the average investor would cultivate.

My take is that no one beats the index year on year over their investment life cycle. The best you get is a Buffet who has beat the index but it's not consistent. These people are unicorns.

The smart investor always takes the index. The smart investor does this because he bets with the odds in his favor.

[Mister Imperceptible]

In between your regularly scheduled programming, ecce homo:

https://m.youtube.com/watch?v=7r6wbCL1c7w

https://m.youtube.com/watch?v=JMkAGueH0BQ&t=0s

[jacob]

In between your regularly scheduled programming, ecce homo:

I'm beginning to think I might have misunderstood you. However, "abiding to [...] regularly scheduled programing" also serves an important purpose. This became clear to me when I was pointing out some exceptions to dogma elsewhere only to be [wisely] informed that most laymen are better served by confidence (staying the course) than expertise (constant self-doubt). Pareto-optimized humanity should position themselves at the top of Mt Stupid. It's really an incredibly clever meta-strategy. I wish I had thought of it, but I'm okay to follow and support it.

Basically, there are two different games being played since about 1983 once interest rates started a perma-decline, namely retail and stratosphere. What separates the two games is how they're played under different rule sets. As such there's a reason why retail and stratosphere rarely engage, namely https://www.youtube.com/watch?v=Zd0jOtxHWDQ Anyhoo ... best to leave subtle traces. We're still in Orange-mode.

[theanimal]

I was beginning to think that we had reached the point where Jacob ceased to debate yet another field (investing). Looks like I was right, just roastings from here on out.

[jacob]

Yeah well, I'll leave this thread having lifted one corner.
Insofar individual misbehavior isn't destructive to the whole, I'll accept it.

[steveo73]

most laymen are better served by confidence (staying the course) than expertise (constant self-doubt).

Your links are pretty funny. They are exactly how I envisage people who think they know better than the data view themselves.

Professionals make rational decisions. They don't delude themselves that they are better educated and somehow know better. That is delusional. That is a terrible terrible way to invest.

Laymen do what you suggest. They get caught up in predictions or understanding the market. They think they are experts. This thread is a classic example.

Mt Stupid is full of investors who think they know better. It's a character flaw when it comes to investing.

[Bankai]

In between your regularly scheduled programming, ecce homo:

https://m.youtube.com/watch?v=7r6wbCL1c7w

https://m.youtube.com/watch?v=JMkAGueH0BQ&t=0s

Just reposting a health warning in before people start selling everything and giving up on ere/fire...

[steveo73]

Just reposting a health warning in before people start selling everything and giving up on ere/fire...

I'd state that this forum has a really low education level when it comes to investing. I'd put it at layperson level at best.

The good news it's really easy to become an educated professional investor and create a portfolio that can last for life.

[Mister Imperceptible]

There are gradations in between binary absolutes. In between 100% long VTSAX and in between 100% cash or net short for example.

But perhaps there is this binary absolute:

1) What cannot go on forever will not go on forever

2) But what insists on going on forever that cannot go on forever, will go on, until it absolutely cannot any longer

[steveo73]

There are gradations in between binary absolutes. In between 100% long VTSAX and in between 100% cash or net short for example.

But perhaps there is this binary absolute:

1) What cannot go on forever will not go on forever

2) But what insists on going on forever that cannot go on forever, will go on, until it absolutely cannot any longer

Yep. The thing is we (definitely I'm not) aren't just talking about 100% stock index and only 100% stock index. I personally think this could be a great portfolio but it's not what I personally choose and it's not what I think most people should choose.

The problem with this thread is that you have people trying to predict the market, getting it completely wrong and then trying to make out they are the advanced educated investors. It's bizarre.

Your issues are easily handled via portfolio management.

[JCD]

[Edit: Doh, I started writing this up yesterday but didn't get to posting it til today and Mister scooped me, sorry for the double post ]

I just watched an interesting interview with Hussman in which he noted he's been wrong and what he's changed in his process: https://www.youtube.com/watch?v=7r6wbCL1c7w

I think there are two aspects to his interview worth examining.  First of all, it really is a "for now" statement. Secondly, he believes he has a new indicator to help guide him to the promised land.  The "for now" part I believe is mostly because he believes in reversion to the mean.  He does not believe there is any way for businesses to produce enough profit/growth from here to justify their prices given the limits of GDP growth today.  He does not believe inflation led growth can change the fact that businesses cannot continue to "grow into valuations" as the price of the business would have to match the inflation plus even more growth.  All that isn't really new for Hussman.
The second part is the part worth mentioning:

"[He starts off describing how to find a bubble...] There is one difference between this bubble and every other cycle we've had... in every other market cycle there was a limit to speculation and you could measure it and you could measure it reliably... Once interest rates went to zero investors lost their minds... you had to wait until internals deteriorate until adopting a bearish position, otherwise you are going to get hammered and we did." - https://youtu.be/7r6wbCL1c7w?t=1226

So in essence Hussman's view is when money is loaned out for "free", the price you pay for a stock does not follow the historical norm and therefore the use of history to judge the future does not work.  If that is the case, if inflation does force interest rates up, one should expect one heck of a ride down in the market.  He thinks that the signal before the market heads down is market internals.  That is to say when you go from SP500 seeing 80% of companies up most days to 20% up most days, regardless of whether the index is up or down is when you go from bullish to bearish. Given the lack of historical parallels I'm not sure what basis Hussman is using to come to this conclusion but I have not read the paper they included with the video, so I might be missing something there.

[jacob]

@JCD - If I remember the Hussman strategy correctly (it's been 10 years since I read the weekly updates), it has 4 market-modes (it's even in the logo) that he uses an econometric model (great faith in the math to the point of taking damage for years and years) to identify. Each market-mode has a corresponding trading strategy. For example, an overvalued (by his metrics) market with poor internals (another metric(*)) condition adopt a fully hedged portfolio positioning using something that effectively follows put-call-parity to turn an otherwise long institutionally-sized position into a short low-duration bond. This account for the steady and non-volatile decline---that's just "insurance premiums" sucking the NAV dry". (A smaller/non-institutional sized person with the same strategy would just have gone in cash but a fund would have too much slippage to do so.)

If a market-mode is identified incorrectly, it will trade wrongly and this is what's been happening for years and years. Essentially Mark Twain's lesson that it's not what you don't know that gets you in trouble, it's what you know for sure that just ain't so. In this case QE put the financial markets in a 5th market-mode, namely TINA. In TINA the idea that the financial market is comprised of investors seeking a stream of money from the economy by purchasing securities in companies to get a part of the money being created in the economy goes out the window. Instead it has been replaced by speculators who make money by buying securities low and selling them higher. Hussman is basically saying (correctly) that current evaluations (the ~40 CAPE) means that investors won't be paid by the economy because it's economically impossible (growth rates simply can't increase enough beyond historical values to justify it). However, what everybody else is currently doing is to realize that even if they can't make money by investing in the economy, they can still make money by speculating in the financial markets. (The distinction between economic returns and market returns is important.)

The total return people (usually represented by MPT) capture both effects but without the distinction---they don't care whether their money is made in the economy (earnings, dividends) or in the financial market (capital gains). It's all the same to them because dollars are dollars. However, the processes by which these dollars arrive are very different both in terms of how it affects the economy (ZIRP driven malinvestment---but it creates jobs) and the aggregate (speculation always requires a "greater fool").

So basically, the "logo" needs to change. I don't think Hussman's problem is a new indicator or the lack thereof. The problem is that the model is structurally wrong in that it lacks the TINA-market mode which is new to the world. You can't save a structurally wrong mechanism by tweaking parts of it. Overall, his reasoning is sound, it just lacks imagination outside-the-box. A 5th mode is required. Conversely, the EMH/asset allocation space seems to have been more "open-minded" in terms of breaking with previous discipline and increasing the equity weight to the point that some have gone to 2x and 3x funds or at least beyond the usual 100-age rule. (Variations observed have been 120-age or the ever popular 100%).

The rest of us should very much consider the possibility that the financial markets are being turned into a place that is no longer a place capitalists can invest in the most profitable undertakings but to what is essentially a "pension-scheme for the people"(*)+"a way for the 0.1% to stay 0.1%" and trade accordingly. The former is driven by demographics (literally in the shape of a pyramid in the e.g. US but not in Japan, eh? An I pointed out 10+ years ago) and the latter is driven by leverage.

(*) But one the government can punt on. "Hey it's not our fault the stock market went down."

PS: Just for fun, Hussman uses his own metric for internals, but most traders would be familiar with using the spread between the nasdaq and the spu to detect internal rotation between speculative "non-earning companies" (there are more in the qqqs) and "earning companies", which may or may not have investment potential depending on their pricing. An institutionally sized TINA strategy could use the futures market to implement that synthetically. Anyway just looking at equally weighted QQQ-SPY would be a simple proxy for those "internals".

[Campitor]

The rest of us should very much consider the possibility that the financial markets are being turned into a place that is no longer a place capitalists can invest in the most profitable undertakings but to what is essentially a "pension-scheme for the people"(*)+"a way for the 0.1% to stay 0.1%" and trade accordingly.

I think this has been developing since the 1990s - this is when I noticed a huge drop in savings interests rates that coincided with increased banking fees coupled with increased minimum holdings. And companies started to dump pensions for 401Ks at an accelerated rate in my area as the new millennium approached.

[jacob]

I think this has been developing since the 1990s - this is when I noticed a huge drop in savings interests rates that coincided with increased banking fees coupled with increased minimum holdings. And companies started to dump pensions for 401Ks at an accelerated rate in my area as the new millennium approached.

Indeed. Similar observations for retail in Europe 30 years later. The stock market was once considered a backwater for discretionary speculators as any "everybody knows this..."-private investors were in either bonds or bricks (their own home). However, with first ZIRP and now NIRP, everyman has discovered the magic of getting rich quick with stocks over the past few (<5) years. They're basically discovering in real-time what the anglosphere discovered many decades ago and so early adopters have crazy high capital gains which in turn attract other speculators and so on. The banks are all too happy to facilitate this as keeping NIRP savings accounts on their books hurt their bottom lines. Everybody is playing hot potato under TINA. Unfortunately, many people ARE potatoes w/o realizing it.

[Campitor]

My take is that no one beats the index year on year over their investment life cycle. The best you get is a Buffet who has beat the index but it's not consistent. These people are unicorns.

I agree since most people have fulltime jobs and can't equal the performance of a professional investor who studies the market day in and out and has thousands of trades under his belt. The majority of non-professional investors are incentivized to be in the market because it's easy to buy into a company sponsored 401K or a publicly available ETF; no sizeable upfront cash is required.

When interests rates took a nose-dive, and the FED put QE into hyperdrive, it forced the majority of the working population, who were smart enough to know Social Security alone wasn't going to meet their retirement needs, into stocks or real-estate.

Other than hard skills (bartering home grown produce or skilled labor a.k.a ERE resiliency) what attainable alternatives do the common folk have in today's current market? Keynesian economics is about manipulating economic incentives and I say it has done a pretty good job in that regard.

[JCD]

... a "pension-scheme for the people"(*)+"a way for the 0.1% to stay 0.1%" and trade accordingly. The former is driven by demographics...

From what I have heard (no citation I'm afraid, but it might have been Mike Green?) the boomers have actually been pulling out more retirement savings than they have been putting in. Again, it was a while back I heard this, but if I recall right, it was suggested that passive flow would soon be swamped by boomer retirement. If true, that suggests demographics are about to or perhaps have flipped. From what I can tell, it isn't just demographics but foreigners buying up the US market (See https://www.taxpolicycenter.org/taxvox/ ... -americans ) that would be the flows explaining the US market going up. Possibly that is non-US boomers, which could make the flows even stronger, but I've not seen any sort of breakdown at that level. I'm not sure what that implies in the long run for TINA, regardless of what the FED or interest rates do.

Just thinking out loud, if flows come out of the stock market but the total dollars pulled is greater than the economy is producing in commensurate goods, does that imply either we get future inflation or a rapid fall in the market? In the first case the fact that there are finally dollars in the real economy chasing too few goods seems valid. In the second case, it's the highway into the market and a goat trail out. If the fed prints to keep the market up, we get inflation, if not deflation. Am I thinking about this all wrong?

PS: Just for fun, Hussman uses his own metric for internals...

Of course he does. Gotta do something to justify being paid. I should have written something more along the lines of "For example, internals can be measured by..."

[jacob]

From what I can tell, it isn't just demographics but foreigners buying up the US market (See https://www.taxpolicycenter.org/taxvox/ ... -americans ) that would be the flows explaining the US market going up. Possibly that is non-US boomers, which could make the flows even stronger, but I've not seen any sort of breakdown at that level. I'm not sure what that implies in the long run for TINA, regardless of what the FED or interest rates do.

Just thinking out loud, if flows come out of the stock market but the total dollars pulled is greater than the economy is producing in commensurate goods, does that imply either we get future inflation or a rapid fall in the market? In the first case the fact that there are finally dollars in the real economy chasing too few goods seems valid. In the second case, it's the highway into the market and a goat trail out. If the fed prints to keep the market up, we get inflation, if not deflation. Am I thinking about this all wrong?

Right, okay. NIKKEI is often brought up as an example of how Japanese retail buy&hold investors would have been crushed if they retired in 1990. However, that's not what they actually did as goat trails eventually turned into highways and people abandoned their previous beliefs that real estate or stocks always go up the long run. Instead monies were redirected into long-term US treasuries and with deflation going on locally that was a nice strategy for them (insofar they actually paid attention and went with it). Similarly, there are very easy ways for eurodollars to make it into us equity. There's a strong anti-correlation between days when US equity goes up and USD relative to "euro" goes down via the currency markets.

To make macro-predictions, it's necessary to see the entire dog and how equity is basically just the tail (bonds and currencies are way larger markets than common equity). I really have nothing better to offer than either spending 1000+ hours to grok the whole picture (individual people are better off just making more money and increasing their savings rate) OR paying attention from time to time and not getting stuck in jihad-mode. I remain cognizant of the fact that only 15% of people have a functional understanding of the difference between a prediction and a risk-analysis. This makes public communication difficult and selective.

To avoid leaving you hanging, consider that US CPI inflation is determined by US retail spending (monthly), US asset inflation (day to day) is determined by GLOBAL stratosphere-money movement, but BOTH are measured in US/"euro" currency trades in the short run and trade imbalance/interest rate differentials in the 1yr run. This requires holding three different timescales and THREE different simultaneous perspectives. Hopefully this provides a starting point?

Of course he does. Gotta do something to justify being paid. I should have written something more along the lines of "For example, internals can be measured by..."

Oi ve! Here's the irony. IIRC, he actually did post his performance using his proprietary non-hedged performance as well and that did show alpha. However, being in the wrong market-mode killed it. IOW right on the micro, wrong on the macro. Hence the importance of doing the right thing wrong rather than doing the wrong thing right. Put it another way, insofar a new mode in the Markov chain had actually been identified back then, the outcomes would have looked different.