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

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

Post by Lemur »

@Jacob
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.
I have been thinking about this a lot lately..at least for the past couple of months.

With money no where else to go....(bonds negative return, commodities why?, crypto 'not fully buying this') but equities...as long as everyone believes that stocks go up in the long-run, and the S&P 500 continues to filter out non-profitable firms, then ...why not? What would prompt an interest rate increase anyway? (something I don't fully understand...and can't see the benefit at all in this current environment).

Increased interest rates benefit savers, but it seems to me that just maybe equities are just the modern day savings account.

Realizing that my entire investing career (started investing in 2012 or so?) has been QE, Federal Reserve printing money, low interest rates, and 'stocks only go up' mentality. A blessing but also a curse in a way because I don't have the perspective of investing in a different interest rate environment. Or a "normal environment"...or perhaps my investing career really is just the beginning of this the new normal.

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

Post by The Old Man »

http://www.philosophicaleconomics.com/2 ... -as-banks/

With respect to equity markets in particular, I’ll end with this. If we want to get in front of things that are going to break a market’s network of confidence and undermine people’s beliefs that they’ll be able to sell near or above where they’ve been buying, we shouldn’t be focusing on valuation. We should be focusing instead on factors and forces that actually do cause panics, that actually do break the networks of confidence that hold markets together. We should be focusing on conditions and developments in the real economy, in the corporate sector, in the banking system, in the credit markets, and so on, looking for imbalances and vulnerabilities that, when they unwind and unravel, will sour the moods of investors, bring their fears and anxieties to the surface, and cause them to question the sustainability of prevailing prices, regardless of the valuations at which the process happens to begin.

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

Post by jacob »

What I can't figure out is the answer to the "why equities?" of all things. For a "greater fool"-trade, stamps or gold would work just as well. Indeed, see bitcoin. With cash inflation, it makes sense that ownership of claims on companies (equities) or stuff (gold) or math (bitcoin) or bricks (RE) would win out over claims on future cash (bonds). However, the fact that it's equity might just come down to fashion or practicalities like extremely favorable tax treatment in the US which then gets copied blindly into other countries.

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

Post by 7Wannabe5 »

Yeah, but what would happen if the tax treatment suddenly became even more favorable?

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

Post by classical_Liberal »

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Last edited by classical_Liberal on Fri Feb 05, 2021 2:02 am, edited 1 time in total.

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

Post by Lemur »

My answer to 'why equities' ... mainly convenience; its liquid and one could just buy/sell at the click of an app these days. More and more people now are jumping into options now.

As for the other alternatives, I can deduce here based on personal opinion...

Gold - Copying Warren's thoughts, doesn't actually produce anything of real value.
Crypto - Still seems like voodoo to maybe 75% of the millennials (including myself) and everyone else up. Can't speak for the next generations.
Real Estate - Too illiquid. Nowadays a lot of people are just mobile and don't want to tie down roots (including having to manage physical properties). One could just invest in REITs anway.
Bonds - As stated, doesn't return a real value in this environment.

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

Post by Lucky C »

jacob wrote:
Thu Jan 21, 2021 9:20 am
..."why equities?" of all things. For a "greater fool"-trade...
a) The majority of stock investors are either ignorant to the very idea of the major stock indices being overvalued and a "greater fool" trade.

b) Of those who are aware, most don't care: "I'm dollar cost averaging 10% of my paycheck for decades"; "I know stocks are overvalued but I know I shouldn't try to time the market either"; "I'm a fund manager who can't lag the market too much or I'll be fired"

c) Of the remaining minority who are aware of the "greater fool" trade, some percent opt out until there is a better opportunity

d) For the others who still participate, I imagine the vast majority would be active investors/traders who have a plan in place to sell rather than be willing to buy/hold at extremely high valuations & sentiment and do absolutely nothing while the values decline 60% or so. They would likely believe that their strategy is above average, so that even if active stock trades are a zero-sum game or a negative-sum game once we're in a bear market, they would believe their strategy would earn them positive returns or at least beat the market (say a 10% loss instead of a 50% loss).

e) Finally there may be a small minority of the small minority, who understands that they are in a greater fool trade, who still opt in to such a trade, and who realize that the expected return of zero in a zero-sum game (or negative in a negative-sum game) applies to them because they are not superior investors. I imagine this small group of people would be only betting a small amount of money for a combination of excitement and trying to build skills in such an endeavor. They are willing to lose that amount of money for various reasons, as illogical as they may be. I also imagine the majority of casino and lottery players are not complete idiots and understand that the odds are against them.

Anyway, all that is to say that I don't think it makes sense to paint the majority of holders of any overly expensive asset as people who are trying to profit from a "greater fool" trade. Having said that, the small majority of intentional "greater fool" traders of course don't only participate in equities buy also in gold and other commodities, cryptocurrencies, etc. But it wouldn't make sense to play that game with something that isn't currently both popular and volatile, and it wouldn't make sense to try something you're completely unfamiliar with. So equities checks the boxes of popularity, volatility, and familiarity. Cryptocurrencies increasingly so, particular with the younger crowd.

On the other hand, it wouldn't make sense for one to try a "greater fool" trade with tulip bulbs in 2021 without the volatility and popularity, even if one is an expert on tulip prices. But in the fall of 1636, after tulip bulb prices had already tripled the past year, you still would have had about 6 months to find a greater fool at up to 10x the price you paid. Not a bad trade if you can recognize when the supply of greater fools is slowing down.

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

Post by Lemur »

@The Old Man

Good Read.

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

Post by The Old Man »

"Stock prices have reached what looks like a permanently high plateau." - Professor Irving Fisher, 15 Oct 1929

Federal Reserve financial engineering has led to an incredible rise in stock prices. A 50% decline would only lead to a "normal" valuation level. The selling when it begins would become a flood. It will overshoot, so a decline of 75+% would not be unreasonable. The decline will begin when the Federal Reserve decides to stop supporting the stock market; thus, the bull market will continue for some time. When the crash finally comes, you have to wonder how the real economy will survive it.

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

Post by Seppia »

Or maybe we just all become japan and the market goes sideways for a couple decades.
Mad Max scenario is not the only plausible one in my opinion

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

Post by ertyu »

here is my question: can stocks fall if real yields don't rise

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

Post by The Old Man »

Seppia wrote:
Sat Jan 23, 2021 1:08 am
Or maybe we just all become japan and the market goes sideways for a couple decades.
Mad Max scenario is not the only plausible one in my opinion
https://en.wikipedia.org/wiki/Nikkei_225

The Nikkei 225 stock index reached a “bubble” top in 1989. It is still well below its top in 2020. Index top in 1989 was 38,915.87. Bottom was reached in 2011 with an index of 8,455.35 (loss of ~80%). In 2020 the index was 27,444.17.

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

Post by Lucky C »

ertyu wrote:
Sat Jan 23, 2021 4:44 am
here is my question: can stocks fall if real yields don't rise
Yes, believe it or not, there was a period in time when the 10-Year UST rate fell from 1.56% to 0.54% while the total return of the S&P500 fell by 19%! This historical event took place from February 19th 2020 to March 9th 2020.


For an older example, I was also looking at Shiller's data over the Great Depression but all he has for 10-year rates is annual data, which he sets for January of each year and then interpolates to get monthly data. What I can see is that 10-year UST rates started 1929 higher than they were at the beginning of 1928. So if you thought stocks were unsafe when they were expensive and yields were rising, you would avoid them in 1929.

After the initial 1929 crash, rates varied a bit for a few years including some drops, but CPI shows a lot of deflation, so real rates were in fact rising.

By 1934, stocks would appear to be "safe" again with rates falling and CPI rising, through 1940. Over this time, the S&P Composite real total return rose by 32.5%. Real total return of 4% per year.

However within this period is the 1937-1938 recession. Real total return of -42% over 14 months. During this time, CPI was flat while 10-year USTs dropped from a bit below 2.7% to a bit above 2.5%.

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

Post by Lucky C »

If I just look at just the shaded recession periods of this chart combining 10 year rates, the Fed Funds Rate, and S&P500 prices...
https://www.advisorperspectives.com/dsh ... erspective
It looks to me like FFR and stock prices were falling together, at least in some point, during every recession.

Of course these are nominal yields, but if these events pique your interest, it would be easy enough for you to conovrt them to real yields using CPI data.

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

Post by shemp »

"Stock prices have reached what looks like a permanently high plateau." - Professor Irving Fisher, 15 Oct 1929

He would have been correct if the consensus in the 1930's for what constitutes wise economic policy was what it is today. Prior to the 1950's, stocks were usually much cheaper than since, because everyone knew that stocks suffered under depression conditions. After the government took steps to prevent another depression in the late 1940's, and chose inflation instead, it became clear that depression risk was off the table. Elimination of depression risk drove the stock market boom of the 1950's and 1960's.

A second risk for stocks is the interaction of inflation with high marginal income tax rates. Inflation creates false nominal income, which is then taxed as if were real, and final result is that after-tax real income is zero or even negative. This is why the high stock price plateau of the 1960's gave way to the great stock price collapse of the 1970's. Once tax rates were reduced in 1983, stock prices returned to a high plateau by the mid 1990's, where they have remained ever since (with some bubbles and busts here and there in the meantime).

I see no reason to believe consensus regarding wise economic policy will ever change back to the view that depressions are acceptable. And I see no reason to expect very high marginal tax rates like prior to 1983, because modern consensus is that tax rates over 39% are counterproductive. These 2 government policy differences with respect to past time periods mean stock prices should usually be substantially more expensive than in the past. Maybe average CAPE10 of 25 is normal now versus 18 in the past.

Hussman's arguments are ultimately based on the idea that we will eventually again see either depressions like in the 1930's or combination of high inflation and high marginal tax rates like in the 1970's, and thus average CAPE10 should be 18 like in the past.

I can easily see the possibility of high real interest rates or high inflation returning in the future. However, higher real interest rates will crush gold, bitcoin, long bonds far more than stocks or real estate. And high inflation without high marginal income tax rates is no big threat to stocks or real estate.

All things considered, at current prices, 100% stocks and/or real-estate is the safest all-weather bet. (I am referring to the overall world stock market. Piling into USA tech stocks like Tesla another story.) Maybe if stock and real-estate prices go up another 50%, then it will make sense to go all cash and damn the slow but steady losses that cash suffers under interest rate repression (negative real interest rates) conditions.
Last edited by shemp on Sat Jan 23, 2021 12:05 pm, edited 1 time in total.

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

Post by Lucky C »

Maybe sentiment has reached a permanently high plateau as well!

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

Post by The Old Man »

shemp wrote:
Sat Jan 23, 2021 9:51 am
I see no reason to believe consensus regarding wise economic policy will ever change back to the view that depressions are acceptable. And I see no reason to expect very high marginal tax rates like prior to 1983, because modern consensus is that tax rates over 39% are counterproductive. These 2 government policy differences with respect to past time periods mean stock prices should usually be substantially more expensive than in the past. Maybe average CAPE10 of 25 is normal now versus 18 in the past.
Government resources are vast, but they are not infinite. Financial engineering cannot compensate for economic decline, only - at best - economic fluctuations.

Economic growth has averaged 2% a year for the first two decades of the 21st century. This rate compares with 3% a year for the 20th century (except for the 1930s). The entire economic and political infrastructure has been predicated on a growth rate which is now NOT being achieved.

Low inflation and low interest rates support a high CAPE10; however, the Federal Reserve has signaled it wants inflation and its expansive monetary policy will generate just that. Expansive monetary policy will not generate real economic growth out of thin air. Inflation without economic growth will only yield high inflation, high unemployment (or low labor participation rate), and low CAPE10.

The sub-prime crisis and pandemic necessitated government intervention; however, economic weakness has transformed this temporary support into long term economic life support. This support can continue for as long as the government has the resources to support it, but the government does not have infinite resources.

You talk about the interplay of high marginal tax rates, inflation, and stock prices. Due to tax shelters high marginal tax rates do not have the impact that would seem apparent. The main impact is that high taxes create tax shelters which then directs investments into unproductive economic activity. The big impact of inflation is that company decision making is impaired. High inflation makes it difficult for companies to predict costs and revenues; thus, increasing the likelihood of mistakes and lowering profits. Low profits reduce earnings which puts pressure on stock prices. Real estate, especially leveraged real estate, does well in an inflationary environment, so investments will be redirected from stocks into real estate. Real estate will do well unless or until the real economy descends into crisis (1930s).

The government with its policy tools (Keynesian & Monetary) can only delay the day of reckoning, not prevent it.

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

Post by white belt »

I think the big wildcard that makes economic predictions tricky over the next 10-20 years is that at some point central bank digital currencies (CBDC) will replace fiat paper currencies around the world, which will reverberate nth order effects in a way that’s difficult to model. Of course the displacement of the US dollar reserve status will be disruptive, but I’m more talking about how CBDC changes the fundamentals of how an economy and society are structured. The study of economics has never had to consider what happens when a government can track every single financial transaction that takes place, instantly determine the velocity of money, incentivize individual behaviors with negative interest rates, etc.

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

Post by classical_Liberal »

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

Post by shemp »

The Old Man wrote:
Sat Jan 23, 2021 2:53 pm
Government resources are vast, but they are not infinite.
Government resources to fight depression are infinite. Period. Real world resources another story. No unlimited supply of humans to do labor or iron ore to make steel, for example. But infinite supply of money, yes. And that's all that matters to investors.
The Old Man wrote:
Sat Jan 23, 2021 2:53 pm
Due to tax shelters high marginal tax rates do not have the impact that would seem apparent.
Buffett wrote a famous article in some business magazine in the 1970's about this issue, showing how inflation plus tax rates made real profits disappear. You can maybe find it by searching. The main issue is that depreciation is understated under inflation, but there are other factors. And no, corporations cannot always magically shelter all their income. Some can, but most can't. No one has thought through this issue more than Buffett and yet Berkshire Hathaway pays substantial corporate taxes to this day. No BRK dividends hence no dividend taxes precisely because Buffett is so tax conscious. Corporate taxes were a much bigger part of the federal budget in the past: partly higher corporate tax rates. partly inflation effects.

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