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Hussman Weekly: Capitulation Everywhere

January 28, 2013
GuruFocus

GuruFocus

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“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.”

- Benjamin Graham

“Human beings desperately want to belong, but, they also desperately want to understand the environment around them. Often, the desire to belong and the desire to know the truth conflict. The idea of the majority view or the ‘mainstream,’ gives people the sense that they are a part of a group, and at the same time, gives them the illusion of being informed.”

- Brandon Smith

The bears are gone, extinct, vanished. Among the ones remaining, many are people whom even I would consider to be either permabears or nut-cases. And yet, the historical evidence for major defensiveness has rarely been stronger.

The newest iteration of the bullish case is the idea of a “great rotation” from bonds and cash to stocks, as if the outstanding quantity of each is not held by someone at every point in time. The head of a “too big to fail” investment firm argued last week that stocks are “underowned” – as if every share of stock presently in existence is not actually owned by someone. To assert that stocks can be “underowned” seems to reflect either a misunderstanding of how markets work, or a desire to distribute overvalued institutional holdings onto the unwashed muppets. Likewise, the idea of a “rotation” out of bonds and into stocks begs the question of who will buy the bonds and sell the stocks, as someone must be on the other side of that trade. Similarly, to “move cash into the market” requires a seller of stock who becomes the new holder of said cash.

Quite simply, the reason that pension funds and other investors hold more bonds relative to stocks than they have historically is that there are more bonds outstanding, relative to stocks, than there have been historically. What is viewed as “underinvestment” in stocks is actually a symptom of a rise in the gross indebtedness of the global economy, enabled and encouraged by quantitative easing of central banks, which have been successful in suppressing all apparent costs of that releveraging.

The "rotation" fallacy has emerged even in the work of analysts that we admire. Ray Dalio of Bridgewater talked on CNBC last week of a move “out of” cash and “into” stocks, seemingly reversing comments he made only weeks ago at the Dealbook conference (h/t PragCap) where he suggested that risk premiums are likely to expand, that the effects of QE are diminishing as we do more rounds, that we’re facing austerity, that growth is flagging, that the economy is facing unprecedented risk, and that we face a slowdown with very little room to maneuver. Meanwhile, Albert Edwards of SocGen suggested that there has been an excessive “move away from equities” in recent years – instead of noting, for example, that the volume of U.S. government debt foisted upon the public (even excluding what has been purchased by the Fed) has doubled since 2007, not to mention other sources of global debt issuance, while the market capitalization of stocks has merely recovered to its previously overvalued highs.

Read the complete commentary


Rating: 2.5/5 (6 votes)

Comments

paulwitt
Paulwitt - 1 year ago
I think it's fine to look at the macro. BUT, I also think it is good to look at the micro. For instance, take small samples of the market. If people would have looked at housing prices in 2007 where I live in Orange County, CA they would have seen average home prices around $650,000 and I asked myself how can the average person afford that. Well, it turned out they couldn't.

Now take a sample of the stock market. A few people are saying the market is toppy. But how can it be when BAC,C, and AIG are under book.


BTW I think Dr. Hussman has a fine record

donli
Donli premium member - 1 year ago
test
chentao1006
Chentao1006 premium member - 1 year ago
test
sww
Sww - 1 year ago
Hussman Fund have a "Great Return"



Average Annual Total Returns

for periods ended

12/31/12
1 Year-12.62%
3 Year-5.05%
5 Year-4.01%
10 Year1.69%
Since

Inception

(07/24/00)
4.84%


-from http://www.hussmanfunds.com/theFunds.html

Why Hussman is a guru on Gurufocus.com? It's a kick in the face to all other Gurus.
Cornelius Chan
Cornelius Chan - 1 year ago
There are plenty of other gurus with similar track records FYI. Let's not single out one guy.

By my figuring, a guy should only be a guru if he can return 10% since inception... which according to the guru scoreboard eliminates 70% of the gurus.

vgm
Vgm - 1 year ago
"By my figuring, a guy should only be a guru if he can return 10% since inception... which according to the guru scoreboard eliminates 70%..."

A track record needs to be in comparison to a standard of some kind. So, if you mean 10% on top of inflation then I agree. That would really cut down the list. Not a bad thing in my opinion. The very long list of "gurus" here is at best misleading and at worst dangerous.

To my mind there are only around six who are truly outstanding and worth studying. The rest are also-rans.

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