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Hussman Weekly: Number Five

October 08, 2012

Examine the points in history that the Shiller P/E has been above 18, the S&P 500 has been within 2% of a 4-year high, 60% above a 4-year low, and more than 8% above its 52-week average, advisory bulls have exceeded 45%, with bears less than 27%, and the 10-year Treasury yield has been above its level of 20-weeks prior. While there are numerous similar ways to define an “overvalued, overbought, overbullish, rising-yields” syndrome, there are five small clusters of this one in the post-war record: November-December 1972, July-August 1987, a cluster between late-1999 and early 2000, early 2007, and today. The first four instances preceded the four most violent market declines in the post-war record, though each permitted a few percent of additional upside progress before those declines began in earnest. We do not know what will happen in the present instance, particularly over the short-run. But on the basis of this and a broad ensemble of additional evidence, we estimate that the likelihood of deep losses overwhelms the likelihood of durable gains. To ignore those four prior outcomes as “too small a sample” is like standing directly underneath a falling anvil, on the logic that falling anvils are an extremely rare occurrence.

On the economic front, Friday’s employment report was interesting in that total non-farm payrolls (the “establishment survey” figure most widely quoted in news reports) came in slightly below expectations, but total civilian employment (the “household survey” figure used to compute the unemployment rate) jumped enough to produce a drop in the unemployment rate to 7.8%. While the difference was certainly an outlier in terms of typical correlations between establishment and household figures, it wasn’t the sort of outlier that would justify the suggestions of political conspiracy that were bandied about over the weekend.

The fact is that on a month-to-month basis, there is only a 50% correlation between the establishment and household employment figures, rising to about 90% correlation for year-over-year changes. The household data is notably more volatile, but the establishment figure makes up for the lower volatility with significant after-the-fact revisions, particularly around economic turning points. The month-to-month changes above and below the 12-month average are about 50% larger in each direction for the household survey than for the establishment survey. What’s interesting is that these changes are often matched by changes in the reported size of the labor force, which is why they don’t usually result in large changes in the unemployment rate from month-to-month. For example, in January 2000, the household figure jumped by over 2 million jobs, while the establishment figure increased by only 248,000 jobs. But the unemployment rate held steady at 4% because the reported labor force also increased by over 2 million workers.

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Rating: 3.1/5 (16 votes)


Chicasal1234 - 5 years ago    Report SPAM
So once again John writes the same horrible times theme he's written for years.....

......and like everyone else he has his little investment portfolio.....

......that looks like all the others.

Traderatwork - 5 years ago    Report SPAM
Agree with you Chicasal1234. Wonder those who invest in his fund did any due diligence check about this guy.
AlbertaSunwapta - 5 years ago    Report SPAM
^ You need to read some Seth Klarman. Due diligence is not only looking at short term returns but also looking for downside protection and avoidance of permanent loss of capital.

I have an ok investment record, partially due to my buying and Berkshire Hathaway in the early 1990s and never selling it - and of going to 80+% cash, but again not touching BRK, in the summer of '08, but selling 15 year old bank positions, and then buying back into the market near its depth in March '09. Moreover, I've tried to 'time' other collapses such as in 1998-99 by building cash and trying to profit off a collapse in tech via L and FFH short positions. That said, unlike the posters above I take Hussman's commentaries very seriously. There's always going to be the fund manager with fantastic outperformance in an up market that everyone compares others like Hussman to, but what matters is protection of principal and Hussman has a distinct focus on that. Buffett does too.

While I didn't really follow him before about 2009 I went back through his many fantastic writings and looked at the time of peaking of the 'ignorance is bliss' investment philosophy and found this:

June 4, 2007

Pretty Pictures

John P. Hussman, Ph.D.

"As of last week, the Market Climate for stocks was characterized by unusually unfavorable valuations, positive market action on the basis of broad price trends, but also a combination of overvalued, overbought, overbullish and rising-yield conditions that has generally been followed not only by returns below Treasury bill yields, on average, but typically by deep and abrupt market losses. That tendency, however, has generally not provided other forewarning – stocks have tended to achieve successive marginal new highs until an abrupt correction has emerged that eliminates weeks or months of progress."

Now everyone should re-read his current article's first paragraph again.

PS I'm raising cash again.

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