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John Hussman Weekly Comment: 2009 vs. 2013

June 10, 2013

Let’s begin with a reminder of where we are in the market cycle. At present, the stock market is in a mature, heavily bullish, overbought, overvalued bull market advance, near a multi-year high in the S&P 500, with consumer confidence at similar multi-year highs, with the broad perception that downside risk is insignificant, and that “tail risk” has been eliminated. This is a dangerous place to be, because it is precisely where risk aversion is scarce and hated most by investors, and where risk aversion is most likely to be rewarded in the future.

Consider the opposite. Recall the points in time where the stock market has been in a mature, heavily bearish, oversold, undervalued (or at least moderately valued) bear market decline, near a multi-year low in the S&P 500, with consumer confidence at similar multi-year lows, with the broad perception that downside risk is enormous, and that “tail risk” is growing. This is a wonderful place to be, because it is precisely where the willingness to accept risk is scarce and hated most by investors, and where the willingness to accept risk is most likely to be rewarded in the future.

Which market environment is the one where investors should generally be optimistic about multi-year market prospects? Clearly, the second. It’s a description that applies well to the 1974, 1982, 2002 and 2009 bear market lows. In contrast, the present description applies equally well to the 1972, 1987, 2000 and 2007 bull market peaks. It should be utterly obvious here that risk aversion is appropriate in present conditions.

2009 versus 2013

I’ve created some noise in the signal that investors are getting here. That’s because despite obvious historical evidence that we are in very dangerous conditions, it seems quite easy to dismiss these concerns. Why? Two reasons: 1) I insisted on stress-testing against Depression-era data in 2009-early 2010, and missed significant gains in the interim; 2) I missed the opportunity to be more bullish at several points since 2010 where speculation would have been possible (as more recent research suggests that we can “override” negative return/risk estimates even in overvalued markets, provided that trend-following measures are favorable andhostile “overvalued, overbought, overbullish” syndromes are absent).

I frequently discuss our 2009-early 2010 miss, not because I enjoy doing so, but because it remains a source of misunderstanding. If one doesn’t correctly understand why I was defensive then, it's tempting to argue that there's no reason to be defensive now either. At the beginning of the 2003 bull market, I shifted decisively to a constructive view, yet I remained defensive in 2009, despite better valuations. The best way to understand this narrative, and to see why we expect to be appropriately constructive in future cycles, is to understand why we missed that opportunity in the present one.

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Rating: 2.2/5 (11 votes)


Traderatwork - 4 years ago    Report SPAM
Buffett once said:

"... _, my partner Charlie Munger, the company’s Vice Chairman, and I will not change yardsticks. It’s our job to increase intrinsic business value.."

Dr Hussman, you should listen to him. : Don't change your yardsticks and find excuses for your missed and try to make money for your shareholder/investors.

Buffett pen an op-ed on NYTime in 2008 Oct: Buy American. I am


The Oracle missed by about 6 months the market bottom on 2009 March.

Where are you Dr. Hussman?

Final Quote:

"History is important but you can't drive forward by keep looking at rear view mirror."

AlbertaSunwapta - 4 years ago    Report SPAM
^ Well, as I've bragged about a number of times, I bought BRK around Mar 15, '09 (a couple days before it bottomed) and I was mostly in cash to that point. When markets don't seem to be acting at all rational, either on the upside or downside, I tend to think that something has to change for the better or worse.

Buffett too personally was in cash sometime before the fall of 2008. He'd put hundreds of millions of dollars into treasuries and/or bonds sometime prior to the market collapse.

And going into the last recession, in 2007-08, the Buffett quote that was in my mind came from the early 1970s when Buffett had cashed out of the market. Buffett said that; 'had he stayed in the market he'd have had "mediocre returns" '.

Today, my view is that the investment world is living in a highly subsidized dream world and that has lowered their cost of capital, changing their capital structure for the better but... it's pretty much a one time benefit that's already being priced into the market. Hopefully the world's economies will continue to mend but short term market pricing and prospective returns are quite another matter. A return of any degree of control to regular free market mechanisms may not bode well for stock prices.

I will however retain the few companies that I see as great companies but I've handed anything marginal over to much more optimistic investors.
LwC - 4 years ago    Report SPAM
Traderatwork: "Where are you Dr. Hussman?"

Hussman: "On Tuesday, June 11, I’ll be joining John Mauldin, Kyle Bass, Mohamed El-Erian, Barry Rithholz and David Rosenberg in a free online video event at 2PM Eastern – Investing in the New Normal"

So where are you, Traderatwork?

Vgm - 4 years ago    Report SPAM
Alberta - when the average joe investor thinks he/she can predict market direction, worries about short term market movements and bases investment decisions on them, as in your commentary, then it's getting silly. You're unaware of your own folly.

LwC - you mean Hussman should be attending a value investing conference instead to learn something useful? Good idea. And his clients would no doubt wish for it too.
AlbertaSunwapta - 4 years ago    Report SPAM
Vgm, I don't know if I'd be considered an "average joe investor" however I do know that I can't predict market movements short term, or for that matter long term either. However, I like to be able to sleep at night and if a zero return on cash permits that, irrational as it might be, so be it. I am fully aware of my potential folly and the potential opportunity cost of not being fully invested in equities but I also have faith that the markets will provide me with clearer opportunities to buy back in.

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