The next chart shows two companion measures. This measure is now 50% above levels that were never seen in history prior to last year. nonfinancial equity market capitalization to corporate gross value-added, including our estimates of foreign revenue (MarketCap/GVA). The chart below shows the valuation measure we find best correlated with actual subsequent market returns in market cycles across history – the ratio of U.S. For a review, see the section titled “The mapping between observable valuations and expected returns is independent of the level of interest rates” in Alice’s Adventures in Equilibrium. Moreover, as I’ve detailed before, the low level of interest rates does nothing to improve those prospective returns. Presently, the valuation measures we find best correlated with actual subsequent market returns are at the most extreme levels in U.S. Yet like other bubbles, I expect that most of the damage will come off the top, resulting in market conditions that are reasonably investable within a year or two. Measured from current extremes, I expect that the unwinding of this bubble will drag S&P 500 total returns below Treasury bill returns for least a decade, and possibly two. My real concern is for passive investors – particularly charitable organizations whose missions would be compromised by a loss of over 50% in their equity investments (and whose missions might be enhanced by avoiding even part of that), and retirees who have barely enough to enjoy their future, but with most of it dependent on the temporarily bloated prices they see printed on a page or flashing on a screen. Rather, our investment stance will change as valuations, market internals, and other observable factors change. Emphatically, our own investment discipline doesn’t require forecasts or rely on projections. I expect that the coming decade – and possibly even the next 12 months – will be a disaster for the U.S. My own concerns here share that sort of pointed seriousness. The difference I’m trying to make is just the routine ‘the market is expensive,’ and the significant. I’ve always tried to make a big difference, but the difference is often wasted because people don’t remember what you sounded like when you were serious. Jeremy Grantham recently observed “Seriousness is flagged by the language that you use. – Jeremy Grantham, GMO, The Top of the Cycle, August 2021 The next time we’re pessimistic, we have more potential to write down asset prices than we have ever had in history, anywhere. ![]() And gradually, the enthusiasm level drops off a bit, you have no more money to borrow, you’re fully borrowed, and the buying pressure gradually slows down. A week later, you’re not quite as enthusiastic as last week and last month. And then the following day, you’re still enthusiastic but not quite as enthusiastic as yesterday. The mechanics of a bubble is you have maximum borrowing, maximum enthusiasm. And my guess is that’s probably the cause, in the end, of most of the bubbles deflating. The biggest cage rattler of all is everything else you haven’t thought about that could go wrong. 1929, no one has agreed yet what the pin was. You can very seldom identify the pin that pops it. ![]() I’ve been very clear about what I consider a definition of success – and that is only that, sooner or later, you will have made money to have sidestepped the bubble phase. ![]() You profoundly do not wish for a super high level to your bubble, and you profoundly do not wish for more than one asset class to be bubbling at the same time. What it does change is the amount of pain that you get to go back to fair value and below. Now the question is how high is high? Very hard to tell always what the peak will be, but what you do know is that how high the peak is has no bearing at all on what the fair value is. This is all characteristic of the handful of great bubbles that we’ve had. Then there’s the most important thing of all, which is crazy behavior, the kind of meme stock, high participation by individuals, enormous trading volume in penny stocks, enormous trading volume in options, huge margin levels, peak borrowing of all kinds, and the news is on the front page. There are a few people who would still argue that 2000 was higher, but most of the data suggests that this is the new American record for highest priced stocks in history. Of course, they’re always extremely overpriced by average historical standards. Bubbles are characterized typically at the end of a long bull market by a period where they accelerate, and they start to rise at two or three times the average speed of the bull market, which they did last year of course. I think it’s clear that we’re deep into bubble territory. President, Hussman Investment Trust November 2021
0 Comments
Leave a Reply. |