John Hussman: The Speculative Market Advance Since 2009 Ended Last Week
There's an old saying on Wall Street that "no one rings a bell at the market top"
This is why so many surprised investors got so badly burned when the DotCom and 2008 stock bubbles burst.
But those who noticed the extreme market conditions beforehand, whose analysis of history convinced them that defense was more prudent than fear of missing out, these few avoided most of the losses -- and some even gained mightily from those crashes, having been positioned wisely in advance.
Today's guest is one of those who smartly navigated the past 2 great market corrections.
He now thinks we stand at the precipice of a 3rd -- and he's ringing a bell for anyone who will listen.
To hear why and what he advises we do about it, we have the great fortune to speak today with Dr John Hussman, founder of Hussman funds, economist, health scientist and philanthropist. He also plays a mean guitar.
John gives interviews very rarely. So it's a true privilege for Thoughtful Money that he's was willing to give us so much of his time in this important discussion.
Here are my top takeaways from the interview:
John sees current market conditions as highly overvalued. Current valuation extremes parallel past market corrections and bubbles, and he calculates the risk of a 50-70% decline in the S&P 500 based on historical precedent.
For those wondering why his models started performing less well in the post-GFC recovery: John admits that his investment strategy during the recent bubble was too defensive, a stance influenced heavily by the environment following the global financial crisis. He conducted stress tests that suggested certain market syndromes, historically reliable indicators of downturns, should prompt a defensive position. However, the unique conditions of quantitative easing (QE) and zero interest rates altered typical market behaviors, encouraging continuous speculation despite overextended valuations. This led to a prolonged period where traditional indicators of downturns did not apply as they had in past cycles.
Since 2021, market internals have not been favorable, suggesting a cautious approach is warranted. John ties this observation to broader economic indicators, particularly in the labor market. The gradual reduction in job openings, a creeping increase in unemployment rates, and a rise in new unemployment claims are signs he watches closely, indicating the potential for recession is rising.
The historical increases in corporate debt, especially during periods of low interest rates, have heightened the impact of interest expenses on profit margins. He highlights the trend of companies taking advantage of these lower rates to increase leverage, which could pose risks as interest rates rise and debt needs to be refinanced. This could potentially squeeze profit margins in the coming years as higher refinancing costs take effect.
John is skeptical about the efficacy of any Federal Reserve future rate cuts, emphasizing that
their impact largely depends on the prevailing market sentiment and internal economic indicators at the time. If investor psychology is favorable, rate cuts could be beneficial; however, if the sentiment is risk-averse, these cuts might not stimulate economic activity as intended.
Throughout the discussion, John wove in philosophical considerations about risk management, the inevitability of market cycles, and the psychological aspects of investing. Given current conditions, John urging investors to assess their risk tolerance and investment horizon critically. This careful consideration is crucial, especially for those who might not be able to endure a prolonged period of underperformance or significant losses, typical of such market corrections.
Gold and other precious metals typically perform well in environments where real interest rates are compressed, contrary to common perceptions of gold as a straightforward inflation hedge. He highlighted the nuanced performance of gold relative to changes in treasury yields and the U.S. dollar, suggesting strategic inclusion of precious metals in diversified investment portfolios.
For the full interview with John Hussman, watch the below video:
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