John Hussman: Depression Fear Mongering 'Ridiculous'

by: John Hussman October 06, 2008 | about stocks: DIA / QQQQ / SPY    
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John Hussman

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Excerpt from the Hussman Funds' Weekly Market Comment (10/06/08):

I've updated our projections for 10-year S&P 500 total returns below (standard methodology). The heavy line tracks actual 10-year total returns. The green, orange, yellow, and red lines represent the projected total returns for the S&P 500 assuming terminal valuation multiples of 20, 14 (average), 11 (median) and 7 times normalized earnings. Current valuations place the most likely expectation for 10-year total returns in the 5-8% range for the S&P 500. That's not particularly high on a historical basis, but already exceeds the projection we had at the 2002 bear market lows, and is the "least bad" since 1995.


As long-term shareholders know, with the exception of 2003, I have considered stocks to be strenuously overvalued for many years. The unfortunate fact is that over the past decade, the S&P 500 has achieved a total return, including dividends, of just 2.45% annually. Since the 2000 market peak, the S&P 500 has performed even worse, achieving a loss of -2.23% annually, again including dividends. The reckless valuation of stocks has held us to a fully hedged investment stance for a much longer period than I would have imagined, but we place risk management and long-term returns ahead of "tracking the market" for short-term participation. Since the inception of the Strategic Growth Fund in 2000, we've generally refused to accept much market exposure, again with the notable exception of 2003, which was (pleasantly) the only year since 2000 that the S&P 500 achieved a total return in excess of 20%.

...

In regard to the legislation actually passed by Congress, one of the interesting improvements is that it includes various mandates (loss recovery, executive compensation limits) that are likely to discourage companies from actually using it, while still creating something of a "lender of the last resort" that will help to thaw the capital markets. As I've repeatedly noted, nearly all of these financials - even the distressed ones - have enough bondholder liabilities on the books that customers will be unharmed even if the companies go belly up. The issue has always been one of capital. As long as the capital cushion from shareholder equity is thin, investors have a tendency to pull money out, which forces institutions to sell assets at distressed prices. With the Treasury now a "last resort" buyer of those assets, my hope is that private investors will be more willing to provide capital. Almost certainly, there will be more dilution ahead for financial companies, so we may not observe a particularly extended rebound in that sector. But in any event, the general easing of concerns about another Great Depression should help the markets.

Frankly, I thought the drama and fear-mongering about another Great Depression was ridiculous in the first place. The same financial news anchors and Wall Street analysts that constantly gurgled about the market's resilience and strong fundamentals at the top, and all the way down, suddenly shifted to warning about Depression, economic meltdown, and bread lines - bread lines! - when they saw a big bucket of money that would only become available if the public was scared out of its gourd. Now you'll hear the same chatter until the Fed cuts rates again (which it almost has to do simply to maintain credibility, because the effective Fed Funds rate - which is hovering below 1% - is already so much lower than the 2% target). Call me cynical. This Depression talk is just outrageous - especially from people who didn't have the slightest sense that any of this was coming.

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This article has 20 comments:

  •  
    Oct 06 01:49 PM
    his Depression talk is just outrageous......unless events spiral out of control globally. The distance to the bottom is a long ways in the US, but not in the EU or the Far East. A depression is possible if we become persuaded that we have a limitless coffer from which to remake our economy. At this point any depression will be induced by tax and fiscal policies that misfire both as to targets and costs. It is possible and we need to know there are limits.
    Reply | Link to Comment
  •  
    Oct 06 02:01 PM
    Thank you. Finally a voice of reason amidst a sea of chaos. This morning I bought early cyclical recovery stocks in the midst of the panic. Happy camper.
    Reply | Link to Comment
  •  
    Oct 06 03:33 PM
    No, the Depression talk comes largely from people who saw this whole thing coming a mile away. Just as the Fed's overly lax monetary policy created the Roaring '20s, and then its interventions and inflationary behavior exacerbated the problem instead of preventing the necessary credit contraction the market said was necessary, so too is this story the same: Greenspan's Fed created the tech bubble and the housing bubble, and now Bernanke is intervening to prevent the necessary contraction, thus making the problem worse.

    History does indeed repeat itself.
    Reply | Link to Comment
  •  
    Oct 06 03:49 PM
    Here... Do you want "Depression Talk"? Here is a paragraph from Franklin Delano Roosevelt's First Inaugural Address... You may find a few sentences like:

    "Faced by failure of credit, they have proposed only the lending of more money."

    Or, "...they have resorted to exhortations, pleading tearfully for restored confidence."

    Does any of this remind you of the Bush-Paulson plan?

    Paragraph from FDR:

    "True, they have tried. But their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit, they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish."

    Complete Inaugural speech for FDR here, for those who are willing to listen to a voice from the past:

    www.americanrhetoric.c...

    www.americanrhetoric.c...
    Reply | Link to Comment
  •  
    Oct 06 04:48 PM
    I think it irresponsible to "declare" anything when the entire financial system is being artificially propped up and manipulated on a weekly (or should I say weakly) basis.

    When people actually wake up and smell the coffee, perhaps we could deflate this monster and restart when value actually equals worth.

    My favorite is those that think this stuff "goes away"...
    Reply | Link to Comment
  •  
    Oct 06 04:51 PM
    Yea, well didn't FDR along with Hoover turn a recession into a depression? FDR also promised to keep us out of WWII. Well, it seems he could talk a good game.

    Ludvig Von Mises predicted the Great Depression. Gotta any quotes form him?
    Reply | Link to Comment
  •  
    Oct 06 05:27 PM
    "FDR also promised to keep us out of WWII."

    I think you're confusing your populist demagogues. It was Wilson and WWI :)
    Reply | Link to Comment
  •  
    Oct 06 05:57 PM
    CNBC people calling depression? Never heard it. I always keep hearing them on and on about how market should be up. They only stopped last week when it became obvious even to them that we are in trouble.
    Actully, I think today's panic felt like a bottom. It is not often you see individual stocks go down 15-20% 3 days in a row.
    I bought some stocks in the morning just to see them another 10% down at lunch. And they were already 30-40% down from last week. They recovered toward the close on yet another rumor. But I was impressed with how strong the panic was. People were basically throwing stocks overboards like they were ballast on a sinking ship.
    Reply | Link to Comment
  •  
    Oct 06 06:50 PM
    More mindless chart followers. The debt economy is collapsing, banks have been nationalized, and the Fed is the only thing keeping the “market” from total collapse. 2008 represents the start of a completely new economic order that can’t be compared with the past.
    Reply | Link to Comment
  •  
    Oct 06 06:54 PM
    There was good reason why Greenspan retired at the height of his career in 2006 and was replaced by Bernanke, the “Depression Specialist”. The Fed new this was coming.
    Reply | Link to Comment
  •  
    Oct 06 07:50 PM
    Pent up,

    Yes, Wilson broke his promise about WWI but FDR broke his promise about WWII by provoking the Japanese and the Germans.
    Reply | Link to Comment
  •  
    Oct 06 10:44 PM
    No "Pent-up Demand", Roosevelt solemny promised the voters to keep the US out of all "foreign wars." Of course he was lying. What he actually meant was that he was going to enter WWII, and once the US was in, the war would no longer bye 'foreign."
    Reply | Link to Comment
  •  
    Oct 07 01:14 AM
    I agree with 90 % of you , Simit , curbs-in . Ludvig Von Mises institute has been predicting ' the greater depression ' for some time . Check out 'shadowstats ' , with 15 % UNIMPLOYMENT , 29 MIL folks on foodstamps ,massive layoffs being announced daily , guess what folks , we are + have been in a recession for quite some time . We are headed straight for Depression , no way , no how , this will be averted . The US will be in ' receivership ' , with foreign governments stepping in + 'taking ' what 's owed to them . WW 111 here we come , except we're broke , + the chinese + Russians know it !
    Reply | Link to Comment
  •  
    Oct 07 01:16 AM
    Yes , the FED did know " this was coming '. planned all the while by the Fed , a private banking cartel .
    Reply | Link to Comment
  •  
    Oct 07 05:45 AM
    Lin,

    As long as we have nukes, no one is going to take anything by force. This is known as "the plutonium standard".
    Reply | Link to Comment
  •  
    Oct 07 06:59 AM
    the insurmountable problem will be diluted in dollars or your currency of choice as the fed and other cb's throw so much money at the problem it shrinks (due to all the fresh currency)and becomes manageable for banks to deal with on their own -it will also bring up the price of assets in the long run -it is world wide currency devaluation so therefore the dollar wont crash because the rest of the world is printing to cover the losses
    Reply | Link to Comment
  •  
    Oct 07 09:07 AM
    The stock market is only a side show. The real problem is in the credit markets and I dont see anything improving there.

    By next October we should see 9-10 % unemployment and a box of cereal costing 6 bucks. Earnings are going to be pathetic in the coming quarters.
    Reply | Link to Comment
  •  
    Oct 07 11:37 AM
    John, talk of a depression is not ridiculous. Before last weeks plunge the S&P had a PE of 25. If we accept a historical norm of say 12 to 15, what is the fair market value? Yup 8 hundred perhaps, at best. During the last depression it was 5 or 6 if memory serves. The national debt is soaring over $4 trillion since bush darkened the scene, debt to GDP numbers are HIGHER than the great depression, the dollar has been tanking for a decade and the government has no way to meet its obligations with the debt which it has incurred without massive tax increases. The debt will never be repaid, John and the world has lost faith in the US financial system. If they don't buy our debt and our treasury securities, how exactly are we to restore our economy? The US economic boom of the past 30 to 50 years was made possible by almost free energy costs which were almost entirely domestically produced until 1970 and are now over 70% imported and which provide a trade deficit in petroleum alone of between 400 and 500 billion dollars a year. Our manufacturing base has been decimated, job loss is accelerating, domestic consumption is plunging and we have no domestic savings whatever.Tax revenues to local,state and federal coffers will soon be dropping, $3 trillion or more has been drained from housing...... Am I missing something or are you missing something. The banking industry with the collusion and encouragement of primarily but not exclusively the republican party establishment has allowed a debt and credit hurricane to form which is threatening to engulf the US and perhaps even the world economy. I would say that there is a plausible risk of a depression given this convergence of negative factors.
    Reply | Link to Comment
  •  
    Oct 08 10:15 AM
    This is what happens when people think that money is the principle source of wealth.
    Reply | Link to Comment
  •  
    Oct 17 09:04 PM
    SpazNetz: Whaaaat? Then why the hell are you commenting on an INVESTING website?

    Such hypocrites.
    Reply | Link to Comment
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