'October’s market decline was a rather mild warning shot.'

Posted by archive 
'..it is probable that a global recession has started (we won’t know officially for six months… two negative quarters of global GDP growth). See here. On the good news front, there is no immediate sign of recession in the U.S.'

- Steve Blumenthal, On My Radar: Take the Shot, November 2, 2018

'Whenever it happens, the next downturn will hit millions who still haven’t recovered from the last recession, millions more who did recover but forgot how bad it was, and millions more who reached adulthood during the boom. They saw it as children or teens but didn’t feel the full impact. Now, with their own jobs and families, they will.'

- John Mauldin, Economic Brake Lights, November 2, 2018

'..Given that most pension funds assume future returns in the range of 7% annually, it implies that the coming years are likely to include a rather widespread pension crisis.'

'Let’s be clear. October’s market decline was a rather mild warning shot. At its lowest close, the S&P 500 lost -9.9% from its September peak, before rebounding in recent sessions. As I noted during the 2000-2002 and 2007-2009 collapses, intermittent “fast, furious, prone-to-failure” rebounds are among the factors that encourage investors to hold on through the entirety of major declines. After particularly severe down-legs in the market (which we have not yet observed), these rebounds can extend for weeks, and sometimes approach gains of as much as 19% before the market plunges again.

Get used to that kind of volatility. Though it will be essential to monitor market internals for periodic shifts in investor psychology, by the completion of the current market cycle, I continue to expect the S&P 500 to lose nearly two-thirds of its value.


Since speculation tends to be indiscriminate, we find that the most reliable way to measure those psychological preferences is by extracting a signal from the uniformity of market action across thousands of individual stocks, industries, sectors, and security-types (what we collectively call “internals”).

While we don’t disclose our own methods, which I developed in 1998, the central principle is that risk-aversion reveals itself through divergence, dispersion, ragged leadership, and lack of participation in financial market behavior. The chart below is reprinted from last month, and presents the cumulative total return of the S&P 500 in periods where our measures of market internals were favorable, assuming Treasury bill interest is accrued otherwise.


I have little question that Federal Reserve policy has again produced a bubble that will have extraordinarily disruptive consequences. The advance of recent years has produced a toxic combination of extreme valuations in every conventional asset class, coupled with a breathtaking mountain of low-grade debt issued by Wall Street (“product” as it was called in the mortgage bubble) to satisfy the yield-seeking speculative demand of investors. As Stanley Druckenmiller, one of the most successful investors in history, recently said of the 2007-2009 global financial collapse:

“Bernanke and I have a big disagreement over what caused the crisis, but to me, the seeds of it were born in ’03 when we had 9% nominal growth in the 4th quarter and we had 1% rates – which wasn’t enough, he had that stupid ‘considerable period’ thing attached… and you had serious, serious malinvestment for 3 or 4 years. We seem to learn something from every crisis. In this one, we didn’t learn anything… We tripled down on what caused the crisis, and we tripled down on it globally. With Wall Street just cheering them on.”


This is clearly not a favorable outlook for passive investors. While investors have embraced passive strategies as a result of strong backward-looking returns, this popularity represents little but performance-chasing at the most extreme valuations in history. At the recent market peak on September 20, we estimate that the prospective 12-year total return from a conventional passive asset mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills reached a low of just 0.48%. There is only one instance in history when these estimates were lower, which was in the 3 weeks immediately surrounding the 1929 market peak. Given that most pension funds assume future returns in the range of 7% annually, it implies that the coming years are likely to include a rather widespread pension crisis.


Market conditions will change, and the outlook will change along with them. In particular, the strongest market return/risk profiles we identify are associated with a material retreat in valuations that is joined by an early improvement in market action. During the recent advance, increasingly extreme “overvalued, overbought, overbullish” conditions encouraged us to adopt a pre-emptive negative market outlook, which was a useful response in market cycles across history, but detrimental in the face of persistent speculation prompted by zero interest rates. We’ve adapted so that market internals always take priority.

My hope and expectation is that our long-term followers, particularly those who were with me in complete cycles before 2009, will feel very much like an old, familiar friend is back at the wheel. In any event, we’ve made our adaptations, and we’ll continue to adhere to a value-conscious, historically-informed, full-cycle investment discipline.'

- John P. Hussman, Ph.D., The Heart of the Matter, November 1, 2018


The $400 Trillion Pension Time Bomb? May 30, 2017

'..global central bankers .. history's most reckless monetary mismanagement .. Harsh geopolitical fallout is unavoidable..'

'..most are unprepared for the worst bear market ever..'