'..The fact of the matter is that the deranged behavior of central banks has produced a world in which prospective returns on nearly all risky assets are likely to be similar or lower than the returns on safer alternatives in the coming years.''Remarkably, however, when valuations actually reach those obscene bubble extremes, investors seem to assume that the bubble valuations will persist indefinitely, and will never, ever, revisit their historical norms again. Presently, investors appear to have entirely ruled out market losses on the order of the -55.3% loss in the S&P 500 during the 2007-2009 collapse, and the -82.8% loss in the Nasdaq 100 during the 2000-2002 collapse. This is a mistake.
It’s too easy to forget that by the low of the 2007-2009 collapse, the total return of the S&P 500 had lagged risk-free Treasury bills for nearly 14 years, all the way back to June 1995, and had outpaced Treasury bills by less than 1.2% annually over the nearly 22-year period since the 1987 high, even though early-2009 valuations reached only modestly undervalued levels based on the most historically reliable measures we identify. Having anticipated both the 2000-2002 and 2007-2009 collapses, with a constructive shift in-between, I remain convinced that investors are walking eyes-wide-shut into a similar outcome today. By the competion of the current market cycle, I expect that the S&P 500 will have lagged Treasury bills for the entire period since roughly October 1997.
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In the interim of that “two data sets problem”, we missed a rebound that both our pre-2009 and our present methods could have captured, and inadvertently introduced a vulnerability to deranged central bank policies that have now produced one of the three most extreme points of market overvaluation in history. We’ve since adapted our discipline (specifically, extreme “overvalued, overbought, overbullish” syndromes that were effective in prior market cycles had to be explicitly prioritized behind market internals in a zero interest rate environment). The impact of those adaptations isn’t yet obvious, and in the interim, we’ve experienced an extended period of frustration.
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It’s worth remembering that it has taken one of the most extreme periods of speculation in U.S. financial history to bring the annual total return of the S&P 500 since March 2000 just 3.3% above the return that investors would have obtained from Treasury bills over the same period. My expectation is that all of that incremental return will vanish over the completion of the current cycle, and then some. In that event, the entire intervening roller-coaster ride will have been of no use at all to passive investors.
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Remember, however, that the historical relationship between valuations and subsequent returns quietly embeds growth rates in U.S. GDP and corporate revenues that were much higher than we currently observe. Assuming a permanently low interest rate environment, based on the possibility that growth rates have also permanently slowed from historical norms, the expected return associated with a -48% market decline would also be commensurately lower than has historically been the case. That’s just an implication of discounted cash flows. It’s probably the point that our critics understand the least, because they seem to be making the quiet but devastatingly unlikely assumption that future interest rates will be permanently low, yet future growth rates will be historically normal.
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..The fact of the matter is that the deranged behavior of central banks has produced a world in which prospective returns on nearly all risky assets are likely to be similar or lower than the returns on safer alternatives in the coming years.'
- John P. Hussman, Ph.D.,
Eyes Wide Shut, September 18, 2017
Context (Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..''..the true “Phillips Curve” .. is actually a scarcity relationship between unemployment and real wages, not general prices.'