HUSSMAN DOES KALECKI

John Hussman had a really nice piece out this week and he riffed off the James Montier piece I cited last week.  You can also see my analysis on corporate profits using a Kalecki approach here.  His conclusion was similar to the one that Montier and myself came to.  Dr. Hussman summarizes his point succinctly:

“What remains then is a fairly simple assertion: the primary way to boost corporate profits to abnormally high – but unsustainable – levels is for the government and the household sector to both spend beyond their means at the same time.

If we go to the data, we see the link between profit margins and deficits in the quarterly figures, but the tightest relationship is actually a causal one – large government deficits (as a percentage of GDP) coupled with weak household savings rates result in temporarily high corporate profit margins, with a lead of about 4-6 quarters.

The conclusion is straightforward. The hope for continued high profit margins really comes down to the hope that government and the household sector will both continue along unsustainable spending trajectories indefinitely. Conversely, any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins. With the ratio of corporate profits to GDP now about 70% above the historical norm, driven by a federal deficit in excess of 8% of GDP and a deeply depressed household saving rate, we view Wall Street’s embedded assumption of a permanently high plateau in profit margins as myopic.”

That’s really good stuff.  If you’ve understood the dynamics of the balance sheet recession and the massive impact of the government’s spending and the bulging deficit you’ve been leaps and bounds ahead of other investors over the last few years.  The same will be true in the coming 24 months as the downside risk to the deficit grows.  As I mentioned previously, the current environment is relatively easy to predict because private investment is so low.  Generally private investment bounces back sharply during a recovery and private investment can be notoriously hard to predict.  But with private investment low on a historical basis we can see that the government deficit is carrying the burden.  While investment is picking up it’s still not outpacing the effect of the deficit.  And since the deficit is relatively easy to predict we can gauge the trajectory of the economy to some degree.  So stay tuned.  I still think corporate profits and the economy are on a positive trajectory, but as we head into 2013 those risks are going to rise SUBSTANTIALLY.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • B Ferro

    Obama’s chances of getting re-elected look better to me by the day, would you agree?

    If so, per the past two years as we’ve cited the risk to reduced gov’t spending as a reason to be bearish, doesn’t it likely mean spending remains elevated and with it, coprorate profits/margins?

  • LRM

    Do you think that there is a chance that the debt ceiling debate pops up prior to the election to snatch the crown from BHO ? Otherwise, even if shortly after, will this not mute the governments ability to spend?

  • http://www.pragcap.com Cullen Roche

    Yeah. It’s surprising to me. I said two years ago that the UE rate would be over 8% at election time and it would bury Obama. But it hasn’t at all. Which is kind of amazing. I wonder if a President has ever won re-election with UE over 8%. But maybe it just goes to show the weakness of the R field….

  • That guy

    Dr. Hussman…a clock that is right once every 8 years.

  • http://www.pragcap.com Cullen Roche

    Come on. Hussman has crushed the S&P since inception. Yes, it’s been nothing special in recent years, but his fund is specifically designed to perform well over the course of a FULL cycle. That’s exactly what its done….I think Hussman’s critics are too hard on him.

  • hangemhi

    The tale of two economies – 60 minutes piece on Sunday about the art world – parabolic price move in recent years. Another recent stat; 90+% of income gains since 2009 to the top 1%. Luxury real estate making a come back, and Manhattan RE barely skipped a beat. So inequality not only continues, it’s getting worse. Large corporations and the uber-wealthy sitting on trillions. Nearly 80% of Americans with no savings.

    What’s it all add up to? Bet on whatever the ultra rich spend on. I would think this is good short term for stocks… but long term?????

  • Octavio Richetta

    I love reading Hussman, very clever guy. I don’t invest in his funds. But what the hell is this guy doing with his flagship fund HSGFX?

    YTD it is down 7.08% and he is not supposed to be a net short fund. Even if his longs have done poorly, loosing 7% in hedging in ree months seems extreme. Is he going away from his mandate?

    As I posted sosmewhere else in this site, YTD I am -2.05%, and I have consistently tried to short this market smartly but AGRESSIVELY via SPX puts, frequently being over 100% short since I have virtually no equity exposure. So, how come Hussman who is supposed to have an equity cushion and should not be net short is down 7%?

    I think what he does boils down to persistent fancy market timing and market timing, if you do it 100% of the time, works at best 50% of the time,I.e., it does not work!
    When I have stayed out of the market, I have done it for years at the time. Like a couple of years before the tech and housing nibble bursts. I was way early but came out well ahead since I locked in the high interest rates that were prevalent before the bubbles bursted..

  • jt26

    TPC, your work on analyzing and explaining the Fed and sectoral balances, has been just stellar since you’ve begun. I see no reason for a smart economics student to run up $100k student debt, when he can just come to pragcap. Unless of course you have a stealth plan to launch “Corinthian Capitalist College”. ;-}

  • anon

    As an outsider of the USA looking in, this whole presidential election looks insane. I keep asking myself “they have over 300 million residents…and this is the best potential leaders they can find?”

    I don’t understand it – your society does a really good job at getting, for example, the top business leaders into CEO roles, getting the best actors and TV hosts into the right roles, great investions funded through efficient venture capital systems etc etc… yet when it comes to finding a leader for the whole country it just all goes horribly wrong…

  • anon

    I just think its crazy that some people seem to think you can’t possibly have anything constructive to add to a financial debate unless you happen to have made a heap of money in the last 12 months. That’s totally stupid – those that have that view are doomed to follow yesterday’s hero down the road to miserable returns while ignoring hugely insightful people because they don’t run a hedge fund.

    Cullen, as far as I understand your personal trading results are not public info – I guess according to people like “That Guy” that means we should ignore everything you say as well until such time as you publish amazing results…

  • http://www.conventionalwisdumb.com Conventional Wisdumb

    No point in defending Hussman during the bull-phase of a market because no one feels bad when stocks and markets are rising and no one gives credit to those that run contrary to the current thinking regardless of their track record.

    I read his stuff because I think he is the most intelligent quantitative analyst out there and he writes in a form that most people can understand with a little patience and effort which unfortunately is in short supply in today’s 140 character attention span.

    No one has to take his investment advice but they should read his commentary especially if you manage your own money.

    By the way these were the opening paragraphs on his Nov 12, 2007 commentary:

    “Expecting a recession

    In recent months, I’ve repeatedly noted that while recession risks were gradually increasing, there was not sufficient evidence to expect an imminent economic downturn. Most economists still believe this. On Saturday, the consensus of economists surveyed by Blue Chip Economic Indicators indicated expectations that growth will be sluggish into next year, but that there will be no recession. Unfortunately, the economic consensus has never accurately anticipated a recession. For my part, the outlook has changed. I expect that a U.S. economic recession is immediately ahead.

    This conclusion is based on the combined weight of several classes of indicators, including asset prices, reliable survey measures, and measures of labor market activity. One way to understand this change in outlook is to examine our 4-indicator “rule of thumb” – a simple composite of readily obtainable indicators that have been observed in every U.S. recession. It is a syndrome of conditions that are logically and historically related to economic weakness, none particularly informative when observed individually, but important when they occur together.”

    That’s around three weeks after the S&P hits its all time high. I would say that was prescient and incredibly contrarian. Was it a fluke?

    Well since he backs up his reasoning with facts and figures, I would say no. It wasn’t a guess based upon feelings.

    The good thing about Hussman is that he is completely open about his record and his writings are archived all the way back to 2000.

  • B Ferro

    I think it’s your last point…the competition is so weak.

  • B Ferro

    You make interesting points anon…it’s that timeless debate of whether being smart and right is the same thing as making money.

    I might be smart and not make money but it’s hard to argue with me making money and NOT being smart (consistently making money not Paulson-ensue who seemed to have caught lightning in a bottle).

    Hugh Hendry might be “right” someday and China might blow up, but how much downside will he have to endure before that comes to fruition? What opportunities will he miss?

    Interesting debate…

  • anon

    Indeed – Paulson is a great example to use in this debate!!

    I think time horizon and investment style play an important part. What’s the old saying… the difference between being wrong and early is whether you’re still there to collect your winnings. Hendry is incredibly smart, but his style will see him be early much of the time and his returns very lumpy. I’m sure his long-term returns are going to be very impressive, but he will have some terrible years.

    I think guys like Hussman are actually too smart for their own good – while the 23 year old traders only know the idea of “trend is your friend”, Hussman is not participating because he knows the trend will likely end badly. Fair enough, but it means he will under-perform those blessed with having much less experience and knowledge.

  • VII

    @anon
    Well be ok. Collectively we are not one person…only an American truly understands what flows in our blood and hearts.
    We have not always elected the best to that position. In fact we are good at that.
    So given were we are today…I wouldn’t worry.
    Obama came from very little…and look what he has done with his life. While I can’t say that I would vote for him what he has accomplished is 100% what I love about my country.
    For that I will always call him my president.
    Yes…I have a very strong spot in my heart for any person who serves my country…wether I agree with their politics..they are my countrymen and at the end of the day I would die to protect them. Great leader or average.

  • Bravo

    Hussman is oneof worst timers. Why you keep posting these guys. These guys are asset gatherers, no alpha. Does that not seem clear to you?

    I’ll login next month to this website as usual…….

  • http://www.pragcap.com Cullen Roche

    The Kalecki insight is a good one whether you like Hussman or not. And yes, he has generated alpha since inception. His recent performance has been less than stellar, but again, this is a fund that intended to perform over the course of an entire cycle. Not just in one type of market. He’s achieved his goal though I am sure the “what have you done for me lately” mentality is hurting him now….

    http://www.hussman.net/pdf/hsgperf.pdf

  • Texan

    Hussman’s analysis seems to have gone haywire over the passed 3 years with a -3.67% return. I don’t think his statistical analysis does a good job of capturing the power of CB and government intervention.

  • Obsvr-1

    Even the best at market & business cycle analysis and corporate fundamental analysis can be knocked off course by UNPRECEDENTED Gov’t and CB intervention & manipulation.

    The current environment is ripe for some kind of UNFORESEEN reaction to these UNPRECEDENTED actions.

  • VII

    I wrote an epistle and upon reading it befoe posting it…I hit delete. I’m like a salamander on Dr. Hussman you cut me in half and I go running in two directions on Dr.Hussman. My rant you’ll never see was funny and at the same time showed 0 empathy for someone who has done as much work and service to his profession.
    Further..when I read my views on Dr. Hussman..I can tell you my frustrations with him are the frustrations I have with my self. There was nothing I wrote in critiquing Dr. Hussman that I could not apply to my own abilities. If I’m honest I can tell you that I can emphasize with his frustrations regarding the market. It has been impossible early on to factor in QE2 and other programs which appear to be what got us here.
    It doesn’t change the outcome. As a professional..wether it be a professional sports coach, manager, player, actor, service person defending our country…you don’t get do overs. Few head NFL coaches get to write excuses about why we lost the game. So I emphasize with Dr. Hussman and I’ll leave my cute comments out of this. But.. that is the way it is. His numbers are not good and in any professional business, particularly in the Unites States..you are judged not on what you think will happen but on whether you won or lost. I don’t write the rules of the game. I have to live by them also.
    Dr. Hussman will be right as he always is. There is no one better. BUT he is wrong in the durability of the SPX gains. Those who have gains will realize them prior to the sell off. It was ther job to watch the technicals and avoid the noise…thus when the technicals change they will lock in what Dr.Hussman says they don’t. It’s not him or the other side. Our job is to make money…not take a side on this stuff. I agree with both but I try not to get too far into this conversation.
    That is the whole point. He may refer to it as market timing in a negative fashion. However isn’t his hedging also market timing. Timing based on his Aunt Minnies of a who’s who of awful times to invest. Thus If your going to market time..then you need the right tools. How do I know he doesn’t have the right tools ..YET. His numbers tell us in black and white.
    I agree with everything Dr. Hussman says…actually..if I’m honest..I don’t have the capacity to even get to agree or disagree with him. He was given something only God gets to hand out. An intelligence and skill set unmatched. I would have cheated off him in school but the teachers had us in totally seperate classes.

    At some point he will have totally flipped the SPX numbers and he will be Barrons number one performer. They will have a long interview with him. But then the question comes…at the bottom of the market..would you rather own his fund at 1982 valuations or something more aggresive?
    I have made many more mistakes investing than Dr. Hussman has. I disagree regarding the durability of the SPX returns. Many will lock in what they have. He missed this again. I do understand his 10 year returns but if he had the opportunity as he had in 2009 to lock in 10 yr average returns of 10%..why didn’t he? He could have helped many of his readers had he encouraged them to take risk and focus on the bigger picture…which was even if the market goes down another 20% in April of 2009 you will be rewarded. He focuses on the big picture but then for what ever reason got caught up in a short term view. Keeping his clients out…then flipping back to the bigger picture to explain his views. Since you can’t time the market tops or bottoms as he suggests then why did he try and time the absolute perfect depression sample bottom? I dont’ have the answers to this. I hope I did not get personal.
    I’ve recently had many conversations explaining why I’ve underperformed in November-February. Which is why I have no interest in speaking as though what Dr. Hussman is trying to do is wrong or right. I accept his process…and I’ll use it as I think it can help my clients. But..as a professional..Coaches get fired for his last 3 years. Players get traded…businesses fail if they don’t hit there numbers, Resturants get closed down if the food is poor for that long. That is the reality of what we all face. Myself included. I would encourage any comments about what I wrote…but I think going forward..Dr. Hussman deserves empathy until what hes says does in fact occur. More and I’m glad I deleted my earlier post…I should treat him as though I hope my clients treat me. Knowing that I will do whats in there best interest. I’m not always right. I wish I was. I’m sure that’s why he does what he does also. Not for himself but to help all of us in some way.
    I promiss this is the last time I ever post on Dr. Hussman..I say invest with him or don’t. I trust him and I’m sure his best days are in front of him.

  • mike

    Actually what I find interesting is that the trajectory of BHO’s and GWB’s presidencies are so similar. If the market performed similarly, then I expect some post election continuation of the bull market but then a 10-15 months cyclical bear return. Whether the bear will be a real bear or not I don’t know.

  • BHB

    I too enjoy Dr. Hussman’s articles. His only problem is that he throws out a few too many predictions. He is usually right but people always remember timing. Throwing out predictions with narrow dates is pretty dangerous. Regardless, he is a good manager, bright economist, and a rare long term thinker. Glad to see links to people like Grantham, Shilling, Hussman, Montier, Marx etc. on pragcap.