HUSSMAN: PREPARE FOR RECESSION AND A “WHIPSAW TRAP” IN THE MARKET
John Hussman is still building the case for recession. His latest letter is another convincing case for economic decline. This time, however, he’s adding the caveat of a “whipsaw trap” in the equity market. The latter I can get on board with as the market appears somewhat complacent in the near-term (whipsaw trap might be a bit dramatic though!), but I still don’t see the case for recession. His latest, as always, is a good read:
“As of last week, the combination of evidence we observe continues to be associated with strong recession risk and the likelihood of a “whipsaw trap” in the stock market. We’ll respond to new data as it changes, but I expect that the primary window of interest here is about 6-8 weeks. In the event that economic data can produce fairly upbeat readings over that horizon, and the S&P 500 can remain at or about present levels, our estimate of oncoming recession risk would back off fairly quickly. Presently, that outcome would be outside of the norm based on the leading economic measures we track, as well as the overvalued, overbought, overbullish condition of the stock market.
I want to emphasize again that I am neither a cheerleader for recession, nor a table-pounder for recession. It’s just that given the data that we presently observe, an oncoming recession remains the most probable outcome. When unseen states of the world have to be inferred from imperfect and noisy observable data, there are a few choices when the evidence isn’t 100%. You can either choose a side and pound the table, or you can become comfortable dwelling in uncertainty, and take a position in proportion to the evidence, and the extent to which each possible outcome would affect you.
With most analysts dismissing the likelihood of recession, I have been vocal about ongoing recession concerns not because I want to align myself with one side, but because the investment implications are very asymmetric. A slow but steady stream of modestly good economic news is largely priced in by investors, but a recession and the accompanying earnings disappointments would destroy some critical pillars of hope that investors are relying on to support already rich valuations. We’re always open to shifting our investment stance and outlook in response to new evidence, but the “optimistic” evidence that many observers are using to discard recession concerns is generally based on coincident or lagging data.”
Source: Hussman Funds
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.
Follow Me:
21 Comments
Hussman has mentioned the whipsaw trap in at least his last 3 peices. The market is looking extremely overbought right now. I would think early in this earnings season it will start heading down. All the “good news” has been priced in. People need to remember the market is not the economy and these record profit margins are not here to stay.
Yes, the market is not the economy. The market bets on where the economy is going. The reaction time to price in expectations keeps shrinking. Things look bad, market immediately gets oversold. Things not so bad? Market is overbought. If I knew much about building a trading algorithm, I’d be a happy camper. Too much work to trade it myself.
Hussmann is not alone. The latest “Quarterly Review and Outlook” from Hoisington Investment Management is on the same tone or worst. Gary Schilling on the same side and ECRI never called a recession that didn’t happen. Quite an intimidating set of brilliant people converging on the same forecast.
which is exactly why I am going to hang in a little longer Alberto..a consensus of any kind is a scary trade …the tape is the tape..and we re trending up for now..Donn
Donn,
3 people is not a “consensus”. The consensus is exactly the opposite of what you are suggesting – the risk of recession is zero according to the consensus.
Even Cullen is in the camp of avoiding recession as he points out so I suggest that if this is your criteria you should reconsider it.
What exactly is a “whipshaw”?
Two man saw, going back and forth in a seemingly uncontrolled motion….
Hussman better make some money for his clients otherwise his fund will slowly shrink to irrelevance.
He has been calling for a recession for the last 2 years I think, and every week comes with an elaborated writing justifying his position. I dont read him anymore.
He might be smart, but that is not a sufficient condition to make money in this market.
I think Hussman forgot to read TPC’s global government put article. Recession or not will have nothing to do with leading indicators etc. It’s clear that, at least in the US (and probably China), they’re going to (try to) steer the economy, to maintain employment at current levels, with just enough deficit and inflation (-2 % real rates) to keep the left and right from being unhappy; a mild muddle with mild stealth deleveraging. We’ll only get a (severe) recession if somehow the Fed and government manage to screw up, but that’s not likely, right?
Recession? Unemployment “offically” at 8.5%. If you count dropouts closer to 11%! Feels like recession to me. Falling wages, falling housing prices. What exactly is his definition of recession any way?
This market is crazy. If you are not trading it, how do you make money. Last Year 14% for me, This year 2% so far. It’s mucho work though. I wish for the easy, buy and hold on days. I hope I live that long.
Frankly I have no idea what to do to invest at the moment. Nothing is clear.
My observations on the article and responses are: –
First, the assumption we have a free market. It’s a fact lots of cheap money has been made available to banks (GS), with a tacit “knod” to buy the market up. That and this crazy issuing of low coupon debt by one government arm, being bought by another to force bond yields down. If this is a free market I’m a Martian! Therefore, we have no idea what the markets would do if not manipulated, thus no way to establish value.
Second, everyone is talking about the economy and company profits, when what is really going on is 2 way volatility trading, based on perceptions of what Europe is or isn’t doing to solve the sovereign debt crisis on one hand and with little attention on the other as to the consequencies of a shooting war with Iran. But then Iran and the West are so sensible and that will never happen and no outside powers are fomenting the Syrian uprising, right? After all they’ve handled everything reall well so far! Yeh, right!!
Bottom line, we have absolutely no idea what’s going on, or what’s off left field (Iran). Trade the risk, but you might just as well put your money on ODDS or EVENS in a casino, where ZERO is left field and still with the house.
The complacency in the face of a sluggish outlooks points to an immproperly priced market, which is clearly a picker and trader’s news driven market. Seems like a cold dose of reality will lower the prices of most equities, but then where do you put your money? Like Bill O’Niel said, all stocks are bad unless they go up — but the market now has 2 new friends: the Fed’s plunge protection team and the European banks who will stuff their old Euros into a puffed up U.S market. So wild swings are coming as economic realities collide with desires for returns. Whipsaw will take on a new meaning to many.
The US economy is like a massive ship on the ocean. All indications suggest we are heading directly toward an iceberg. If we take immediate and sever evasive action now we may avoid the iceberg, but we’re gonna break a few dishes.
Definitions of a recession have different parameters depending on who is making the assessment. The simple facts are that given our DEBT BASED monetary system, which is in reality nothing more than a glorified Ponzi scheme, periodic recessions are a given, In fact, some economists would say we are simply in a continuation of the 08 meltdown and only “money printing has propped up the economy temporarily.
This artificial “stimulus” has less and less effect and ultimately will heed to inflation and breakdown of the system as the levels of debt carried on a world scale simply can not be sustained. Energy, precious metals and commodities in general are the trading mediums of choice, but you need to be very nimble in identifying short term trends, no easy money left.
Over the last decade we have had “whipsaw” bear moves and I feel that today everyone is now expecting “whipsaw” bear moves. I personally do NOT expect whipsaw moves… not this time!
The “consensus” is positive, no doubt about it. But, from my experience, everyone is on board, everything is going great, all pundits are right if looking in that direction until ….. it’s not. Suddenly, there is no consensus, the door is not big enough to exit, every pundit is now offering clear guidance pointing to the evidence and facts so obviously predicting the new turn. The issue what are the latent negatives vs the published positives.
Earnings have been good, corporate America has been performing, and surprisingly the American consumer is hanging in there. But, an EU on the precipice, still high unemployment (much higher than formally reported), and the clear and present danger of a collapsing EU with big impacts on S. American lending (EU is major lender there) and dramatic cuts to exports – everywhere. Put on top of that any further decline in Fed tax receipts and US deficit will be over the top. Lastly, as Bill Gross (PIMCO) writes, the “deleveraging” that he and others expected and which is so often written of and is the 800 lb gorilla in the room, just isn’t happening that much or at least as signficantly as one would expect. It’s important to assess WHY? Are govts. in such protect their jobs and maintain the barricade mode that they’ve kicked the can down the road long enough and far enough to protect THEIR position, THEIR cozy standing ONLY? If so, we’re all in for a Big Bang – because NOBODY is bigger than the markets, not even Big governments. Eventually MARKETS win out. Question is – is that clock about to strike 12:00 now or in 5 hours?
I would have to agree with pas. All this so called good news is a big facade we have not had enough REAL growth to say we ever came out of the recession in the first place. Corporate profits have not been that significant as they were in 2007-2008 before the crash, when I look at volume trading and real profit not backed by government bail outs I am not convinced the Dow should be anywhere above 10,000.
I would have to agree that evidence is worth its weight in gold. What the heck happened to the jury, out to lunch?
The problem is, we never know exactly when or where this will all start that is why the rule of thumb I always follow is simple: If you venture out, even for a short trip, ALWAYS take a backpack with first aid and emergency supplies.
That’s why I started buying and selling long term food, good for 25+ years. It’s always in our trip packing along with the usual emergency essentials.
Do what the market is doing not what you think it should do. Then you will make consistent profits.