HUSSMAN: STOCKS AREN’T PRICING IN THE COMING RECESSION

In this week’s investment update John Hussman discussed the ongoing Euro crisis and the ensuing bank crisis.  More interestingly though, he touched on the fact that equities have become so enticed by the Euro crisis that they’re ignoring the other risks in the market.  Most notably, Hussman believes leading indicators continue to point to recession:

“I continue to view economic evidence as consistent with oncoming recession. While there was some enthusiasm over the pop in the Philly Fed index to 8.7%, it’s useful to remember that the Philly Fed index also popped from negative levels in August 2007 to 8.6% in November 2007 (the month our Recession Warning Composite turned negative and the economy went into recession). Meanwhile, the Conference Board’s index of leading indicators places nearly half of its weight on the yield curve and M2, which reduces its robustness compared with broader methods. The slight positive reading last month was driven by those monetary components. As Babson Capital has noted, the non-monetary components of the LEI have historically had a 94% correlation with the index, with much more noise from the monetary components. In fact, in recent years, the monetary components have become negatively correlated with the economic components, so that improvements in the monetary components typically occur despite true economic deterioration. For example, I suspect that last month’s rise in M2 was largely due to investors switching from large money market funds (which have substantial holdings in European bank debt) and into Certificates of Deposit at U.S. banks – hardly an indication of robust economic prospects. Even the Conference Board conceded a very high probability of oncoming recession last month.

Notably, the ECRI Weekly Leading Index growth rate dropped to a fresh low of -10.1% last week, and unlike 2010, the deterioration is matched by weakness in a much broader set of evidence. Suffice it to say that leading data is leading data, and there is typically a gap between the point that the leading evidence turns down decisively and the point where coincident and lagging indicators confirm the deterioration. As for stocks, recession-linked bear markets don’t end before the recession even begins.”

Source: Hussman Funds

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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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  • Sherman McCoy

    This gentleman has a profound grasp of economic data. If this knowledge had any value, economists would top the Forbes 400. Unfortunately, the stock market is a discounting mechanism. Economic data – especially data massaged by bureaucrats – cannot predict stock prices, and is at best a coincident indicator rather than causative.It would be more enlightening if Mr. Hussman’s objective was to predict economic data using stock prices.

  • InvestorX

    I think you are not right. There are positive feedback loops between economic data and stock markets.

  • sc

    I don’t doubt that Hussman understands his Fundamentals. Problem is his results are abysmal so the question he should be asking is why is this the case? Eventually he will be right on his fundamentals ,but along the way missing out on the largest bull market run in history must put some context on their worth.

  • Andrew P

    The ECRI is not low enough to guarantee a recession. It was equally low in July 2010, before QE2. There was no recession then.

  • Alex

    Andrew, that’s right but the growth index is one component of the ECRI forecasting toolbox, and those who built it probably understand it better than you do. They refrained from calling a recession back then despite the growth index falling to similar levels, and they are doing the call now.

    sc, not sure what you are rumbling about, Hussman’s growth fund had a performance in excess of double the market since inception with lower volatility. Stick to facts when making judgements.

  • Gordon

    Now Everyone Thinks The Market’s Going To Crash
    Henry Blodget | May 30, 2010, 10:23 AM | 14,368 | 38
    … Seth Klarman at Baupost Group is worried. John Hussman of the Hussman Funds says all sorts of warning lights have lit up across his screen. …

    80% Chance Of A Market Crash In The Next Year
    John P. Hussman, PhD | Dec. 7, 2009, 6:12 AM | 2,932 | 9
    Email. Zip. 80% Chance Of A Market Crash In The Next Year. John P. Hussman, PhD | Dec. … The following is an excerpt from fund manager John Hussman’s weekly letter …

    Hussman: The Market Is More Overbought Than Any Time In History
    Henry Blodget | Oct. 20, 2009, 6:49 AM | 3,720 | 19
    … Hussman: The Market Is More Overbought Than Any Time In History. Henry Blodget | Oct. … You have successfully emailed the post. John Hussman rains on the parade: …

    Hussman On Stocks: “Abrupt Downside Risk”
    Henry Blodget | May 28, 2009, 7:05 AM | 4,788 | 10
    Enter you email address and zip code to set up customized email alerts. Email. Zip. Hussman On Stocks: “Abrupt Downside Risk”. Henry …

    John Hussman: Volume Warns Of A Sharp Pullback
    Vincent Fernando | Oct. 12, 2009, 4:23 PM | 1,889 | 9
    Enter you email address and zip code to set up customized email alerts. Email. Zip. John Hussman: Volume Warns Of A Sharp Pullback. Vincent Fernando | Oct. …

    A Great New Bull Market? Why?
    Henry Blodget | May 14, 2009, 11:53 AM | 4,554 | 19
    … In the meantime, here’s fund manager John Hussman, who comes to the same conclusion that we have: … Read John Hussman’s whole column here >. …

    Enjoying The Suckers’ Rally?
    Henry Blodget | Apr. 15, 2009, 1:41 PM | 13,297 | 44
    … Fund manager John Hussman lays out a persuasive bear case in this week’s letter. Here’s an excerpt: … Read John Hussman’s full note here >. …

    Deseret News, The (Salt Lake City, UT) – June 12, 1994

    NEWSLETTER SAYS STOCKS ARE A BEAR

    Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331), which The Hulbert Financial Digest has called “the most promising newcomer among investment newsletters” after its first three-year performance doubled the market’s return, has turned bearish on stocks. “The market is beginning to display the classic traits generally associated with bull-market tops. The time to buy stocks is in the middle of a recession, not when an expansion…

    ———

    A Coupla Bears Tell Why They’re Still Growling
    Pay-Per-View – Los Angeles Times – ProQuest Archiver – Mar 3, 1995
    It’s not the end of civilization, Hussman says: “Stocks are just due for a natural, normal, run-of-the-mill bear market.” …

    ——–

    Analyst unimpressed by Pyxis rival
    Pay-Per-View – San Diego Union – Tribune – ProQuest Archiver – Jul 30, 1995
    John P. Hussman of the Michigan-based newsletter Hussman Econometrics is not bullish on the stock market now,

    ———

    BusinessWeek: May 15, 1995
    Adds John P. Hussman, a money manager and investment newsletter writer based in Farmington Hills, Mich.: “There’s a likelihood of slipping into a bear market at any time.”

    ——-

    S&P’S 500 DIVIDEND YIELD IS 2.66%, LOWEST OF CENTURY
    $2.95 – Deseret News – NewsBank – Jun 18, 1995
    “The stock market has left itself no room for error,” observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, MI 48331). …

    ———–

    May 5, 1996

    STOCKS OFFER LOW-RISK PREMIUM, PAPER SAYS
    The latest argument for higher stock prices is that Baby Boomers are saving more and investing it in stocks, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334). “In fact, there’s been no evidence of any significant increase in the U.S. savings rate. The money-flow argument ignores the fact that every buyer’s dollar that enters the market leaves it moments later with a seller. Stocks currently offer the lowest risk-premium in…

    ——–

    Published on March 26, 1996, The Washington Times{PUBLICATION2}

    Market’s total value points to bad times

    There have been five times this century when the size of the stock market (total capitalization) relative to the size of the economy (nominal gross domestic product) exceeded 75 percent, as it does today, observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, Mich. 48331)

    “Each instance coincided with a Standard & Poor’s 500 dividend yield of only 3 percent or less, as is also the case now. Each marked the peak of a major bull market

    ————

    Mr. Bear and Mr. Bull
    By Mark Hulbert, 02.10.97
    Forbes

    The bear is John Hussman, editor of Hussman Econometrics, and adjunct professor of economics at the University of Michigan. What sets Hussman apart from the other bears isn’t his focus on the market’s fundamental extreme overvaluation. That’s something he shares with virtually every other bear. What makes Hussman’s bearishness noteworthy is his compelling explanation of the mistakes he made several years ago when he and the others turned prematurely bearish. ;

    ———-

    Published on July 1, 1997, The Washington Times{PUBLICATION2}

    Sky-high prices may warn of stocks’ fall

    Historically, when the price-earnings ratio on the Standard & Poor’s 500 has been above 20-to-1, as it has been recently, it has always been because earnings are depressed, observes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).

    “This is the first time in history that we’ve seen a P/E over 20-to-1 on record earnings. The only two times the P/E exceeded even 19-to-1 on record earnings was in 1964 and 1972. In

    ——–

    Published on June 3, 1997, The Washington Times{PUBLICATION2}

    As dividend yields sink, how far can stocks rise?

    “The extremely high returns on stocks over the past 14 years have been the result of a decline from the highest dividend yield in two generations, 6.7 percent in August 1982, to the lowest dividend yield in history, now well below 2 percent,” notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).

    “It seems unlikely that the dividend yield can fall much from current levels. So it seems equally unlikely that stocks can rise

    ————

    Nov 7, 1997

    Stocks have never been this highly valued when earnings were at record levels, notes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, …

    ———-

    Economist: U.S. might already be in recession

    The San Diego Union – Tribune – San Diego, Calif.
    Author: DON BAUDER
    Date: Oct 30, 1998

    He’s John P. Hussman of Sunrise, Fla.-based Hussman Econometric Advisors, and he says the markets are already giving off clear recessionary signals: The interest rate spread between corporate debt and Treasury debt has widened, indicating growing fear of credit risk, while the spread between long- and short-term Treasury instrument interest rates has narrowed considerably, suggesting the market expects a very sharp growth slowdown.

    Combine these so-called “forward-looking” indicators with other similar ones, such as the stock market decline, the drop in consumer confidence and the National Association of Purchasing Managers Index suggesting that manufacturing is contracting, and “the signal says, `Hey, we’re expecting very slow growth, probably recession,’” Hussman says
    .

  • Ashkat

    Perma-bears always get the majority of press. And eventually they turn out to be correct. But this crap gets old after a while.

  • Gordon

    Hussman manages about $6B in assets with a 1% expense ratio. even after expenses, that’s a pretty good scam he’s got going on.

  • sc

    Alex,
    I read Hussman’s letters every week and the implications from them was that his funds have been sat heavily sidelined since 2009 lows.Indeed so much so that quite recently he decided to alter some of his investment indicators to ‘better’ reflect the market etc etc.
    Now when you say “since inception” I have no clue what that really means as I have no idea when they were formed etc.However,if you are saying he has outperformed a general market that has gone no bloody where in 10 years and over then please excuse me if I remain distinctly unimpressed. If I want 4%pa i could have just parked the money on deposit with a uk B/s and enjoyed that return with the knowledge that risk was as close to zero as it can get. However, when I expose mmoney to risk and pay to do so I want ad expect to get much better tha that.

  • quark

    Stocks crack without a warning. Itbis like a light being turned off .in a room, one minute you can see everythhing clearly until the the light is turned off and there is no bid in sight. The stock market predicts very little, particularly the madness of crowds.

  • JRH

    The ECRI makes the WLI index available publicly but they have a much larger toolbox of indicators available to members. The WLI index is a short-leading index. They also have long-leading indexes for manufacturing and services. Their recession call takes into account what Lakshman Achuthan has called “contagion” amongst these and other forward indicators (i.e., they are all turning down in sync). This condition did not exist in 2010, as evidenced by their avoidance of a recession call at that time.

  • http://pragmaticcapitalism Michael Schofield

    Even without EU debt, external risk is at higher levels than I would consider normal. But how can EU debt be ignored? It appears no real fix is in the cards and what is on the table does nothing but buy time. So far this round of talks is a step towards disaster as it is revolving around an amount of money that may buy no time at all. Meanwhile growth in the US is slow enough that any external shock involves a high level of risk. Is this a reason to be bearish? In my estimate it is. In the mean time, the equity markets are sending a signal that they intend to ignore bad news. I don’t intend to ignore this rally because I have been wrong before but I don’t trust it either. To play this rally caution must be the first priority- I would suggest hedges and tight stops. Do not chase. Be ready to pull longs quickly we are watchful not only of bears but dragons.

  • Dave

    I think if the stock market is purely a discounting mechanism then we wouldn’t see periods of high volatility. Every information would be interpreted the same and discount the stock market.
    There is a lot of uncertainty in the stock market at it can be over priced or under priced…

  • jswede

    Since inception in 2000, Hussman’s Strategic Growth is +110% vs -4.4% for the S&P.

    Last 5yrs, Hussman beats +35% to -3.3%.

  • JRH

    Hussman’s methodology makes more sense to me than any other mutual fund or investment strategy out there if you care about risk. He eliminates as many risks as he can and then exposes the fund to those risks when their individual risk-return characteristics turn positive – based on historical data.

    Certainly you can make stronger criticisms in regard to execution, but that, too, requires respect for context. If you believe there was a nonzero chance that 2009 could have ended up like 1930, then he did the right thing by hedging away all market (beta) risk.

    Hindsight is always 20/20. As Nassim Taleb observed in “Fooled by Randomness”, to judge a decision correctly, you have to judge it across the entire domain of possible outcomes based on information available when the decision was made. We have a very limited dataset of similar situations with which to judge the value of his decision.

  • jswede

    …and if you adjust to volatility/deviation, it’s not even fair: std dev is 2-5x LOWER for Hussman than S&P for the life, depending on your exact parameters.

  • jswede

    yea. a lot of people are “fooled” by the steady long-term out-performance….

  • LRM

    It is always an interesting discussion on whether individuals can gain some advantage from trying to understand or follow the views of successful (if that can be defined) money managers. As a lone individual investor where does one go to get objective information and can such lone individuals actually assess whether the information is truthful let alone actionable.
    I took the time today to listen to Ray Dalio on Charlie Rose.
    http://www.charlierose.com/view/interview/11957

    Here is an individual that has $125 billion AUM if I understand the introduction correctly. Is his opinion 20 times more valuable than Hussman due to the ability to successfully manager so much money? He talks about the economic machine and seems to imply that we do have a debt problem that needs to be tackled from both the revenue side and the spending side. It looks like he is not a MMTer from that point of view but yet at the end he divided nations into printers vs non printers.
    Has anyone read a good article on how he describes the economic machine ? I assume if he is being successful like he is that he fully understands the way the money system works but yet, his revenue raise + spend cut solution would not be in agreement with the MMT solutions. Does Ray Dalio provide better information than Hussman for the present economic difficulty?

  • Anon

    https://www.bwater.com/ViewDocument.aspx?f=44

    20 pages describing his general framework for the economy. He does not get very specific in terms of predictions, but again, it’s just a framework.

  • http://pragmaticcapitalism Michael Schofield

    LRM that is a very good question. I think a big part of the answer lies in doing what everyone who is really involved in the markets does- listen to many different opinions. Try to square that with your own ideas and don’t stop until you are comfortable with your own opinion. Is it advisable to trust one or two opinions? Even if you have chosen the best idea do you really understand it? There is a big difference in having a good idea and trading/investing it effectivly. It is much better to act on your own creation.

  • LRM

    Yes Michael, at least when one “acts on their own creation” it is clear where the buck stops even if it was not realized that they were playing the game against the insiders and central bankers!!!
    I will continue to search for the “silver bullet” and hope I find it soon enough .

  • sc

    Then I stand corrected..

  • http://pragmaticcapitalism Michael Schofield

    No silver bullets here buddy- just hedges and timely trades. But if you find some majic stuff I’d like to buy a some.

  • http://riskandreturn,net Lance Paddock

    Yeah, a scam to massively outperform the very benchmark he charges to outperform. What a dastardly human being. More concerning is someone who posts a bunch of headlines with no context. If you read each of those articles his analysis of long term issues (those that drive most of his performance, for good or ill) is fantastic.

    For example:

    S&P’S 500 DIVIDEND YIELD IS 2.66%, LOWEST OF CENTURY
    $2.95 – Deseret News – NewsBank – Jun 18, 1995
    “The stock market has left itself no room for error,” observes Hussman Econometrics (34119 W. Twelve Mile Road, Farmington Hills, MI 48331). …

    Uh, are you arguing with that? Your idol, John Bogle, after years of misleading investors about the potential returns of stocks has now adopted a version similar to Hussman’s methodology to estimate future returns. So, why when Hussman makes the same point Bogle does using the same reasoning is Bogle a “saint” and Hussman a scam artist?

    Again:

    Published on July 1, 1997, The Washington Times{PUBLICATION2}

    Sky-high prices may warn of stocks’ fall

    Historically, when the price-earnings ratio on the Standard & Poor’s 500 has been above 20-to-1, as it has been recently, it has always been because earnings are depressed, observes Hussman Econometrics (34405 W. Twelve Mile Road, Farmington Hills, Mich. 48334).

    “This is the first time in history that we’ve seen a P/E over 20-to-1 on record earnings. The only two times the P/E exceeded even 19-to-1 on record earnings was in 1964 and 1972. In…”

    Uh, once again. Wasn’t he correct? Are those not facts? Is pointing out facts a problem for you? As for the import of those facts. Were not long term returns from that point predictably disappointing? Since that is what he was addressing, is being correct, and correct for the right reasons, a problem for you? I suspect you haven’t even read the above referenced articles. Given that those articles are filled with very worthwhile analysis, I bet you copied those down from some thread somewhere and just keep copying them with no idea what the underlying articles actually say or any understanding of his reasoning.

    Criticize him if you want for not always getting the timing right (though, that isn’t what he does) but acting as if putting very accurate analysis up there is supposed to dissuade us from listening to him is a bit odd. That might work on some Bogle head bulletin board where everyone is clapping themselves on the back and congratulating themselves about their wisdom compared to those addle minded active investors. However, with people who think critically and actually analyze, looking at people who made rational calls in the face of an irrational market is a good thing. It puts process over one-time outcomes. More importantly he made money on the call. For longer term investors, that he did so is far more important than getting all wound up at missing the latter stages of the largest bubble in US stock market history.

    If you had listened to him, even when the benefits were delayed, after the bubble burst you would have done much better than following the Bogle Head advice as well.

    I am a fan of John Bogle, but fetishizing buy and hold indexing in the face of overvaluation is no virtue. Nor is ridiculing short term aspects of long term calls intellectually honest.

  • http://riskandreturn,net Lance Paddock

    SC,

    You are welcome to not invest with him, but if you are going to argue performance it should be accurate. Since Inception (July 24, 2000) through the third quarter was 7.18%.

    As noted his performance from March of 2009 through March of 2010 was disappointing. Outside of that one period it has been right in line with what one would expect and really quite excellent.

    To judge someone’s economic discussions and investment commentary on that one period would be a mistake. No great investor has avoided a period when people questioned them. I would hate to not have availed myself of the wisdom of Buffett, Julian Robertson, John Templeton, or many other based on that kind of screen. I especially wouldn’t ignore sound reasoning because of something that has no bearing on the soundness of the point made. Facts and their relationships don’t cease being facts and relationships just because someone had a bad quarter based on unrelated factors such as deciding to hedge against a potential cascading financial crisis or whether they burnt last nights dinner. Both may or may not be worth criticizing but neither disqualifies anything else they may say except to point out they have not achieved perfection.

  • VII

    jswede- well said…thanks for pulling that data.

    I would never trash Hussman for short term performance. If you do you might as well admit you don’t understand his funds.

    He is one of the worst SHORT term investors and speculators. HE WILL tell you this himself.

    I do think his short term performance would be better if the Fed would get out of running the people money like a hedge fund. That is different than public spending to absorb private contraction. The fed is not allocating capital productivley for the future. The misallocation of capital is hard for someone as prudent as Hussman to understand. It must boggle his mind how Wall St. begs for policies that cause future crisis. Crisis that Wall St. bets will be so bad they can get more policies that encourage this very thing.

    I spend alot of time on short term stuff…but there is no one better steward of your money than Dr. Hussman. In MY OPINION. I understand if many disagree.

  • rs

    Gordon is correct, if you read Hussman’s long trail of prognostications. He is very erudite and honest. However, no doubt he missed a big move.
    Dalio was similarly bearish at bottom… and he is a smart guy

    Sold out a break-even position that I had aggressively bought to the March lows. Put the proceeds in to Hussman growth, thinking his sophisticated hedges would be safe harbor managed with prudence! I am -6% + his fees for the 3 yrs!!

    Anyway, this is tough stuff and the guy is honest (if a little too cock-sure of his geek stuff, where is judgement in all this???)

    Interseting how his Total return fund has managed to make steady gains – wonder how this fund performs if bonds tank suddenly?