JOHN HUSSMAN DEFENDS HIS RECESSION CALL

In his latest weekly letter John Hussman explains why his recession call has not been invalidated by recent economic data and why a 25% decline in the market would not be surprising here:

“On a related note, we’ve seen a few suggestions that because the latest Purchasing Managers Index came in above 54 (the January figure was 54.1) and the S&P 500 is now above where it was 6 months ago, any concern about a recession is now invalidated as two of the four components of our basic Recession Warning Composite (see Expecting A Recession ) are no longer active. Put simply, this is not how this particular “Aunt Minnie” works. At least one signal from the Recession Warning Composite has appeared either just before or during each of the past 8 recessions, without false signals (the PMI never hit that 54 level in 2010), but those signals are typically not “step” impulses that stay continuously active. Rather, the appearance of even one composite signal is, in and of itself, cause for some recession concern. But given the simplicity of the Recession Warning Composite, a much broader set of evidence is clearly preferable, much of which has been the subject of numerous recent weekly comments.

As it happens, I received identical criticism of my recession concerns in May 2008, when the S&P 500 briefly rose above its level of 6 months earlier, and credit spreads briefly retreated from their levels of 6 months earlier, leading to suggestions that even our own recession evidence had “turned.” At the time, the Fed was easing, Congress had passed an economic “stimulus” in the form of tax rebates, economic reports were coming in tepid but ahead of expectations, and any concern about recession was viewed with disdain. The S&P 500 had advanced about 12% over a period of about 10 weeks, and was only about 8% below its 2007 peak, having recovered much of what was (in hindsight) the initial bear market selloff. This was the most recent example of the “exhaustion syndrome” that emerged again last week (see Warning: Goat Rodeo ).

At the highs of that May 2008 advance, I observed “The reality is that as recessions develop (and I continue to believe the U.S. faces a much more significant downturn than we’ve observed to date), the data can take months to accumulate to a compelling verdict, and in the meantime, speculative pressures can remain alive” (see Poor Fundamentals with Borderline Market Action ). A few weeks later, the surreal calm in the face of seemingly obvious risks prompted the title of my June 2, 2008 weekly comment - Wall Street Decides to Close its Ears and Hum , where I noted “investors appear to be viewing the recent period of weak but not terrible economic news as a signal that the worst is behind us and that clear conditions are ahead.” Memorably, that was not the case.

Though I don’t expect a 2008-type collapse here, I would view a 25% market decline as only run-of-the-mill. I don’t view the probability of recession as 100%, but the leading evidence continues to indicate recession as the most likely probability. While we track a very broad set of data, a crude but useful rule of thumb is that the combination of a) an upturn in the OECD leading indicators (U.S. and total world), coupled with b) a turn to positive growth in the ECRI weekly leading index, has generally been a good sign that recession risk is receding. Those shifts can occur fairly quickly, but we don’t observe them at present.

We aren’t oblivious to the comfortable reports from indicators that typically lag the economy, but we also see disturbing recession risks in indicators that typically lead the economy. The problem is that even though investors know that lagging data lags, it deals with actual recent outcomes that can be “seen and touched.” In contrast, even though investors know that leading data leads, it deals withunobserved future prospects that have not yet been realized. It’s natural to focus attention of what can be seen and touched, even if it’s not indicative of the future.”

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.

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  • JWG

    Permabears are as misleading as permabulls.

  • Walter

    In this week’s commentary, Hussman explains why he has been a permabear for so long – valuations have been unattractive for many years.

  • KB

    time to build a new model

  • Charles

    Yawn

  • Jonas

    He might very well be right in the end, BUT He is overestimating the leadingness of the leading signals.

  • 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
    .

  • BJM

    Here was my response to the “Former Hussman/ECRI believer” on another thread….

    Hussman/ECRI,

    Take it down a notch dude. Hussman and his ilk tend to be right over long periods of time, and the fact that you are an “angry bear” as Conventional states most likely is a reasonable indicator that the market is nearing a topping phase and/or is at risk of a near-term pullback (the latter of which is confirmed by the negative position of Cullen’s algo).

    The global economy is weak at best, and is highly at risk of an exogneous shock currently unknown to the market. Greece is more than priced in, but currently the marketplace expects merely a 1H slowdown in the EZ economy, a muddle-through in the US and a soft landing in China. The ECRI has paying members, some of which are Fortune 500 companies – they take their calls very seriously, and make them based on a proven set of objective indicators. I guarantee you their set of long-leading indicators has not moved out of the recession camp – perhaps they have improved slightly, but given the historical tendency of the marketplace to take nearly 12 months to come around to their opinion, I believe they will be proven right. Both John Mauldin’s “Easy Button” piece (http://www.ritholtz.com/blog/2012/02/who-took-my-easy-button/) and Hussman’s recent note (http://www.hussman.net/wmc/wmc120206.htm) present very credible evidence that employment figures over the past three months are distorted, with, IMO, the payroll tax data cited by Mauldin being the most credible citation.

    As readers of this website, we all know what kind of economic volatility a gold-standard-based monetary system such as the one currently in place in the EZ does not at all bode well for a balance sheet recession. The EZ has only merely begun to implement the “required” austerity measures, and the effects not yet seen will be vastly negative over the next two years.

    Keep hanging in there. We’re in a secular bear market and the market is currently overvalued even for “normal” economic environments, let alone a low/no-growth deleveraging environment. Median real EPS according to the most recent Schiller data is 66.71 per share. If we assume secular bears tend to last 17 years and that the most recent bear started in 2000, then we have 5 years left including 2012. If EPS growth is 6% for the next 6 years, then 2017 estimated EPS will be 94.62. Lastly, if we assume secular bears tend to end when valuations hit 7 to 10 on a PE basis, then conceivably the S&P 500 could end 2016 at between 662 and 946. The long-term median PE based on 10y median real earnings is 15.61 – if estimated 2017 EPS is 94.62, and the S&P 500 traded at fair value (i.e. 15.61) by 2016 FYE, that would mean the market would return 1.9% per annum, not including dividends, between here and FYE 2016. Including an adjusted dividend yield of approximately 2.1% (5y median real dividends multiplied by 1.06 for NTM dividends), the total return per annum for the next five years would be 4% per year.

    All that to say – there is an extreme level of risk in the marketplace right now, regardless of the “central bank put” so strongly relied upon by market participants. It is generally thought that the “Greenspan Put” was established during the Asian Contagion – however, I would remind anyone relying upon that backstop that October 2008 happend while that “Put” was in place. No entity, I repeat, no entity is more powerful than the market regardless of how long it takes for long-run market forces to exert their power. In time, the US stock market will reflect the inevitable long-run fundamentals of elevated profit margins and above-average PE ratios, as will EZ bond yields reflect the dire underlying plight of the EZ economy so long as a full fiscal union is not implemented in order to counteract private sector deleveraging (i.e. no amount of limited ECB printing will stop the inevitable EZ “End Game”).

    Hang in there Hussman/ECRI – remember, as Mr. Buffett has written since his early days as a HF manager, more money is made over the long-term by being defensive.

  • Andrew P

    Historically, the market won’t plummeted to new multi-decade lows until it has sucked in nearly everyone. It always acts to separate the crowd from their money. And if the crowd is content to wait, then Mr. Market will wait too – as long as it needs to.

  • Coolidge Low

    Agreed.

  • Gordon

    “Bull markets are born on pessimism grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – John Templeton

  • http://wellsfargomustdie.blogspot.com Wells Fargo Must Die

    This looks to me like he is backing off a bit. Previously, he was pretty much saying it was a 100% likelihood. The data was simply irrefutable. Now he’s not nearly so confident.

  • John C

    Judging from all the cynicism and disdain being displayed in the comments section here towards John Hussman, I suspect Hussman will most likely be proven right.

  • Johnny Evers

    I have a lot of respect for Hussman. He puts a lot of work into his methodology and I think he’s careful to present the probabilities as he sees them. … Obviously it is not an exact science — if the number indicate a strong chance of a recession and a recession does not occur, that does not necessarily mean he is wrong, any more than you would be wrong for stating that you should not draw a card at 18 in blackjack, even if a 3 is drawn next.
    He is also a fundamentalist is what is largely a market-timing, momentum-trading, technician’s marketplace.
    Last comment: The economy is a lot worse on the street level than it is in most finacial analysis that I read.

  • Gordon

    IMO make your judgments based on the plethora of sensationalistic headline pablum coming from today’s “experts” like Rosenberg, SHILLing, Roubini, Taleb, MAULdin, HUSSman, Whitney, Grantham, Prechter, Faber, Schiff, BLUDGEON, Shedlock, Smithers, Davidowitz, Short, Ferguson, Russell, Granville, SPITzer, RATgina, et al. and the majority of commenters here and elsewhere that support their dire predictions of doom and gloom for the last 3 years. sentiment is certainly not rosy. the smart money has ignored these “experts” and has gotten richer. the dumb money is hiding under their beds cowering in fear waiting for the end of the world.

  • Nils

    So how do I know if I’m smart money or dumb money?

  • Ilya

    I would not put Hussman and Roubini in the same bucket. On every dip Hussman updates his call to a more positive risk/return scenario. Roubini is the end of the world guy. He want’s to be known for calling a Black Swaan so he predicts it every week. Clearly Hussmans approach is a very slow risk reward one that will never capture a rally from 17 P/E to 21. I find it useful in positioning my hedges. If you are an all in all out guy he is not the one to follow.

  • Nils

    Hussman, to his credit, also has money running on what he’s saying and his performance is public.

  • Octavio Richetta

    Vat can I say? Great post Gordon. I was a perma bull from 1980 and until the fall of 97; turned bearish SEVERAL YEARS too early. Even though I did manage to miss the Tech bubble, boy, I am indeed happy i was not reading Hussman as early as 1994. Gues what? We did t have the Internet penetration we have today back then. I guess in many ways and for many people internet use for investment management has hurt more than helped.

  • VII

    @ Gordon

    You don’t like Hussman or those you’ve listed. You’ve put them all into a bearish box. Any comments they make one can expect the Gordon opus of where they were wrong. Only listing those calls which they were wrong. I’m sure most can figure this out but thanks. You seem overly “pessimistic” on these “experts” ability to work through the data. But are they overly pessimistic with fear?
    What would you have them do? Really..what and how could they have made money? Let’s examine how one could have made money since 2000. When you look at it this way you find many bull and bear markets. Certainly if they would have taken more risk in 2003…sold Reits in 2006…sold Commodities….bought gold…sold the SPX in 2007..then bought back in 2009 etc. BUT think about that. In order for one to make money in the last 12 years you would have had to rent these moves and then sold. In many cases almost out of stocks for 1.5-2 years. So here’s the question. Why would you sell the SPX in 2000 and wait until 2003? Well because in order to make money..you’d have to be BEARISH! Then you go long and then you’d sell in 2007 why becuse you’d have to be BEARISH! And once everyone else sold out with -50% returns from the high well then I guess it’s time to get optimistically happy while everyone else just lost a bunch of money they took out from under there beds. While economoy slows the SPX goes up and once again we will unfortunatley have to take to those you dismiss because well..in order to make money we’ll have to get BEARISH again. iN fact it pays to get and be bearish. But I wouldn’t hold that view to long.
    In fact in order to please those investors like yourself…..it calls for them to get bearish or buy bearish investments until markets sell off. Then you come back in.(BTW-that’s not always easy) But that’s what your saying. DON’T be a pessimist…or bearish. Be an optimist, Bullish and buy stocks. When in fact that is the worst strategy one could have done in 1998-2000 then again from 2005-2007. in 2010, in 2011. IN fact…the only way this works is if you get a little pessmism or bear in you.
    More the smart money? What was the most profitable trade last year? Up 60% Long Govt. bonds…so the smart money was betting not on stocks last year but on the power of convexity in long yields to flatten.(kind of a bearish bet)
    Look I don’t care where you put your money. The bed, piggy bank, long bonds, short or long SPX. There are plenty of ways to make money.
    But if you don’t like Dr. J…then stop reading him.
    And more…at least they post what they do and put them selves out there. The SPX today is at 1340 +or-. What do you own? What is your market call 3 months out? Please tell us in advance what you are doing? So that some day…Gordon II can be sure to let us know how your calls have done.
    Hussman is Hussman. Don’t invest with him. Rosenberg has nailed fixed income..he’s a raging bull in the one asset that has clobbered the stock market. He’s a raging bull on many assets…just not your prescious stock market. And guess what..he’s been spot on. And based on the movement of the SPX in 2010,2011 he has rented the moves(although he never loaded up on the beta..that in the end turned out to be exactly the right move).
    But who cares about these guys. What do you own? Where is the market heading in 3 months Gordon?

  • Alberto

    I followed the so called perma bear calls since 2002, I was on bonds and gold (high quality govs + gold that was the real killer trade of the decade) and not on equities. I didn’t made tons of money but I don’t remember the last time I closed an year in red. So what Gordon ? And also when reading that not only economic data but also technicals smell a lot I’m even more convinced to be really prudent even this year.

    “We are struggling for superlatives (or whatever the antonym for superlatives is). Today’s NYSE volume is as low as we could find on Bloomberg data. It is the lowest non-holiday trading day volume in over a decade…”

    source ZH today

  • Max

    Hussman is a perma-bear. His performance is “good” only because of when his fund started – 2000. Pure luck!

  • Leverage

    Equities have been suckers for the last 10 years, why exactly should start to be awesome right now I don’t get it.

    It’s always about timing AND timeframes, Hussman is not a short or even intermediate term trader so he is doing the sort of analysis he must do to run his funds.

    Actually as Cullen usually says, the recession/no-recession call is just semantics in a balance sheet recession. The environment is what it is even if you don’t have negative growth for a couple of quarters. 2011 was a year with record earnings and still equities failed to break previous multi-year highs.

    It’s not a matter of if, it’s a matter of when. Being more of an intermediate trader myself it’s difficult to do good timing in this environment, I find easier to trade commodities and play on volatility this days that to time the stock market (that’s why I opened short positions on silver via options last Friday expecting a new leg down).

  • BJM

    If you’re an individual stock picker, then you don’t need to time all of the moves you outline. Even though the general market was overvalued from 1997 to 2000, there was plenty of money to be made in individual stocks, especially considering how strong the economy was. That, IMO, is what Gordon is referring to when he says the “smart money” is making money in this environment.

    I try to marry the macro outlook, when appropriate, with individual stock picking. When an organization such as the ECRI comes out and says we’re going into recession, we have a depressionary environment in Europe and the general market here is overvalued, I think it is a good time to be very well hedged no matter how attractive individual stocks are, as I believe as Buffett says that even undervalued stocks are at risk of decline in a general market correction.