Saturday, December 13, 2008

John Hussman from May 2007

From one of Dr. Hussman's weekly market commentaries in May, 2007, five months before the end of the cyclical bull market that began at the end of 2002 ("How Much Do Interest Rates Affect the Fair Value of Stocks?"):

In recent months, I've used a wide variety of analytical methods (discounted cash flows, normalized earnings, price/peak earnings calculations, etc) to show that stocks are currently priced to deliver unusually poor long-term returns – stated simply, the U.S. stock market is more overvalued than at any point in history except during the late 1990's bubble.

It's worth reading the rest of that column, for Dr. Hussman's skeptical take on the Fed Model, and the conventional wisdom about the relationship between interest rates and stock valuations.


James Grant said...

It's not as complicated as Mr. Hussman is making out.

All capital categories compete for investor dollars (and other currencies). When fixed income rates are extremely low then, in theory, stock valuations should be higher.

In the current fear driven market where T-Bills are being bought even with a zero real return, all rationality has been suspended.

If you believe America and the world are coming to an end then you shouldn't be in stocks at all. Buy non-perishable foods, guns and ammo and build your fallout shelter shelter-type retreat to protect yourself from the rioting masses.

In that environment paper currency is unlikely to help you anyway as it will lose virtually all its value.

I see very high (possibly even hyper) inflation) down the road with all the printing of money and see a chance for surviving [low/no-debt] stocks to at least be marked-up in price as one of the only asset classes that might protect people in that scenario.

America is surely on a severe downward spiral in terms of power, wealth etc. and we have to plan for a less rosy future.

Academic arguments can be fun but are silly in view of the coming financial crisis here in the US due to the entitlement program situation 1- 3- years from now.

DaveinHackensack said...

"If you believe America and the world are coming to an end then you shouldn't be in stocks at all."

That's an irrelevancy that has nothing to do with this post or with Hussman's essay.

"Academic arguments can be fun but are silly..."

It's not just an academic argument to Hussman; his views on valuation determine his hedging posture.