Monday, August 10, 2009

John Hussman, Kool-Aid, Jonestown, Robot Chicken

In his market commentary today, Dr. Hussman mentions he has re-established his "anti-hedge" of index call options comprising 1% of his equity fund's assets. He then offers this comment:

Frankly, our call option allocation here is something of a paean to a notion – a sustained economic recovery and new bull market – that I have no belief in whatsoever. But at this point, the broad strength in the major indices, even lacking volume sponsorship or favorable valuation, requires that we allow for the possibility of additional investor speculation.


[E]stablishing investment exposure here with anything but call options amounts to a game of trying to “ride” the market higher and to get out before it returns to or below current levels. With the market strenuously overbought already, that game strikes me as exquisitely difficult to get right. Hence the use of a modest allocation to call options only, without closing our downside hedges.

Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.

Dr. Hussman, who I assume didn't grow up drinking Kool-Aid1, misspells the name of the drink. For those who are unfamiliar with this beverage, here's a Kool-Aid commercial from the 1970s:

And here are few spoofs of those Kool-Aid spots by the guys at Robot Chicken2. You Tube only had this Russian-dubbed version, but you don't need to understand Russian to get the joke (though it does help to know that, in the middle skit, the characters have just survived a nuclear war in a fallout shelter); you just have to have seen one of the original commercials:

1The phrase "drinking the Kool-Aid" of course comes from the mass suicide at Jonestown, but according to Wikipedia, the cult members drank poisoned Flavor Aid, not Kool-Aid.

2I just discovered this show recently, which is often funny and original. It includes a lot of parodies that will resonate with Gen-Xers.

No comments: