John Hussman's Latest Weekly Market Commentary

In his current market commentary, "Ambiguous Conditions Warrant Moderation", Dr. Hussman gives his opinion on the comparisons of today's economic environment to the Great Depression, finishing with a clever simile:

We continue to hear remarks that the current economic downturn is the worst since the Great Depression. While the prices of stocks and other financial assets have certainly suffered a great deal, by any reasonable measure of output and employment, this isn't even close to being the worst economic downturn since the Depression. Even after November's awful job report, and including all of the downward revisions, the U.S. economy would have to lose twice as many jobs as it has already lost even to be on par with the 1981-82 recession (measuring job losses as a percentage of the labor force).

While we do expect fourth-quarter GDP to come in at a loss of -4% to -6%, it is important to recognize that this is a quarterly change at an annual rate. The overall contraction in U.S. output will be somewhere about 1-1.5% in the fourth quarter. In the Great Depression, actual GDP dropped by 30%. Ben Bernanke was correct in remarks he made last week that there is “an order of magnitude” (10 fold) difference between the current downturn and the Great Depression. For the record, the worst overall drawdowns in GDP since the Depression – not just bad quarterly growth rates – were in 1954 (-2.65%), 1958 (-3.75%), 1975 (-3.10%), and 1982 (-2.87%).

This is not to minimize the prospects for a further economic downturn, but to say that this is “the worst economy since the Great Depression” is like blowing up a crate of dynamite on the Nevada Proving Grounds and saying it is the worst explosion since the detonation of the atomic bomb there. Even if the statement is accurate, the comparison is absurd.

Unlike Bill Gross and John Authers (see "Bill Gross on Stock Valuations"), Hussman does not believe corporate bonds are more attractive than equities at this point:

Corporate yields have increased significantly, but default rates tend to pick up in the later stages of recessions, and there isn't much historical evidence to suggest that corporate bonds reach their lows any earlier than stocks do. For that reason, corporate bonds are essentially equity-equivalents here, and the same considerations about quality apply as well here as they do for stocks. Generally speaking, corporate bonds are currently priced to deliver both lower long-term returns than stocks, but as a group, will probably have lower volatility than stocks as well. Our inclination to invest in corporates for the Total Return Fund will likely increase at about the same time as our willingness to hold stocks on an unhedged basis for Strategic Growth (which is not yet).

Bill Gross on Stock Valuations

In his December Investment Outlook ("Dow 5000 Redux"), PIMCO's Bill Gross writes that regulatory and other responses to the current financial crisis will have a 'transgenerational' impact on stock market valuations:

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.

The chart above, of historic P/E values, comes from Gross's Investment Outlook.