John Hussman of Hussman Funds shares his latest thoughts on the markets.
The present confidence and enthusiasm of investors about the ability of monetary policy to avoid all negative outcomes mirrors the confidence and enthusiasm that investors had in 2000 about the permanence of technology-driven productivity, and in 2007 about the durability of housing gains and leverage-driven prosperity. Market history is littered with unfounded faith in new economic eras, and hopes that “this time is different.” Those periods can be difficult, at least for a while, for investors who are less willing to abandon evidence and lessons of history, not to mention basic principles of economics and valuation. We endured similar discomfort in periods like 2000 and 2007, before hard reality set in.
The recent market cycle has required two changes to our hedging approach. One was in 2009, when our existing approach was dramatically ahead of the S&P 500, but I insisted on making our methods robust to the worst of Depression era data. The other was earlier this year, when we imposed criteria to restrict the frequency of defensive “staggered strike” option positions in Strategic Growth Fund, requiring not only strongly negative expected returns, but also either unfavorable trend-following measures or the presence of unusually hostile indicator syndromes. There’s little doubt that massive central bank interventions have pushed off economic and market difficulties that might have occurred more quickly. The tighter criteria help adapt to that reality, without foregoing the benefit that defensive option positions would have historically had over the course of the market cycle.
Guest post by Peter Tchir.
Is it a New EU?
Of the major players coming into June 2011, almost none are left. Attrition and elections have taken care of most of the major players. In fact, you could make a case that Merkel is really the only major player still in the same position.
I think this is important particularly for the ECB. Draghi has now had time to establish himself in his role, and get comfortable with the people at the ECB, the various central banks, and the politicians. He entered the role with a bang – a rate cut, more symbolic than anything, at this first meeting and then began the LTRO’s.
Since then, his efforts to get Spanish and Italian bond yields down have been thwarted by the markets and a deteriorating economic situation. He wants yields low and looks like he is prepared to stretch his powers to fulfill the mandate of “transmission of economic policies”.
How far is he willing to stretch? How much can he do based on that “transmission” mandate? That is the question and we need to get answers, but more and more, it looks like he is prepared to be aggressive. It may not be a completely new EU, but it has changed a lot in a year, and the ECB does look to be a new ECB.
Guest post by Marc Chandler of Marctomarket.
Guest post by Azizonomics.
The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit.
The major selling feature of this “method” is that it provides the only sure means out of what is called the global “deleveraging trap”. This is the trap which is said to have ensnared Japan more than two decades ago and which has now snapped shut on the whole world. And what is a “deleveraging trap”? It is simply the obligation assumed when one becomes a debtor. This is the necessity to repay the debt. There are only three ways in which a debt can be honestly repaid. It can be repaid with new wealth which the proceeds of the debt made it possible to create. It can be repaid by an excess of production over consumption on the part of the debtor. Or it can be repaid from already existing savings. If none of those methods are feasible, the debt cannot be repaid. It can be defaulted upon or the means of “payment” can be created out of thin air, but that does not “solve” the problem, it merely makes it worse.
The simple truth is this; equities are NOT really ‘cheap’. The chart of the S&P500 (middle, left) shows what valuation tops and bottoms look like in terms of P/E ratios and dividend yields and we are not there yet. Government bonds are at levels we have pretty much never seen before and likely never will again (chart, top left) and are only being bought out of fear or in the hope that the government will come in and be the greater fool (which I will admit is usually a pretty safe bet, but this time, the stampede to sell the government what it offers to buy will be absolutely overwhelming and many investors will get trampled in the rush). High yield debt is also getting way ahead of itself as a look at the number of shares outstanding in BlackRock’s iShares iBoxx $ High Yield Corporate Bond Fund ETF (HYG) demonstrates (chart, below left). Investors are being forced, by financially repres- sive government intervention, into chasing yield wherever they can find it—even if that means heading in directions that traditionally warrant a lot more caution.
Guest post by Doug Short.
The world market rally slowed last week, except for the Nikkei 225, which remained in the top spot with a 3% gain. The indexes of the two eurozone nations, France and Germany, came in a distant second and third, with 1.5% and 1.4% gains, respectively. The S&P 500 beat out the Mumbai SENSEX in a close race for an equally distant fourth place. The UK’s FTSE 100 kept one nostril above water with a 0.1% gain. China sank into the Red Sea, with the Hang Seng down 0.1% and the Shanghai Composite down 2.5%.
Only one of the eight markets in my weekend basket, the Shanghai Composite, is in bear territory — the traditional designation for a 20% decline from an interim high. This is one less than last week, with Nikkei’s strong performance lifting it above this market stigma. See the table inset (lower right) in thechart below. In our gang of eight, the S&P 500 remains the closest to an interim new high, down fractionally a from its April 2nd peak. At the other end, the Shanghai Composite is over 39% off its interim high of August 2009.