The following is an excerpt from fund manager John Hussman’s weekly letter. You can read the whole thing here.
I noted last week that from a Bayesian perspective, I would estimate a probability of nearly 80% that we will observe a second round of credit losses coupled with a market plunge in the coming year or so. That doesn’t imply an all-out “crash,” but more likely a retreat similar in size to what we have often observed following other post-crash rebounds (about -28% on average).
Of course, from the standpoint of compounding, a 28% decline converts a 60% gain to a more modest 15% net advance, so even without an outright “crash,” it would not be surprising to see the majority of the gains since the March low wiped out. Most likely, we may see a few more years of sideways movement after that, as the economy absorbs the full weight of adjustment to the deleveraging of bad debt and massive increase in government liabilities that we have on our hands.
Suffice it to say that I do not anticipate a V-shaped recovery, and while the stock market may very well recover faster than the rest of the economy, I don’t expect durable market gains until after the second wave of losses shakes out.
On the subject of credit delinquencies, the latest report by Trepp (which provides independent research on commercial mortgage-backed securities) indicates that delinquencies on multifamily CMBS loans rose to 8.78 per cent in November, up from 7.66 per cent the previous month. Commercial delinquencies in retail, industrial and office loans increased as well. The largest jump in delinquencies was in the hotel sector, where the delinquency rate shot to 14.09 per cent, from 8.67 per cent in October. The data from the banking sector also shows no abatement…