In his latest letter, John Hussman once again takes issue with what he sees is a myopic market, wilfully ignoring reality.
Overall, it strikes me that the markets have wholeheartedly embraced the view that the recent downturn was nothing but a typical and purely transitory post-war wrinkle. Yet income continues to deteriorate once government transfer payments are backed out, in stark comparison to other post-war recoveries (see Bill Hester’s recent piece Business Cycles, Election Cycles and Potential Risks).
Investors have looked past the effects of temporary stimulus and opaque accounting, maybe on the Madoff-like thesis that neither sustainability nor accurate disclosure really matter as long as the numbers are good. Yet there’s also no denying that this thesis has worked beautifully, and we’ve missed out by questioning it. As I detailed last week in Looking Back, Looking Forward, the criteria for accepting risk – on the basis of valuation and market action – have been more stringent in periods of credit crisis (both U.S. and internationally) than we could have, in hindsight, got away with last year. I continue to believe that the market’s enthusiasm may turn out badly, given the extent to which GDP gains have been induced by unparalleled deficit spending, and earnings gains have been predominated by financials enjoying suspended accounting transparency. But we’ll see how this plays out over time.