John Hussman's New Presentation Clearly Explains Why The Stock Market Is Frighteningly Distorted

John Hussman

John Hussman of Hussman Funds has maintained a bearish slant toward the market for quite a while.

“I’m  known as somewhere between permabear and prophet of doom,” said Hussman as he opened his presentation during Mish Shedlock’s Wine Country Conference.

“I’m actually an inordinately optimistic person who actually believes there is virtue in finance,” he added.

In his thought-provoking presentation, Hussman very clearly argues that distortions in the financial markets have created an environment with very low prospective returns.

“This fragile equilibrium that we’re in because of monetary policy, because of fiscal policy, and because of the combination of yield-seeking plus the apperence of yield through forward operating earnings because profit margins are elevated — this creates an environment where stock returns prospectively are very low,” he says.

“That’s really the point of QE,” he reiterated. “It creates discomfort as a search for yield.”

Thanks to Sitka Pacific for giving us permission to feature this presentation.

Click Here To See Hussman’s Presentation >
The Wine Country Conference was hosted by Mike Shedlock of Mish’s Global Economic Trend Analysis and Sitka Pacific Capital Management to raise funds in the fight against ALS, the disease that took Mish’s wife Joanne.  In total, Mish has raised nearly a half million dollars for the Les Turner ALS Foundation —  please consider making a donation. Please check out www.winecountryconference.com for videos of the speaker presentations and more information about the April 2014 event where Mish and John Hussman will team up to raise money for Autism research and programs.

There is stable and there is unstable equilibrium in the financial markets.

Here are the some basic insights into the equilibria listed in the previous slide.

We can't just assume that an extra dollar of reserves will create $10 of spending without considering the economic issues that matter.

In the real world, when we increase the monetary base, it's turnover falls. This is why quantitative easing isn't' working.

The fundamental purpose of quantitative easing is to provoke discomfort and a speculative reach for yield.

When government deficits rise, household savings fall.

However, these huge profit margins come with a substantial drop in profit growth.

The record negative position in the government deficit and household savings equilibrium has forced corporate profitability to surge to a record high.

Current profit margins imply profit growth contraction at a 12% annual rate.

These distortions have encouraged investors to flock to the stock market where there is an illusion of high operating earnings yield.

By many measures, the expected 10-year average total returns on stocks is near a very low 3.5%.

For your reference, here's how Hussman got to that low return estimate. In short, it assumes some reversion to the mean.

China bear Jim Chanos also gave a presentation...

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