One of the first things you hear about the stock market are the stories of the great bull markets and great crashes.
And when you hear the stories about these dramatic moves, you also quickly hear about the great (and not-so-great) forecasts that preceded them.
We like to imagine that there are people who can predict the future. And none are more revered than those who famously predict a dramatic future — especially a dramatic crash — when everyone else is confident the market is headed the other way.
One of the most famous of these doom predictions came just before the “Great Crash,” the one that began in the fall of 1929, after a decade-long bull market had seen the DOW rise ten-fold.
That prediction was made by an investor named Roger Babson on Sept. 15, 1929.
“Sooner or later a crash is coming,” Babson said. “And it may be terrific.”
Stocks tanked immediately thereafter. And, three years later, they bottomed nearly 80% below their peak.
With a prediction like that, it’s not surprising that history has lionized Babson and his forecast — at the same time as it has memorialised the words of the famous economist Irving Fisher who, a month later, after the first lurch down, announced that “stocks have reached what looks like a permanently high plateau.” (Oops.)
What has been forgotten is that Babson had been saying the same thing for years.
Babson had been so consistent in his doomsaying, in fact, that in today’s parlance, he would likely have been branded a “perma-bear.”
Check out the chart below. Babson’s famous forecast came at point “A.” As Babson himself noted when he made the forecast, he had said the same thing the year before and the year before that. Irving Fisher’s alternative and more optimistic view is noted at point “B.”
Another word for “perma-bear” in a great bull market, of course, is “idiot.”
To the extent that anyone heard Babson’s dour warnings in the late 1920s, they likely dismissed him as a fool.
That is, until the market crashed, and Babson became a hero for all time.
One man who has a good chance of becoming a modern-day Roger Babson is the fund manager John Hussman of the Hussman Funds. Hussman has been clear and “wrong” about a coming market disaster for years. And he is still calling for one today.
Having been through several market cycles — some of which he has correctly predicted and others of which he has missed (the latest bull run, included) — Hussman is fully aware of how reputations ebb and flow with how well one’s view correlates with recent market conditions.
He is so aware of this, in fact, that he is the one who created the chart above.
Because Hussman has been so clear and “wrong” for so long, he has now become a laughingstock. In an industry that measures itself by weekly, monthly, and quarterly performance, you have about 90 days to be “right” before your reputation begins to erode. Hussman’s years of caution, therefore, have destroyed most of the credibility and influence he once (deservedly) had.
But, importantly, that doesn’t mean Hussman’s analysis is wrong.
In fact, if there’s any lesson to be learned from history, beyond the fact that major market moves are extraordinarily difficult to predict, it’s that the current reputation of a forecaster is often a contrarian indicator of how seriously his or her forecasts should be taken.
Really, to avoid biasing one’s perception of particular market analyses by tainting them with the current reputations of the analysts, one should just look at the analyses themselves.
And to this analyst of market analyses, at least, Hussman’s analysis remains alarmingly persuasive. It concludes that stocks are about twice normal valuation levels. And about three or four times the levels reached in previous “secular lows.”
Here’s just one of the many valuation measures Hussman cites to support this conclusion. He notes that there have only been 54 weeks in history in which stocks have been more expensive than they are today — the 21 weeks preceding the market top in 2000 and the 33 weeks after that top before stocks continued their crash.
Hussman thinks stocks will drop 40%-60% from today’s level. Or more.
He can’t say when — no one can.
And he can’t say for certain that this forecast is right. No one can do that, either.
But unless some fundamental and longstanding trends in economic growth and valuation have changed, Hussman’s reputation is likely to one day be restored.
You can read Hussman’s latest weekly note here. It is remarkably and admirably free of the vague assertions and hedging that normally characterise stock-market analysis. It says what he has been saying for at least the past two years. And it begins with the following…
There are moments in time when durable history is made; history that others observe much later, shaking their heads, at a loss to understand how the events that followed could not have been obvious at the time…
85 years ago, Roger Babson put it this way: “A crash is coming, and it may be terrific.”
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