John Hussman: 80% Probability of +40% Market Plunge By End of 2010!
June 22, 2010 by Editor · Leave a Comment
In my estimation, there is still close to an 80% probability that a second market plunge and economic downturn will unfold [before the end of] 2010. This is not a certainty, but the evidence that we’ve observed to date in the equity, labor and credit markets is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Words: 503
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from John Hussman’s (www.hussmanfunds.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Hussman goes on to say:
As Gluskin Sheff chief economist David Rosenberg has noted:
“Even if the recession is over, the historical record shows that downturns induced by asset deflation and credit contraction are different than a garden-variety recession induced by Fed tightening and excessive manufacturing inventories since the former typically induce a secular shift in behavior and attitudes towards debt, asset allocation, savings, discretionary spending and homeownership. The latter fades more quickly.
This is why people didn’t figure out that it was the Great Depression until two years after the worst point in the crisis in the 1930s; and why it took decades, not months, quarters or even years, for the complete transition to the next sustainable economic expansion and bull market… We are probably not even [half] way through this deleveraging cycle. Tread carefully.”
Andrew Smithers, one of the few other analysts who foresaw the credit implosion and remains a credible voice now, says:
“The good news so far is that the stock market got down to pretty much fair value or even, possibly, a tickle below it, at its March 2009 bottom. Now it has gone up… we probably have a market which is [more than] 40% overpriced.
In order to assess value, it is necessary either to
a) calculate the level at which the EPS would be if profits were neither depressed nor elevated, or
b) use a metric of value which does not depend on profits.
In a) above the cyclically adjusted P/E (CAPE) normalizes EPS by averaging them over 10 years. In b) above the q ratio compares the market capitalization of companies with their net worth, also adjusted to current prices.
The validity of both of these approaches can be tested and is robust under testing – and they produce results that agree: both q and CAPE are saying that the U.S. stock market is [at least] 40% overvalued.”
*http://www.bloomberg.com/apps/news?pid=20601103&sid=aPLctfeL7ptA
Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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