John Hussman runs a very large mutual fund whose performance for the past five years has not been great. He is reviled by many of his fellow Masters of the Universe for saying of them, as he did in a recent client newsletter, that Wall Street, collectively, is “quite measurably out of its mind.” Others balance the scorn of the gamblers against the fact that Hussman was saying much the same thing just before the crashes of 2000 and 2008. In a world whose collective memory maxes out at 90 days, in which logic and mathematics are optional belief systems, Hussman is an historian and number cruncher. What do the numbers tell him? To brace for impact.
What history, and the numbers, tell him [as explained by Ilargi Meijer ina post on The Automatic Earth], and should tell us, is that stocks in general are hysterically over-valued; what the sellers and buyers and hawkers of stocks believe they are worth has no basis in the real world of assets and earnings. Buy a share of just about any company in today’s market and you are paying more than twice what it’s worth. There are only two other times in the history of the stock market when over-valuation has been worse than it is now: in 1929 just before the crash that ushered in the Great Depression, and during the dot-com bubble just before the crash of 2000. It was about this bad in 2007 just before the Great Recession.
But, say the MOUs who despise him, he’s not making as much money for his clients as we are, so you shouldn’t listen to him. They feel much the same way about Tyler Durden at Phoenix Capital, who says it this way:
1) “Investor sentiment is back to super bullish autumn 2007 levels.
2) Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).
3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).
4) Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).
5) Margin debt (money borrowed to buy stocks) is near record highs.
In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.”
There are many other things wrong with our stock market and those of the industrialized world. At the same time the equities markets are shooting the moon, bond yields and commodity prices (oil, copper, steel, etc.) are in the basement digging holes. Thus three super reliable indicators of the financial future are pointing in opposite directions, one up, two down. Is one mistaken, or are two of them mistaken?
One the one hand, you have gamblers slinging borrowed money, or other peoples’ money onto the table to bid for trinkets whose value only they and the people at the same table can see. They’re having a good time. But the people who make the trinkets, using stuff like oil and steel, and the people who lend money to the trinket-makers — they are in the basement digging holes that are beginning to look like bunkers.
So what about the gamblers, up on the roof drinking champagne, throwing confetti and blowing on noisemakers? “Honestly,” says John Hussman, “you’ve all gone mad.”