Monday, June 4, 2012
Hussman Weekly Market Comment: Run of the Mill
My Views in a Nutshell:
We remain strongly defensive here, which will ideally be resolved by a sharp improvement in valuations followed by early improvement in market action, but we'll respond to shifts in the evidence however conditions change. I doubt that we'll be as defensive as we've been recently for a great while longer, but that's another way of saying that I expect significant market events in fairly short order.
We will respond to any further round of QE to the extent that we observe improvement in our measures of market internals, absent other hostile syndromes of market conditions. We do not share the market's blind faith in a "Bernanke put."
Valuations have improved marginally, but the market remains dramatically higher than levels typically associated with run-of-the-mill bear market lows, not to mention secular ones.
I expect that the U.S. economy is presently entering a recession, which is global in nature. It is unlikely to respond meaningfully to monetary stimulus, which has already gone well past the point of diminishing returns, and on to the point of recklessness.
At present yields, a further round of QE would essentially amount to
policy, subsidizing bond market speculators and banks, and ultimately producing near-certain losses for the Fed, after interest, and at public expense.
Stocks remain overvalued on the basis of normalized earnings, and only appear reasonably priced on the basis of "forward earnings" because forward earnings estimates implicitly reflect assumed profit margins that are 50-70% above historical norms.
Present elevated profit margins are a direct result of massive deficit spending coupled with low savings rates, allowing corporate revenues to outstrip depressed labor expenses. This reflects an accounting identity (see Too Little to Lock In). Without huge deficits and depressed savings, labor income would only be able to support much more limited corporate revenues. The argument that profit margins will contract does not require labor costs to rise - it merely recognizes that massive Federal deficits and weak personal savings rates cannot be sustained over the long-term.
The problems in Europe reflect the impossibility of having a currency union without having a fiscal union, and even 94% agreement among European countries on Eurobonds or other approaches is not sufficient if the 6% holdout happens to be Germany, which is being called on to finance endless transfers and allow money to be permanently printed in order subsidize debt-strapped neighbors.
Investors should expect no easy solutions to the fiscal and global challenges ahead. They should instead expect market valuations that adequately reflect the fact that there are no easy solutions. In my view, those valuations remain miles below present market levels.