Monday, December 10, 2012

Hussman Weekly Market Comment: Secular Bear Markets - Volatility Without Return

Present market and economic conditions highlight a fairly dramatic disparity between continued economic and valuation headwinds (particularly on a “cyclical” horizon of 18-24 months) and complacent short-term conditions that rest on the continuation of massive monetary and fiscal imbalances. It’s obvious even from a casual observation of economic conditions that these imbalances are inconsistent with a healthy economy; short term interest rates near zero, monetary base at 18% of nominal GDP (more than twice the level that would be consistent with short-term yields at even 2%), and a Federal deficit near 10% of GDP. Because it is an accounting identity that the deficit of one sector must be the surplus of another, and neither consumers nor our trading partners are running surpluses, it follows that our massive Federal deficit has temporarily driven corporate profit margins to historic highs about 70% above their norms even while wages as a percent of GDP have reached a record low.