There are bears and then there are bears. Hussman claims he is not a PermaBear, no matter how he sounds.
John Hussman’s latest weekly article is called “Measuring the Bubble”.
The following snip is lengthy, but not in comparison to Hussman’s original text which I encourage everyone to read in full. Hussman displayed 9 charts and tables, I only snipped one of them.
I dispense with my usual blockquotes for ease in reading. The end of the snip should be easy to find.
Begin Hussman: Measuring the Bubble
Critics of value-conscious investing have argued that even the most reliable valuation measures have been extreme for years now, and can therefore be disregarded, since the market has continued to advance. Hold on Scooter. It’s important to distinguish between the level of valuations, which has indeed become breathtakingly extreme in recent years, and the mappingbetween valuations and longer-term market returns (which we observe as a correspondence, where rich valuations are followed by poor returns and depressed valuations are followed by elevated returns). That mapping has remained intact, even in recent market cycles.
The essential thing to understand about valuations is that while they are highly reliable measures of prospective long-term market returns (particularly over 10-12 year horizons), and of potential downside risk over the completion of any market cycle, valuations are also nearly useless over shorter segments of the market cycle. The mapping between valuations and subsequent returns is typically most reliable over a 10-12 year horizon. That’s the point where the “autocorrelation” of valuations (the correlation between valuations at one point in time and valuations at another point in time) typically hits zero.
Now, it’s true that when we examine pre-crash extremes, like 2000 and 2007, we’ll typically find that actual returns over the preceding 12-year period were higher than the returns that one would have expected on the basis of valuations 12 years earlier. No surprise there. The only way to get to breathtaking valuations is to experience a period of surprisingly strong returns. Those breathtaking valuations are then followed by dismal consequences. Likewise, when we examine secular lows like 1974 and 1982, we’ll find that actual returns over the preceding 12-year period fell short of the returns one would have expected on the basis of valuations 12 years earlier.
