John Hussman: Showtime for Visible Roots and Fruit

Excerpt from the Hussman Funds' Weekly Market Comment (9/7/09):

In my view, the next 12-16 weeks will be extremely important in shedding light on any incipient economic recovery. Investors have become so used to the idea that stocks often foreshadow economic strength that actual, convincing evidence has been dispensable – beyond the excitement over “less bad” economic news. The next 12-16 weeks will change that. As it happens, aside from the unemployment rate (which is a lagging indicator), past economic recoveries have been very forceful in generating clear evidence of real economic improvement in the months immediately following the economic low. Not every indicator moves at once, or in every cycle, but the composite movement of economic indicators of production, new orders, temporary workers, and housing starts has been clearly and almost immediately positive as soon as a recovery begins. Notably, except for a few months in the aftermath of 9/11, even net job growth (not just temporaries) has turned positive within three months of a recession low. (For a look at how temporary employment leads overall payroll figures, see Bill Hester's new article Is The Job Market Ready for a Recovery? - additional link at the end of this comment).

Essentially, we have now entered the window in which growth – not simply slowing of deterioration – is required to support the idea of an economic recovery. The next 12-16 weeks will be the first hurdle on that front. I don't rule that possibility out (hence our index call position), but I do remain skeptical. Beyond that first hurdle, there is a second, which is the impact of the second wave of adjustable rate mortgage resets. My impression is that the changes in mark-to-market rules early this year have quietly allowed bank balance sheets to experience unreported deterioration in recent months, but I suspect that there will be a point very late this year or early next year when the financial officers of major banks will refuse to sharpen their pencils to a stub, and banks will be forced into a fresh round of capital-eliminating asset writedowns.

Comments

[Nick36:]

Analysts and many companies have been raising their earnings expectations. And the stock market has been pricing in these increased expectations.

Which means that company earnings need to increase a lot during the next earnings season and the one after next. Or else a lot of earnings will come in below expectations. And that most likely will lead to stock market declines.

But it's hard to see how company earnings can improve a lot, when consumers in virtually all rich countries have to deal with high unemployment, large consumer debts, and decreased willingness of banks to lend.

Companies can improve their profitability through cost-cutting only so much. Before their cost-cutting hurts the consumers through increased unemployment and makes this cost-cutting counterproductive in terms of company earnings.

Sep 08 11:09 AM

[djackson:]

It's not just the resi market and the option arm resets (which are really more a 2010 phenom), its also the CRE market that will weight on the banks. Oh, and how about it FASB later this month actually does force the SIVs back on the balance sheet?

Sep 08 11:39 AM

[Jan Paul:]

Foreign earnings, not domestic earnings are the key.

IF and it is a big IF, the global economy is recovering then all the international companies in the DOW and S&P and Naz, are going to go up and when converted to devalued dollars, go up even more.

What are the markets gambling on? I believe they are gambling that a global recovery is going on without the U.S. taking part.

Any bad news on the global recovery could plunge the markets, cause the dollar to rally and also cause our economy to get worse.

The move to a global economy with 2 billion middle class consumers (buying power, not standard of living) that is growing millions each month, has changed everything we use to be able to use to gauge the future of equities.

We are shrinking while the world grows the purchases of cars, clothes, computers, cell phones, oil, etc. For the first time, demand for oil by emerging markets has passed developed nations (due to their decline in part) and the world is looking to the emerging markets, not the U.S. to lead in any global recovery.

Sep 08 12:12 PM

[Hans111:]

Company evaluation in La La land.....
been there done that.

Anything new?

Sep 08 12:16 PM

[conceptwizard:]

Austrian economist Ludwig von Mises (1881 - 1973) said:

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

SOUND FAMILIAR!

Under Alan Greenspan, Ben Bernanke and successive US Treasury Secretaries, America chose the latter path and now faces the consequences of their reckless, criminal behavior.

In early 2009, economist Michael Hudson said:

The (US) economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but (at) the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored," only delayed to postpone a painful day of reckoning.

Sep 08 12:43 PM

[LKofEnglish:]

and the day of reckoning is here. of course austria got its butt whooped in mulitple wars and is now the size of pennsylvania. so much for the empire. ahh, the glory days. don't see secession on our horizon and so far no one has even confronted our military as every european power did against austria (in particular Napolean who i think single handedly turned austria into a nation of economists.) in any case--still find myself in agreement with conceptwizard. i think.

Sep 08 01:31 PM

[basehitz:]

From the full article on John’s website:
“the large extent to which prior economic recoveries have relied on the expansion of debt-financed economic activity”

Since our ballooning debt has gone parabolic, we’ve shot the wad here. So the govt borrows trillions to spend on consumption and govt expansion. They can’t print money forever.

Back in the real world, Bill Hester’s report (linked above) compares numerous employment stats of this recession vs history and concludes:
“the current recession overshadows . . . on virtually every measure (except of course for stock market valuation)”

By “overshadow”, he means it’s worse this time than the worst recession in 50 years. The stock market disconnect is striking. Yet the WS propagandists daily try to convince NOW to buy stocks. Where were they in early March? So Banana Ben print money but the folks are saving more and watching expenses. Glad somebody finally gets it. Memo to WS and BB . . .

Sep 08 01:31 PM