This Bubble Is 'Beyond 1929 And 2007'

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 |  Includes: DIA, QQQ, SPY
by: Bill Kort

Editor's note: Originally published on July 31, 2014

This is the investment landscape, according to economist / portfolio manager, John Hussman, highlighted in MarketWatch, “The Tell”, July 27, 2014.

It is but a sample of what seems to be a recent barrage of ‘bubble talk’. One article cites data that indicates large doses of ‘bubble talk’ may be a predictor of bad times ahead; or, at a minimum potentially create a self-fulfilling prophecy (“Use of the word ‘bubble’ reaches worrying levels”–CNBC on line, Markets, 7/29/14).

We have had these discussions about bubbles and ‘bubble talk’ before. My opinion has been, and continues to be, that it is the punditry corps fighting the last battle of the previous war, looking backward, not forward. This is typical and positive, as it continues to be strong evidence of extreme skepticism over the underpinnings of the current bull market. In my world, fear and skepticism are good things to have working in a rising market.

Do not confuse my positive tilt on ‘Bubble Talk’ with the concept of minimal risk!

With the market tripling over the past five years, absent any recent significant correction, there is considerable short-term risk. A whopper of a correction (normal, predictable and not the end of the world) could be in the offing vis-a-vis Mark Faber’s most recent commentary (“Marc Faber predicts 20 to 30% drop in stocks–CNBC on line, 7/28/2014). Of course, Faber has been right about twice in the last 15 years, about the same number of times John Hussman has been right.

Why are they still viewed as credible sources?

Hussman has been another ‘stopped clock’ since the lows of 2009. This economist, turned fund manager, says (back to the ‘bubble talk’), “Make no mistake–this is an equity bubble and a highly advanced one. On most historically reliable measures, it is easily beyond 1972 (The ‘Nifty Fifty’ bubble) and 1987, beyond 1929 and 2007, and now is within 15% of 2000.” (MarketWatch, The Tell, July 27, 2014).

John Hussman and how NOT to pick a money manager

Hussman was a legend after successfully avoiding the ‘Tech Implosion’ and 9/11 rout of 2000-2002 and posting gains. He was only down 9% in 2008 vs. the S&P down 37%. Investors flocked to his fund after that–for the exact wrong reason at the exact wrong time. Of course, things immediately fell apart, as Hussman failed to embrace the bull market that began in 2009.

“The {Hussman’s} five year annual return (through 2/26 2014, MorningStar) is -3.5% against the S&P’s 22.2%. Ten year returns are -1.2% annually, while the S&P delivered around 7.1% a year. That’s over 105% in relative underperformance over 10 years.”(“Curious case of John Hussman: Understanding the bias in your process–awealthofcommonsense.com-2/27/14)

After five years of being dead wrong I’m sure it is hard for Mr. Hussman to change his tune, as evidenced by our MarketWatch piece. Anyway, if he persists, he will eventually, as my broken clock, be right. There will be a substantial give-back, maybe sooner maybe later. Will it be a disaster? Who knows? What I do know is that in the last 200 or so years of our history, when addressing the wiles of the stock market, more importantly investing, it has generally paid to proceed with a positive bias.

What’s your perspective?

Disclosure: No positions