John Hussman: Avoid Being the Greatest Fool

Excerpt from fund manager John Hussman's weekly essay on the U.S. market:

It's fascinating to watch the increasingly carnival-like atmosphere on CNBC on any given day (I generally catch about half an hour with breakfast before the market opens, to hear the prevailing arguments and get the tone of investor sentiment). One quickly finds that the cheerleading tone of the late 90s is back, and the greater fool theory is in full bloom, with investors regularly encouraged to "buy high and sell higher." Lately, the bullish arguments are running so fast and loose that it is apparently no longer a requirement that they have any relationship to fact.

Take for example a remark last week that "mutual funds are sitting on piles of cash that these managers are going to have to get invested."

Wow. That's just a bald-faced fib. It could not be further from the truth. Cash as a proportion of mutual fund assets has never been lower. Never...

The greater fool theory relies on one thing -- the assumption that there is somebody else out there who is willing to pay an even more reckless premium for stocks. That's what the market is thriving on at this point: the hope that there is an ocean of unsatisfied demand out there by short sellers or mutual fund managers who will be "forced" to buy. Unfortunately, the facts do not support that assertion. As noted last week, we may see additional buyout activity, but that is driven primarily by credit spreads and does not have a strong relationship to subsequent market returns.

In any event, mutual fund cash is at a historic low, and higher short interest is more than offset by rising margin debt.

There may not be many greater fools out there after all. As they say, if you're sitting at the poker table and you can't spot the pigeon... you're probably the pigeon.

Comments

[Chris G.:]

Even better this morning was the small graphic (I wish I could reproduce it here)...basically, it was an upward-slanting 45 degree arrow, with the words "Riding the Rally" along the line.

The shoe-shine crew at CNBC pretty much sums up what this market is doing, at least in my eyes.

2007 May 08 08:56 AM

[David Roskoph:]

John, I too am amazed at the belief that market moves are always fundamentally justified. Especially after the great route of a mere seven years ago. Now, however, I believe the bullies of the hedge fund word have the ability to move the markets (or support them) just enough to squeeze out their lessers while the crowd wonders what happened. It has never been more of a zero sum game and the market never more than a mere battleground.

2007 May 08 12:29 PM

[Richie:]

John,

You purposely mis-lead your readers by declaring that Mutual Fund cash levels are at all time low levels.

Why do you exclude the funds available to the hedge funds and wealth managers from your total of Mutual Fund cash levels? The point of the article you refer to is that there remains tons of money available to fuel this great bull market.

While it MAY be true that Mutual Fund (in the classical sense) cash is less than 4%, there is certainly ample liquidity from all sources to keep this rally going. Money, especially on a world wide basis, is everywhere.

Also, what do margin debt levels have to do with anything? You must be aware that never in history have high margin debt levels percipitated an economic or even a stock market decline. Check with Hulbert.

2007 May 08 03:48 PM

[Patrick Ran...:]

Ravernon,

John is simply taking the noise out of the markets, and is NOT “purposely mis-leading his readers.”

“In the classical sense”? Mutual Funds are not the same as hedge funds and the quote that John is referring to clearly says “Mutual Fund”.

You must be aware that the year 2000 was the last time margin debt was this high. And, while margins debt is high, it represents greed and in times like this I would hate to be “The Greatest Ravernon”.

2007 May 08 05:09 PM

[Richie:]

Patrick ---

How then does declaring that M/F cash levels are at historically low levels have any value as a commentary? His argument is that liquid funds for investment are disappearing. Does it make sense to you not to mention that funds from all other sources are SEVEN times higher than at any other time in history?

2007 May 09 12:52 PM

[Jim Turse:]

In fairness to both John and CNBC, CNBC has consistently presented commentary indicating that retail investor inflows to mutual funds are at significant lows. Frankly, I have not heard the comment he referred to that "mutual fund managers are sitting on cash", but CNBC presents a pretty good cross section of talking heads, often in conflict with one another. I run CNBC in background for about 2-3 hours while working on our own portfolio, so maybe I'm getting a little broader view.

2007 May 09 02:34 PM

[omooc:]

CNBC, in my view, offers an excellent service to the retail investors, of which I am one. It levels the playing field for those who are not on the Street. Being a retiree, I can tune to CNBC any time of the day, though mainly to see the graphics on the top line. The quotation under consideration, in my view, is not biased. One must take a broader view of what "invested" means. Investing in treasuries is as valid as investing in stocks and bonds. Besides, as Cramer says from time to time, there is a bull market somewhere -- it may be the cyclicals one day, the utilities the next, etc. Not all stocks drop or rise simultaneously. omooc

2007 May 09 11:43 PM

[Johnny Bitc...:]

Hussman, at least you could be intellectually rigorous and honest in your flippant commentary:

Wow. That's just a bald-faced fib. It could not be further from the truth. Cash as a proportion of mutual fund assets has never been lower. Never...

Let's look dispassionately at some facts:

1. the commenter did not say "cash as a proportion of mutual fund assets" is at a high

2. your retort which implies so seems more dishonest than the actual comment

if you are going to call someone a liar, you might at least respond honestly yourself:

can you tell us where actual nominal cash levels are today ?

i don't think it's all that important for investment decisions, but you look like more of a liar or bald-faced fibber to me than the guy you are ripping.

would you care to provide a chart with actual cash levels ?

regards, john.

2007 May 10 01:34 AM

[Johnny Bitc...:]

P.S.

If the math is too difficult for you, just provide Mutual Fund Assets over the last 7 years and readers can do the math !

You might end up looking like the greater fool, my man !

Truth is, I have no idea.

But I do know that "cash as a percent of mutual fund assets" is different than "cash".

know what i mean ?

2007 May 10 01:37 AM

[Johnny Bitc...:]

Hey, by the way......it was clever of you to distance yourself from CNBC by suggesting you only watch it as part of your professional research into investor psychology !

Aren't there more efficient ways to get this information than watching it for 30 minutes a day... {editor deletions due to lack of decorum}

[CNBC] will tell you nothing about investor psychology.

regards, john.

2007 May 10 01:41 AM