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More from Hussman: While the sell-off in stocks gives the S&P a bit more value in his models...

More from Hussman: While the sell-off in stocks gives the S&P a bit more value in his models - a 5.5% annual return over the next decade - bear markets usually don't end until the market offers 10%, and secular bears don't end until prospective returns hit 20%!. Just getting to 10% would require an S&P in the mid-800s.
Comments (10)
  • Per Hussman:
    "So at this point, if the Fed buys Treasury bonds, it will predictably lose money - after interest - unless interest rates rise less than 20 basis points a year during the period that the Fed holds those bonds. Over the past year, the standard deviation of week-to-week changes in the 10-year Treasury yield has been about 13 basis points, so 20 bips over the course of a full year is nothing. Whether or not a speculator is willing to take a bet on lower yields, it's highly unlikely that the Fed could buy Treasury bonds here at a yield of 1.5% and ever expect to unload its portfolio later at even lower yields, because yields would shoot higher merely on the anticipation of Fed liquidation.


    As a result, Treasury debt purchased by the Fed here would almost certainly result in capital losses, at taxpayer expense, and those capital losses would be an implicit subsidy to speculators who sold those bonds to the Fed at elevated prices."


    So now......what is the AMMO the FED has left?
    4 Jun 2012, 02:00 PM Reply Like
  • WM:

    4 Jun 2012, 02:16 PM Reply Like
  • Tack,


    "Of course it is conceivable that capital losses could reduce the Fed's net income to zero [note: from current $83 billion-wmw] or even gererate net losses. I such unlikely circumstances, the Fed's capital base would be maintained by letting remittances to the Treasury fall to zero. In the most extreme case, future remittances would also be reduced (and recorded as a change in deferred credit) but the Fed's capital base and financial position still would remain completely secure."


    1. To suggest that a possiblity exists to wipe out $83 billion a year of remittances and take that number down to zero or negative - suggests the possibility (without probability discussion) of capital losses of consequences.


    2. Interestingly, it appears the Fed is immune from destruction of its capital base, as all it has to do is secure an IOU from the Treasury to protect from having to wipe out its "Paid in Capital" or go seeking additional capital from member banks.
    4 Jun 2012, 03:49 PM Reply Like
  • WM:


    You last comment is consistent with the fact that the Fed has unlimited power to create currency.
    4 Jun 2012, 03:58 PM Reply Like
  • There's a problem with Hussman's line of thinking. To get to a 10.00% yield for 10 years, stocks would have to be so undervalued that a 1 year reversion to the normal price level would return 39.28%.


    I can imagine a hardy band of speculators bidding the market up, before Husshman's followers have finally bought in.


    Now to get that 20.00% 10 year return, the market would have to be so low that a 1 year reversion would return 234.30%. Not very likely, in my book.
    4 Jun 2012, 02:46 PM Reply Like
  • Tom, I'll let you and Hussman argue about the math.
    4 Jun 2012, 03:43 PM Reply Like
  • Two questions:


    1. What are you calling 'normal price'? Until the 1990's 10 year return projections (using H's methods) tended to bounce around 10%. So, arguablye 10% IS normal.


    2. Why would you assume that the market would revert to normal from a secular bear market low in one year? Never happened before.
    4 Jun 2012, 04:38 PM Reply Like
  • Bixbubba,


    The point is, it will not take 10 years to revert to a normal level. From March 2009, with the S&P at 667, it took less than two years to hit a normal level, 1,200 at the time, which it reached in November 2010.


    That returned 42% annualized. Of course, once the market got up to 1,200, prospects for a long-term rate of return much in excess of the historical average real return of 7% were much diminished.


    I get a normal price by using a historical average ratio of the S&P 500 to either GDP or NIPA corporate profits. Here's a link to an article I wrote here on Seeking Alpha:

    4 Jun 2012, 05:04 PM Reply Like
  • 52 wk high in the S&P = 1422, then subtract 10% = 1279 or 20% = 1137.6.


    I heard the 800 number earlier this morning on Bloomberg TV and am confused by where it originates from?
    5 Jun 2012, 10:17 AM Reply Like
  • He is talking about potential returns in the future years. Based on Hussmans projections the S&P needs to get to 800 in order for it to give a 10% annual return over the next ten years.
    5 Jun 2012, 05:53 PM Reply Like
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