Hussman: "I Expect the S&P 500 to Lose 2/3 of Its Value"

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.

The chart below offers a reminder of what this looks like, in data since the 1920’s. Look at the “errors” in 1988, 1995, and 2006. Count forward 12 years, and you’ll find the major valuation peaks of 2000, 2007 and today that were responsible for the overshoot of actual returns. The 2000 and 2007 instances were both followed by losses of 50% or more in the S&P 500. Look at the “errors” in 1937, 1962, 1966, and 1970. Count forward 12 years, and you’ll find the market lows of 1949, 1974, 1978 and 1982 that were responsible for the undershoot of actual returns. Those market lows turned out to be the best buying opportunities of the post-war era. When market cycles move to extreme overvaluation or undervaluation, they become an exercise in borrowing or lending returns to the future, and then surrendering or receiving them back over the remaining half of the cycle.

Measure what is measurable

Put simply, in my view, stock prices are rising not because Wall Street has thoughtfully quantified the effect of taxes, interest rates, corporate profits, or anything else. Instead, Wall Street is mesmerized by the self-reinforcing outcomes of its own speculation, relying on verbal arguments, optimistic projections lacking grounds in observable data, and enthusiastic assertions about cause-effect relationships that are accepted without the need for any evidence at all (much less decades of it).

Back to Galileo. Measure what is measurable, and make measurable what is not so. When we do this, come to understand the current speculative extreme as the tension between two observations that are not actually contradictory – just uncomfortable. One is that stock prices are indeed three times the level at which they are likely to end the current market cycle. The other is that there is no pressure for valuations to normalize over shorter segments of the cycle, as long as risk-seeking speculative psychology remains intact.

I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle. My impression is that future generations will look back on this moment and say “… and this is where they completely lost their minds.”

John P. Hussman


Is Hussman a PermaBear? No, not really, but it's easy to believe so, because for years on end he has been saying the same thing.

History suggests its unwise to invest at these stock market levels. GMO's expected returns are similar.

Some of my new readers were shocked when I posted that chart. However, GMO has been posting similar charts for at least a couple of years.

GMO's forecast goes out 7 years, Hussman's 10-12 years. There's plenty of room for more downside in the GMO position.

Ride the Wave

Bulls and even many bears will ride the wave for all its worth and then ride it all the way back down again.

In fact, it's impossible to do otherwise. Someone has to hold every stock and every bond 100% of the time.

Pension Fund Disaster

The sad part of this story is that despite the biggest bull market in history, pension funds are extremely underfunded.

Whether the decline is 33%, 50%, or 66%, pension funds will get crushed.

Heck, given 7% per-year assumptions, even flat returns for seven years will destroy many if not most of them.

Mike "Mish" Shedlock

No. 1-25

Reading Hussman for many years, he would be my 1 read if made to choose and highly respect his opinion and research.

(deleted message)

drhotdog. I don't mind people chiming in with well reasoned arguments for being perpetually long the stock market i.e. the only credible argument is that fractional reserve banking system has unleashed an unholy amount of monetary inflation over the past few decades. But when they start babbling about value this and growth that, the naivety meter starts to head to "11" with great haste. Hussman's analysis is fundamentally correct and I believe he will be proven correct in time (if not nominally, certainly in 'real' terms) but his mistake has been to ignore the Central Bank manoeuvres which have been instrumental to boosting risk assets and prevented the stock market crash of '08 from completing its cycle . There are a conga line of idiots on blogs who opine but don't understand (El Tedo etc). The GFC was a debt crisis (sub-prime was the trigger not the problem) and global debt then was $140trn. Today that total is $235trn+. The point that people fail to grasp is that, debt is senior to equity in the average capital structure i.e. when a company fails, equity holders get wiped out (because they are at the bottom of the pile) and debt-holders become the new owners of the company. With corporate debt now nearly 70% higher today than during the GFC what does that do to equity values in the next crisis? You could easily argue that the aggregate cram-down is going to be even more severe this time because the weight of debt makes the value of equity far less in a recession / depression. In other words, Hussman's estimate that equity values falling two thirds over the completion of the next cycle may be too optimistic. This is a complex situation that demands a degree of humility from those utterly unequipped to opine on it. Perhaps time spent learning instead of spewing uneducated garbage on blogs would be more profitable in the long run.


should read ....would now have a...(second last line


Hussman's graphs are in fact understated because GVA has been artificially inflated by revisions to the 2013 System of National Accounts which capitalised R&D and in-house software. These outstanding and highly significant graphs need to be adjusted for the rise in inequality which has seen the top 5% hoover up all the extra income, and then invest it primarily in shares. This has two effects. Firstly it makes current data incommensurate with previous data. It is to be expected that shares would be more highly valued and that this would be the new normal. Secondly, because personal consumption is so highly dependent on the movement in share prices, a proportionate fall in share prices would not have a disproportionate effect on the economy compared to previous crashes.


Down nearly 5% over 7 years, that is a real bear market. Even the presidency of GW Bush which included two selloffs, the stock market returned 3% over the eight years, so down this much, that is scary.