ERICOPOLY

This I don’t understand… If you know better valuation models, I mean models that from 1948 until 2003 have a track record of predicting stock market returns better than the ones on page 8 and 9, very well then I would like to see them… But I don’t understand how they could lead to different conclusions… Once again, either the data are flawed, or this time is different. Gio Okay, how about somebody makes a model that shows that every time the employment level has been this lousy, it has been followed by an economic recovery? Or how economic recoveries have always followed periods when housing construction has been this poor? Or market returns following forward P/E multiples of 15x. There are many things that could be presented, but Hussman is only putting in ones that support his conclusions. There are many value screens that work great when backtesting against data, as Hussmann is doing -- but they aren't necessarily predictive. How did the ECRI guys get it so wrong these past two years?

Well, first of all I hope he invested in WFC, while shorting the general market… That is much different than sitting in cash! The real problem with Mr. Hussman maybe is that he is not a very good stock picker! But that is a completely different story… Anyway, I am not interested in how good Mr. Hussman is as an investor… Who cares?! Instead, I wanted to understand if 51 people think the historical data he shows are flawed, or if 51 people think “this time is different”. Gio So if the data he shows is not flawed then necessarily "this time is different"? Right, you see there is a problem with that. How about if the data he shows is not flawed, but rather he is just putting up accurate data that doesn't actually support his conclusions? Take a look at twacowfa's comment about the profit margins in the domestic non-financial sector.

Eric, of course the charts I am trying to disprove have some relevance with the discussion on this thread!! Leave profit margins alone for a second, and just look at the chart on page 8 (Price / Revenue) and the one on page 9 (Market Cap / GDP). I am only interested in the past… no prediction about the future! My question is: are the data on those charts accurate? And, if not, can anyone show me better data, please? Gio The point about the hemlines is to show enough contrast that it would clearly be ridiculous and thus discarded, even if it showed a correllation. The trouble with what Hussman is presenting is that nobody can discard it out of hand because it is presented as the evidence that will settle all doubt, and unfortunately it is economic data (so you can't just laugh it off). Instead, you need to present a serious argument as to why "this time is different", as it will be perceived. So he sits within his impenetrable castle walls... Wells Fargo was about $22 two years ago, where was Hussmann?. It is frigging IDIOTIC to sit in cash when so many bargains have been available. He has been a fool.

This is true and I feel like the US promoted an acceleration of the nuclear trend when they hanged Saddam. Guess what kind of message that sent to other regimes? Uh huh, better arm yourself with nukes or the US is coming for you.

One thing he takes for granted is that today's profit margins are due to government and private sector deficits. So I have a two-part question: Are government deficits going to shrink in the decades to come? How high are private sector deficits today? I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins. So what if the government deficit keeps getting bigger? The operating profits of nonfinancial domestic corporations or subsidiaries as a percentage of GDP are about average historically. :) So the distortion comes from non-domestic corporations and/or financials. Why can't Hussmann invest in domestic nonfinancials?

When is Packer going to open a fund?

quote: He also says this downturn appears to be fairly modest and may be over before many people recognize that it even took place. http://money.cnn.com/2013/03/08/news/economy/recession-forecast/index.html So perhaps it's over now, and it holds true that few recognized that it even took place. So he is not wrong!

I could show you a chart of ladies' hemlines and my data would be accurate. It's up to you as an intelligent person to ask if hemlines, even if correlated, can be relied on without further thought.

Yes! But this is a “this time is different” argument. Instead, I wanted to know: does Mr. Hussman make mistakes in putting together historical data? Gio Mr. Hussman makes a claim that corporate profits are high "because of..." . Then he presents only that data (spending levels). Is this approach prone to making a mistake? I think so.

On the positive side, if Iran develops nukes the US won't start a war with Iran. We only bomb/invade the countries that don't have nukes.

"disprove" is an interesting request. Has anything in fact been proved by that graph? One thing it doesn't account for is the supply of labor and presence/absence of wage pressure. Which period in that graph going back to 1950 has a labor market similar to today's?

This is a very good question and the answer is: profit margins will keep getting higher! ;) But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do! Gio I think his correlation might just be completely full of shit. Does Japan have record profit margins? http://boards.fool.com/the-most-recent-personal-savings-rate-just-came-in-30965776.aspx Thanks. The first few sentences say it all: The most recent personal savings rate just came in at +4.9%. The government deficit as a % of GDP in 2013 is expected to come in at -3.9%. This thread was partly about Hussman's claim in 2012 and again earlier this year, that the sum of these two rates determined, by accounting identity, the corporate profit rate.

This is a very good question and the answer is: profit margins will keep getting higher! ;) But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do! Gio I think his correlation might just be completely full of shit. Does Japan have record profit margins?

One thing he takes for granted is that today's profit margins are due to government and private sector deficits. So I have a two-part question: Are government deficits going to shrink in the decades to come? How high are private sector deficits today? I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins. So what if the government deficit keeps getting bigger?

Can't Hussman invest in areas that aren't showing record profit margins, like banks and insurance companies? Are the interest payments on bonds that an insurer counts as income... are they too high from a historical standpoint? His argument sounds like that of a young man who refuses to date women because (due to the aging baby boomers), demographically women are older than they used to be and he only wants a young woman. For example, he brings up bank insolvency again but those worries are long past. I think he is trying to justify why he didn't buy the market bottom and of course, it wasn't because he was wrong that the market rallied, it's because of an accounting fraud. You missed the bottom, quit whining baby! There were lots of bargains to choose from -- you didn't need to stay away simply because of banking insolvency.

The more expensive the overall market (the greater it's total valuation mass), the greater the gravitational pull it will exert on undervalued stocks. This happens when people trade expensive for cheap. There comes a time where a lot of stock become expensive and few cheap ones remain. This is a bullish outcome for the prospects of those cheap stocks. I am talking about truly cheap stocks, not just ones that are "cheap" for good reason.

I tend to think my portfolio will gain about 35% next year (from now through end of 2014), and that makes me bullish. That's without using leverage. It has nothing to do with central banks making me go into stocks. A 35% probable return is enough to do it for me. I also tend to think people will warm up to what's in my portfolio at an accelerating pace given that less opportunity is available elsewhere -- that's my efficient market hypothesis, I will expect a call from Sweden any minute now.

Look at the relative headwind coming from the US Treasury this year. They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much. On absolute terms, it's still a deficit. But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no? Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut. http://www.usgovernmentspending.com/federal_deficit_chart.html FY 2013: $680 billion FY 2012: $1,087 billion FY 2011: $1,300 billion FY 2010: $1,294 billion Note that it will start increasing again due to structural issues (at least according to CBO): http://www.calculatedriskblog.com/2013/08/update-shrinking-deficit.html Yes, but before that happens it's expected to roughly halve from present levels (relative to GDP): Quoting: For the current fiscal year (ends September 30th), the CBO is projecting a deficit of 4.0%. This is down sharply from 7.0% last year. And the CBO expects the deficit to fall to 2.1% of GDP in 2015.

Money isn't easy. The Fed tries to make it easy, but then it goes through this filter (aka "the banks") who are exceptionally difficult to borrow from. The banks aren't reporting much lending growth, indicating that as easy as the money may be, it's not driving the economy on any kind of debt binge. Not consumer debt anyhow. My comments are in relation to what your experience would be if you walked into a bank and wanted a loan, as a consumer.

Look at the relative headwind coming from the US Treasury this year. They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much. On absolute terms, it's still a deficit. But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no? Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut. http://www.usgovernmentspending.com/federal_deficit_chart.html FY 2013: $680 billion FY 2012: $1,087 billion FY 2011: $1,300 billion FY 2010: $1,294 billion

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations. Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms). Anyhow, it seems to me that the last two mega-crashes in the stock market were not just about lofty stock prices -- they were about unsustainable bubbles in sectors of the real economy. They were magnified by industries that quickly moved from booms into depressions, and that dragged general employment down and led to recessions (that fed into stock prices). Right, I would agree here, as well. I think this is Klarman's point. The economy is so weak that the fed is not only keeping interest rates low in the traditional sense but with QE, too. They have been doing this for years now and the economy still isn't back to normal. As he sad "there is no free lunch" but, if this works out as people hope, there would be. Perhaps "this time is different" and monetary shenanigans will work out with no super tough pain to get a full recovery, just a longer, less painful way there. This process can take quite a while. That's why I'm cautious but not "batten down the hatches" cautious yet. Things are rarely as good or as bad as we think. They did raise taxes this year. Times are not quite as easy as some of the pundits claim.

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations. Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms). Anyhow, it seems to me that the last two mega-crashes in the stock market were not just about lofty stock prices -- they were about unsustainable bubbles in sectors of the real economy. They were magnified by industries that quickly moved from booms into depressions, and that dragged general employment down and led to recessions (that fed into stock prices). Housing going from mega-boom into Depression overnight was just catastrophic. I mean, that's a real Epic one that we'll probably never top in my lifetime.

That is something that can go on for a heck of a long time -- look at Japan's indebtedness. But I've seen it mentioned many times that it doesn't need to go on for a long time -- only until the private sector deleveraging is over, and we're 1/2 there already (according to a few sources). Meanwhile, debt is growing at a slower pace compared to at the start of this process. The slowly growing economy is gradually lifting government revenue. Inflation, when it comes, will at least be lifting the imputed earnings of the indebted Americans. Take that girl we recently talked about who has $250,000 of student loans and $25,000 of income. Were inflation to be 5%, she would have tax-free imputed income of $12,500, which is a 50% increase over the $25,000 she currently makes.

The Tesla boom you mention is purely stock market related. The tech boom wasn't just a stock market boom -- it was tons and tons of new startup companies ordering tons and tons of equipment using debt that would never be paid back. So it created a real economy that collapsed. Tesla has not spawned a real-economy boom. It's just a stock that went up -- did not drag GDP along with it.

I have been front-and-center in every (2 for 2) boom of my adult life -- perhaps that's why I thought they were so obvious. I had sudden gains from employee options that were suddenly gone. Then, given that Seattle had the 2nd-worst economy (behind Portland) after the tech bust (due to all the laid-off tech contractors), I was able to leverage my Microsoft salary with real estate rentals. The Seattle market wasn't appreciating while other markets in the country were up 20% annually -- I just speculated that the same would happen in Seattle once the local job market recovered. I made a quick little fortune when Seattle had a couple of 20% years of it's own. It was at this time that the Fairfax options came along in 2006 -- I had a couple of hundred thousand to invest from my easy money in real estate. Tada! So, maybe you are right that there is a boom going on right now in the areas you mentioned, and perhaps I'm not seeing it because this time I'm missing out on it. But I'm having a little mini-boom of my own in BAC, which despite the boom-like returns is really still trading at recession-level valuation.