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Hussman slams QE2


Zorrofan
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I am sorry to bring more macro economic arguments but this is a general discussion topic and Zorro and I kind of fall in the same camp at this time I think...

 

- QE2 has led to parabolic moves in most commodities: companies at home may not be able to pass costs to consumers.

- QE2 is bringing more inflation in emerging nations. In addition the last thing Europe and Japan need is their currencies to appreciate against the dollar. It basically increased global imbalances and currency/trade wars risks.

- QE2 has also led to increased expectations and may decrease confidence in government institutions when doubts arise.

 

The funny part is that it is not money printing per se, more like an asset swap or a duration modifier. Still, the markets interpret it as an inflationary event leading to all those speculative moves.

 

The real issue is too much debt and the fact that the private sector is in desperate need of de-leveraging. We have around twice the amount of debt than we had during the great depression in the private sector and this factor will be with us for a long time. If one looks behind the numbers in the last few months one will find out that data tend to show the possibility of a looming contraction coming again:

- 2/3 of growth in the last quarter was restocking and same for sales. This cannot continue unless consumer spending picks up.

- The housing market looks like it is double dipping. Realtytrack publish an astounding 107 months supply figure in the housing market (visible and shadow inventory). We are not even talking about the mortgage/foreclosure/robot signing issues.

- Railroad traffic definitively improved since 2009 but is around 10% below 2008 and 2007 levels. The subcategory auto transports is 25% below!

- Lending is not happening and banks are continuing to just buy bonds. QE2 might just be a disguised preemptive bond bailout by the way!

- Consumer metrics are still in contraction mode. Actually measures like ECRI, WLI, Consumer metrics, Consumer confidence etc... point to levels only seen during recessions or close.

- The job market figures obfuscated continuous job losses across the board. More and more are just giving up looking for jobs, unemployment benefits are expiring, states are and will lay off much more, many existing jobs are replaced by temporary ones too. Real unemployment is at around 17% to 22%.

- We are probably going towards more austerity with the GOP now.

- The market is not cheap under any measure.

etc...

 

One that does a great job at describing this debt saturation issue is Steve Kleen who saw the credit crisis early:

here is an interview: http://www.chrismartenson.com/blog/straight-talk-steve-keen/47466

 

What you call a correction could very well be a meltdown as we realize that our expectations about the future (in terms of valuations at least) are completely unrealistic and it may happen pretty soon.

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Guest broxburnboy

Probably but while the music is playing ....

 

Speaking of that we need a correction, which means the next minor event will be played up like a huge crisis. Any guesses.

 

The QE2 announcement marks a new milestone on the road to sovereign currency collapse and a new revised global monetary system.

Going forward the whole US fiscal deficit is being financed solely by the creation of new money... no more borrowing.. 100% money creation and wealth dillution.

The writing has been on the wall and documented/predicted by many credible sources for years, especially since the 2008 massive government intervention to prop up USD credit.

Many commodities and commodity related stocks have been front running this announcement and some have gone parabolic in the last week particularly in the junior precious metals markets. Silver prices have the additional tailwind of the recent regulatory revelation of massive fraud and regulatory failure. The housing finance market is plagued by similar revelations.

Things are not getting better ..they are getting worse for the USD.

This kind of news is not particularly welcome in a value investing forum, but for the first time we are beginning to see mainstream financial newsmakers starting to change their tune (its amazing how they can contradict yesterday's views in such a 180 degree switch).

It's not too late to get into commodities, precious metals and other companies who's income can be measured in real things. Its not too late to get out of investments that pay off nothing but fiat currencies and its derivatives.

It's not the real economy that's collapsing... it's the currency. Time to get real.

 

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Guest broxburnboy

Looks like Hussman is not buying the inflation talk:

 

"Likewise, we clipped our precious metals holdings to only about 1% of assets on price strength."

 

I'm not sure that quote illustrates Hussman's views on inflation, but regardless, anyone having that view should look at the recent price charts for agricultural and other commodities. End users actually take future delivery of these commodities and pass the wholesale price inflation down the pipe. There is a large pile of consumer price inflation already baked into the cake.. due to arrive on storeshelves near you early 2011.

Cheers

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http://hussmanfunds.com/wmc/wmc101108.htm

 

The old saying is don't fight the FED but is the FED leading the markets into the mother of all corrections?

Interesting reading......

 

cheers

Zorro

 

yeah...too bad his math was wrong!!!

"Let's do the math.

 

Historically, a 1% increase in the S&P 500 has been associated with a corresponding change in GDP of 0.042% in the same year, 0.035% the next year, and has negative correlations with GDP growth thereafter (sufficient to eliminate any effect on the long-run level of GDP). Now, even if one assumes - counter to reasonable analysis - that the GDP changes are caused by the stock market changes (rather than stocks responding to the economy), the potential benefit to the economy of even a 10% market advance would be to increment GDP growth by less than half of one percent for a two year period.

 

Now, as of last week, the total capitalization of the U.S. stock market was at about the same as the level as nominal GDP ($14.7 trillion). So a market advance of say, 10% - again, even assuming that stock prices cause GDP - would result in $1.47 trillion of market value, and a cumulative but temporary increment to GDP that works out to $11.3 billion dollars divided over two years. Moreover, even if profits as a share of GDP were to hold at a record high of 8%, and these profits were entirely deliverable to shareholders, the resulting one-time benefit to corporate shareholders would amount to a lump sum of $904 million dollars. In effect, Ben Bernanke is arguing that investors should value a one-time payout of $904 million dollars at $1.47 trillion. Virtuous circle indeed. "

 

He did: (0.042%+0.035%)*10%*10*14700 = 11.3

 

Should be: (0.042%+0.035%)*10*14700 = 113

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Economists are interesting. It really is the dismal science. I prefer those who make logical arguments vs. mathematical ones.

 

It seems as though the fed is fighting deflation. I think they have the tool kit to win and will do what it takes. So for me deflation is not the risk.

 

The main risk is unintended consequences and inflation. They will try to mop up the liquity when its time but how the hell will they know its time and these things tend to overshoot. We also have currency wars, and a bunch of other things that could go wrong.

 

I find Hussman a bit too complex and prefer Grant or Grantham.

 

I think they win their fight on deflation and loose with inflation / unintended consequences down the line.

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It's not too late to get into commodities, precious metals and other companies who's income can be measured in real things. Its not too late to get out of investments that pay off nothing but fiat currencies and its derivatives.

It's not the real economy that's collapsing... it's the currency. Time to get real.

 

I may be wrong, but this only drives the nail deeper into my skull telling me that this is a bubble.  Every ounce of my sensibilities tell me that trying to monetize these things and make economic sense is the DUMBEST thing I could do...thus I will remain incorrect for the foreseeable future on gold.  

 

The funny thing is that I deal with mining companies every day through Quantum.  Some are making money hand over fist, and their stock prices are following suit.  Yet, I think it is fool's gold!  The same thing happened in 1999 and early 2000...everyone was buying tech stocks.  Today...they buy resource companies!  And the more companies that pop up, the smaller that pie becomes.  There is a limited aggregate demand and utility for gold.  Presently, the demand is artificial...due to speculation, rather than utility.  At some point in time, that will correct - quietly or perhaps violently!

 

I will continue to own investments that I can buy at a discount to their intrinsic value.  An intrinsic value that I can calculate by discounting the future cash flows, or at a discount to the liquidation value of the underlying assets.  I'm ok with the rest of the world owning gold and giving up on equities.  They did that a year and a half ago, and we had our best year thereafter.  Cheers!

 

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However, I don't like when people like this are so single-minded that they are stretching to find data to support their theses, and make up new math techniques along the way.

 

I agree -- ALTHOUGH YOU ARE THE ONE DOING THE STRETCHING PREM.  Next time don't be so eager to criticize.

 

Husman simply and accurately calculated -- (0.042%*14.7T) + (0.035%*14.7T) = $11.3B

 

Basic stuff...

 

He didn't do -- (0.042%+0.035%)*10%*10*14700 = 11.3...which you obviously completely made up as a result of your inability to follow his reasoning.

 

And your assertion that (0.042%+0.035%)*10*14700 = 113 is completely irrelevant to the analysis and reasoning.

 

 

Personally not familiar with Hussman but couldn't let such a basic and somewhat arrogant error slip by on the board.

 

Best.

 

 

 

 

 

 

 

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I'm not a buyer of gold and other metals either -- fool's game at this point but Parsad writes...

 

I'm ok with the rest of the world owning gold and giving up on equities.

 

To which I respond -- come again?

 

The world has given up on equities -- huh?  

 

Have you lived in a cave for the past two months -- I believe the Nasdaq is up close to 18% in two months simply because of speculation/mania around QE2.  Did you not see the WSJ yesterday, which showed that investor bullishness on equities has gone parabolic?  This will all end terribly for equity investors in general -- guaranteed..just a question of when not if...

 

Reading Hussman's letter, he makes an excellent point -- one that Buffett has made numerous times over the years...I'll paraphrase...

 

Stocks are simply a claim on the future cash flows of a business.  QE2 does not increase the cash flows of most business (in fact, as a result of the consequent commodity inflation, QE2 will likely reduce future cash flows -- see KMB and Dean Foods).  QE2 has simply pulled forward/accelerated the price appreciation that would have come from the realization of future cash flows at best, resulting in far lower stock returns in the future.  More likely, the price appreciation resulting from Q2 is the result of speculation/mania that QE2 "will benefit stocks" and "cash is trash" so "get the risk trade on" as well as short covering.

 

I should add -- don't take that "living in a cave comment" personal...just a figure of speech...nothing personal.  

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However, I don't like when people like this are so single-minded that they are stretching to find data to support their theses, and make up new math techniques along the way.

 

I agree -- ALTHOUGH YOU ARE THE ONE DOING THE STRETCHING PREM.  Next time don't be so eager to criticize.

 

Husman simply and accurately calculated -- (0.042%*14.7T) + (0.035%*14.7T) = $11.3B

 

Basic stuff...

 

He didn't do -- (0.042%+0.035%)*10%*10*14700 = 11.3...which you obviously completely made up as a result of your inability to follow his reasoning.

 

And your assertion that (0.042%+0.035%)*10*14700 = 113 is completely irrelevant to the analysis and reasoning.

 

 

Personally not familiar with Hussman but couldn't let such a basic and somewhat arrogant error slip by on the board.

 

Best.

 

Munger: do the math.

 

Hussman "said a 1% increase in the S&P 500 has been associated with a corresponding change in GDP of 0.042% in the same year, 0.035% the next year."

 

That means a 1% change in S&P500 = a 0.077% change in GDP over 2 years.

 

That means a 10% change in S&P500 equals 10x this amount, or a 0.77% change in GDP. 

 

0.77% of 14 trillion is not 11 billion, it is 110 billion.

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Cash flows may weaken but it may also be the lessor of 2 evils. I would rather hold Zimbabwean hard assets & stocks vs Zimbabwean currency though neither look appealing.

 

Call me crazy, but I dont think its a mania to move out of dollars, when the person who exercises considerable control over its value is telling you that its going to go down unless you move out. It seems quite rationale actually to probably move along. You may benefit by staying in while others are scared out, but that doesnt mean they are fools.

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I agree -- ALTHOUGH YOU ARE THE ONE DOING THE STRETCHING PREM.  Next time don't be so eager to criticize.

 

Husman simply and accurately calculated -- (0.042%*14.7T) + (0.035%*14.7T) = $11.3B

 

Basic stuff...

 

He didn't do -- (0.042%+0.035%)*10%*10*14700 = 11.3...which you obviously completely made up as a result of your inability to follow his reasoning.

 

And your assertion that (0.042%+0.035%)*10*14700 = 113 is completely irrelevant to the analysis and reasoning.

 

Munger,

 

Could you elaborate? Hussman's numbers still don't look right to me. Hussman says that a 1% increase in the S&P500 is followed by a .042% increase in GDP the next year and a .035% increase in GDP the year after that. Then he says that a 10% increase in the S&P500 works out to a temporary increment to GDP of 11.3 billion over two years. The math should be the following, right?

 

(0.042%+0.035%)*10*14700 = 113

 

This is exactly what watsa_is_a_randian_hero is saying, I believe.

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Have you lived in a cave for the past two months -- I believe the Nasdaq is up close to 18% in two months simply because of speculation/mania around QE2.  Did you not see the WSJ yesterday, which showed that investor bullishness on equities has gone parabolic?  This will all end terribly for equity investors in general -- guaranteed..just a question of when not if...

 

They haven't moved into equities because of QE2...the media loves to talk about that because they get their information directly from Wall Street traders.  The truth is that institutions moved in because yields were so much lower elsewhere.  I told you that over two months ago, and said it was a certainty that capital would eventually move in looking for higher yields...you disagreed vehemently...guess what? 

 

At some point in the near future, you will see a natural correction in equities.  Further down the road, we may see a large scale correction.  But there is little in the way of that happening in the near term.  Some investors are overly optimistic, and many are overly pessimistic.  The truth lies somewhere in between, which is a territory that few seem to inhabit these days.  Cheers! 

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I agree -- ALTHOUGH YOU ARE THE ONE DOING THE STRETCHING PREM.  Next time don't be so eager to criticize.

 

Husman simply and accurately calculated -- (0.042%*14.7T) + (0.035%*14.7T) = $11.3B

 

Basic stuff...

 

He didn't do -- (0.042%+0.035%)*10%*10*14700 = 11.3...which you obviously completely made up as a result of your inability to follow his reasoning.

 

And your assertion that (0.042%+0.035%)*10*14700 = 113 is completely irrelevant to the analysis and reasoning.

 

Munger,

 

Could you elaborate? Hussman's numbers still don't look right to me. Hussman says that a 1% increase in the S&P500 is followed by a .042% increase in GDP the next year and a .035% increase in GDP the year after that. Then he says that a 10% increase in the S&P500 works out to a temporary increment to GDP of 11.3 billion over two years. The math should be the following, right?

 

(0.042%+0.035%)*10*14700 = 113

 

This is exactly what watsa_is_a_randian_hero is saying, I believe.

 

Its ok, treasurehunt.  Hussman made an honest mistake.  On the other hand, I think munger needs to follow his own advice of "Next time don't be so eager to criticize."

 

While he is wrong, I would probably expect him to insult you now as well.  He has a history on this board of using insults as a defense mechanism. 

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Prem

 

You were wrong about asserting that he twisted the math to support his assertion.

 

However, you are correct that the impact would have been $113B instead of $11.3.  As with Hussman, I didn't ajust for the 10% appreciation vs. 1% used as the basis for the estimated 0.042% and 0.035% impact.

 

Further -- the point of the analysis was that net impact on GDP would be insignificant.  Now I don't have an opinion on whether a 1% rise in the stock market equates to a GDP impact of 0.042% and 0.35%.  And I also don't have an opinion on whether this neccessarily implies a 10% rise will have an impact exactly equal to 10x the impact of 1% -- seems like a stretch to assume the all variables hold at every level...  But assuming all of this is correct, the conclusion is accurate --  QE2 would have a neglible long term impact on GDP...whether it is an $11.3B impact or a $113B is a rounding error -- the guy wasn't so "single-minded that they are stretching to find data to support their theses, and make up new math techniques along the way."

 

 

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Munger - what would someone using the handle of Buffett's right hand man be buying these days?

 

We can argue all day about a damn quote but what are your favorite investment ideas? 

 

I like when people post their best ideas and they can be tracked.  There is no credibality to me when someone says "that stock just went up 500% and I caught it at the bottom".  To quote Belushi from "About Last Night"...pull this leg and it plays jingle bells.

 

So what is Munger doing with his cash these days?

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Further -- the point of the analysis was that net impact on GDP would be insignificant.

 

I understand the point of his analysis.  I stated I agree that any gain will be temporary and will not permanently effect long-run gdp.

 

However, he should maybe take a breather before getting so bent out of shape at the FED, and take some time to check his math. 

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truth is that institutions moved in because yields were so much lower elsewhere.  I told you that over two months ago, and said it was a certainty that capital would eventually move in looking for higher yields...you disagreed vehemently...guess what?  

 

At some point in the near future, you will see a natural correction in equities.  Further down the road, we may see a large scale correction.

 

Just to be clear -- I acknowledged at the time that stock prices could well rise for the reason you cite...but this would be trading based on the greater fool theory.

 

And -- "The truth is that institutions moved in because yields were so much lower elsewhere."   This would be somewhat analogous to a Fed induced Ponzi scheme -- no?  

 

Now let's see if you are honest -- you are basically asserting that if two assets are overvalued, one greater than the other -- buy the lower valued asset regardless of absolute value...no?  This has nothing to do with Buffett style value investing -- period.  

 

Also -- let's get this on the record...are you claiming the ability to accurately predict with certainty the timing and direction of  macro capital flows based on relative asset yields?  Your assertion that "I told you that over two months ago, and said it was a certainty that capital would eventually move in looking for higher yields"  would suggest you carry this delusional belief in your ability.  And also recognize, this assertion that you are pounding your chest about has nothing to do with value investing and everything to do with speculation/luck.

 

 

 

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Yes, Hussmann's math is incorrect:

 

- 1% increase in S&P500 equals 0.042% change in GDP:

 

Assuming a 1% change in total stock market valuation increases GDP by 0.042%, 0.042% of $14.7T would be $61.7B.  

 

Therefore, a 10% move would be $617B in the first year alone.

 

Cheers!

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Gentlemen

Could we get back to why this Board is so insightful and worthy of reading every day. And that is, in additon to commenting on Fairfax and Berkshire, trying to find companies which are undervalued, with good margin of safety, and are shareholder friendly just like Fairfax, Berkshire, Chou, Baupost, Longleaf, etc. do all the time. Too much bickering and "noise" going on here right now for me. Just my opinion.

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