Financial Markets Commentary

by

John Hussman on valuations

The saga of Broker Joe, from 2007

7 thoughts on “Financial Markets Commentary”

  1. – Prices are never too high to buy or too low to sell. Nobody knows how far it will go in either direction.

    – Risk is a function of what can happen rather than of what someone predicts. Extreme events in financial markets occur much more frequently than most people expect.

    – There is much to be said for puts and trailing stops. Of course these things are almost never discussed in popular financial media.

  3. Another way to estimate total stock market value is the Q ratio. That is from the beginning of the month, so it is a lot higher now. Even at the New Year’s low it was still high by historical standards.

    As Jonathan says, nobody knows. Human behavior and emotions can’t be easily measured and plugged into these equations. Without accounting for the human factor, we don’t know what the models are really telling us. We learned that in the 90s. The Q ratio hitting 1 signaling market value was equal to replacement value had always been a reliable danger signal. It still was I suppose, but the message changed from, ‘sell and head for shelter’ to ‘you’ll pay dearly for this some day’. Nice to keep in mind, but not exactly actionable anymore.

    I see it looks like Hussman partly conceded this:

    The role of history and evidence is to provide us with something we can learn, and apply in the future. There’s no question that the world can change in ways that violate past experience and offer new learning. But my sense is that the best kind of learning is coherent – you take the new evidence to shift your understanding in a way that makes it consistent with the entirety of experience again. You don’t just abandon everything you know and shrug, “Well, it’s a brand new world”. For our part, prioritizing market internals is sufficient to make things coherent again – the fact is that the entire total return of the S&P 500 from the 2007 peak to today occurred during periods where our measures of market internals were favorable, while nearly all of the 2007-2009 collapse (as well as the recent market weakness) occurred when they were not.”

    If we are constructing models of the world then, like Hussman, we also need to construct a model to know when our models are right and when they are wrong. So here his model of market internals will govern his models of limits.

    Then the next step is another model to put a traffic light on the previous model. Market internal models appear to work fine now, but if they are anything like limit models (and they are) then they some day won’t work fine.

    The next step is… you guessed it, turtles all the way down.

    Now, there is no doubt in my mind that objective truth exists and the world is intelligible enough to determine what objective truth could be. What is also painfully obvious is it takes a long time and sometimes long struggle to make that determination, and that determination will always be incomplete. Any attempts to make it complete are always circular, recursive, or illusions. Through a glass, darkly as the old saying goes.

    You don’t just abandon everything you know and shrug, “Well, it’s a brand new world”. That’s right, you don’t. We do have to make some models and some determinations. We have to proceed through this world with some faith in something. So then we model real things, things that last, things we can control, things we can defend.

  5. I don’t much care for financial markets and the day-trader mentality — more interested in the real economy where actual goods and services are produced. Financial markets of course play an essential role by permitting investments in the real economy — but financial mismanagement by our Betters, along with the excessive speculation they have encouraged, have resulted in the financial tail wagging the real economy dog.

    That said … two books I have been pondering. Mancur Olson’s 1982 book ‘The Rise and Decline of Nations’, and Tom Brown’s 2017 ‘Tragedy & Challenge’. Olson postulates that “distributional coalitions” develop over time in stable societies, where groups from unions to bureaucracies to cartels rationally use their power to grab a bigger piece of the economic pie for themselves, which in the long term shrinks the size of the overall pie and undermines the whole society. Brown focuses on the entirely irrational decline of English manufacturing since the 1970s, in large part due to failure to invest in people & plant, along with a good measure of old-fashioned English incompetence — which he contrasts strongly with the German approach to investing in training and equipment.

    Is it culture which gave the US “the best Congress that money can buy” (as the Chinese have been happily exploiting since Clinton days)? Is it culture with gave the English those plant managers who would never dirty their shoes by stepping onto the shop floor? And how do we (even, can we?) reverse the resulting hollowing out of the real economy, which is a major contributor to what is going to bring down the financial economy in the long run?

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