The key takeaways from John Hussman, if you read my post yesterday:
(1) We can't really trust economic indicators like unemployment rate, consumer confidence, because they are lagging indicators. Prior history suggests that the economy is already well into a recession 6 months or more prior to the first official confirmation from these indicators and usually the bear market would have already started before the official confirmation. And the mainstream including CNBC are behind the curve as are most economists. Hussman's Recession Warning signals are however showing that we are on the cusp of a recession but cannot yet confirm
(2) Just like the fire, you must decide whether you want to exit before the crash or stay with it. As he puts it, you either be an idiot before the crash (keep powder dry while others having short term fun) or an idiot after one and the greater idiot will capitulate when the crash is already well into it (which most of us are).
(3) Valuations in the US market are extremely stretched based on Margin Adjusted PE (MAPE) and Hussman believes a 50-65% loss in the S&P500 is in the offing before the end of the current cycle, and even a 50% drop will only bring market relative valuation to where it was in 2002. BUT markets can stay overvalued for longer if investors have speculative bit in their teeth, as he puts it, meaning animal spirits and exuberance well and truly alive. As I mentioned, it is all about CONFIDENCE but the confidence we have today is not on firm foundation, it is based on illusion of cheap money continuing to prop up markets (see point below) and fundies not wanting to underperform relative to market movement (up) so they have to remain invested despite believing the lack or erosion in fundamentals. As you can see below, US is facing earnings erosion and the economy is also in retreat.
(4) Low interest rates dont justify higher valuations. Low interest rates in a low growth environment signify anaemic earnings growth ahead. Cheap money sustains high valuation and TINA (there is no alternative) is what mainstream wants you to believe so the party can go on.
(5) Passive and defensive investing is a form of capitulation - now we see more people buying healthcare stocks and ETF for safe haven signifying the end of the bull market is approaching.
(6) Cash has an option value- don't condemn cash as having no yield, true but when the Big Kahuna arrives, and you have abundance of cash and little exposure to stocks, the world is your oyster.
I may not have done enough justice to all that he said, but it would be well worth the read if you have the time.
