Re: Bearish Information Re. Hussman
6/2/08 Wall Street Decides to Close Its Ears and Hum http://hussmanfunds.com/wmc/wmc080602.htm
6/2/08 Wall Street Decides to Close Its Ears and Hum http://hussmanfunds.com/wmc/wmc080602.htm
Originally posted by Snips from Hussman's weekly article
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For now, we remain tightly hedged, since the overall profile of valuations and market action remains unfavorable. As I noted a couple of weeks ago, “The reality is that as recessions develop (and I continue to believe the U.S. faces a much more significant downturn than we've observed to date), the data can take months to accumulate to a compelling verdict, and in the meantime, speculative pressures can remain alive.”
Lest investors allow the weak but benign economic reports to create an “all clear” impression for the economy, the latest FDIC Quarterly Banking Profile, released last week, should encourage them not to close their ears and hum. I have to say that having read these regularly since the early 1990's, this is easily the most dismal report I've ever seen.
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The implications of this go far beyond whether or not the prices of financial stocks have “discounted” the lower potential earnings. See, this isn't just a problem of whether the stock prices of financial companies are right. The larger issue is what happens on the real side of the economy, in terms of spending and lending and economic activity. I can't overly stress the points made by Martin Feldstein (the head of the National Bureau of Economic Research, which officially dates U.S. recessions) just a few weeks ago:
“I'll tell you what worries me. We saw house prices overshoot by 60% relative to costs of building and relative to rents. And I worry about the possibility that they will keep falling; they will spiral downwards. In the same way that they went much too high, they could go much too low. And if that happens, then we are going to see individuals feeling a lot poorer, cutting back on their spending, defaulting on mortgages, and we're going to see the holders of those mortgages see their assets, their capital being cut and therefore their ability to make loans being cut.”
In short, investors appear to be viewing the recent period of weak but not terrible economic news as a signal that the worst is behind us and that clear conditions are ahead. That could very well provoke some self-feeding speculation, which we would observe first through an improvement in breadth and price/volume behavior. But even if we do see some fresh short-term speculation, the evidence suggests that the worst of the credit problems are still well ahead.
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Here and now, we remain defensive and very skeptical of the notion that the U.S. has skirted a downturn.
With regard to the “economic stimulus,” I remain convinced that consumers are sufficiently indebted, and concerned about that debt, to use the bulk of the tax rebates in hand for debt service. In equilibrium, the U.S. government will have issued more Treasury bonds, in order to finance a similar contraction in mortgage indebtedness. The effect of the “stimulus” will simply be a modest increase in the volume of Treasury debt held by the public, foreigners and financial institutions, and a modest decrease in the volume of mortgage debt held by the public, foreigners and financial institutions.
For now, we remain tightly hedged, since the overall profile of valuations and market action remains unfavorable. As I noted a couple of weeks ago, “The reality is that as recessions develop (and I continue to believe the U.S. faces a much more significant downturn than we've observed to date), the data can take months to accumulate to a compelling verdict, and in the meantime, speculative pressures can remain alive.”
Lest investors allow the weak but benign economic reports to create an “all clear” impression for the economy, the latest FDIC Quarterly Banking Profile, released last week, should encourage them not to close their ears and hum. I have to say that having read these regularly since the early 1990's, this is easily the most dismal report I've ever seen.
..
The implications of this go far beyond whether or not the prices of financial stocks have “discounted” the lower potential earnings. See, this isn't just a problem of whether the stock prices of financial companies are right. The larger issue is what happens on the real side of the economy, in terms of spending and lending and economic activity. I can't overly stress the points made by Martin Feldstein (the head of the National Bureau of Economic Research, which officially dates U.S. recessions) just a few weeks ago:
“I'll tell you what worries me. We saw house prices overshoot by 60% relative to costs of building and relative to rents. And I worry about the possibility that they will keep falling; they will spiral downwards. In the same way that they went much too high, they could go much too low. And if that happens, then we are going to see individuals feeling a lot poorer, cutting back on their spending, defaulting on mortgages, and we're going to see the holders of those mortgages see their assets, their capital being cut and therefore their ability to make loans being cut.”
In short, investors appear to be viewing the recent period of weak but not terrible economic news as a signal that the worst is behind us and that clear conditions are ahead. That could very well provoke some self-feeding speculation, which we would observe first through an improvement in breadth and price/volume behavior. But even if we do see some fresh short-term speculation, the evidence suggests that the worst of the credit problems are still well ahead.
..
..
Here and now, we remain defensive and very skeptical of the notion that the U.S. has skirted a downturn.
With regard to the “economic stimulus,” I remain convinced that consumers are sufficiently indebted, and concerned about that debt, to use the bulk of the tax rebates in hand for debt service. In equilibrium, the U.S. government will have issued more Treasury bonds, in order to finance a similar contraction in mortgage indebtedness. The effect of the “stimulus” will simply be a modest increase in the volume of Treasury debt held by the public, foreigners and financial institutions, and a modest decrease in the volume of mortgage debt held by the public, foreigners and financial institutions.
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