Hussman Says Equities Priced To Offer Low Returns, Accompanied by High Risk

[MichaelB]

Hussman has become emotionally committed to one outcome. This has compromised the value of his investment advice.

Confirmation bias is a substantial risk right now. I'm not suggesting this re Ha's original post, but in general. One analyzes, develops an expected outcome and then focuses on analysis that supports that conclusion.

Over the next few months a global economic slowdown seems likely. I would imagine the media will go into a frenzy. It may create some buying and selling opportunities. Beyond that, the global economy still appears to be in a growth phase greater than ever before, and betting against that could end badly for investors. This will be a good time to stick to one's investment plan.

People in the withdrawal phase should limit their equity allocation to what they can afford to lose.

 

[haha]

Suffice it to say that I stop bothering to look at any clock that only shows one time of day all the time.

With respect to the S&P/general market, IMO we are in a general economic recovery that is moderately sluggish and can be expected to have some fits and starts. That is what we should expect of a post credit crisis recovery: a lot of damage was done and it takes a long time to recover. But the recovery is taking place and firms seem to have the ability to generate quite a lot of cash overall and the environment serves as a moderate but sustained tailwind to business results. That is a scenario where I want to be long equities and patient through the kerfluffles that will inevitably happen.

When I look at the individual businesses I am invested in, I see lots of really positive devleopments, management teams executing on solid business plans, and strong cash flow generation and growth. None of this seems to be getting any respect from investors, but since I am a long term investor in what I own I don't really care in the short to medium term. YMMV.

Remember how well that worked in early 2008?

Anyway, accurate information cannot be harmful, one can always use it or not. And, as a matter of history, Hussman was not saying the "same thing" in March of 2009 that he is now saying. Although he did accurately point out that valuations, while better than earlier, were not anywhere close to some prior long term lows.

IMO this history remains to be written.

Beyond that, the global economy still appears to be in a growth phase greater than ever before, and betting against that could end badly for investors. This will be a good time to stick to one's investment plan.

This may be true. However, I see my greater risk in continuing to hold all the equity that I feel income and taxation considerations recommend, rather than in being underinvested in equities.

If I were a tax free investor, I would be at least 80% cash right now, but I am not, so I am not.


Ha

 

[eytonxav]

Hussman's funds generally perform better in down markets and fall short in up markets. Really seem to be more or less designed to be market neutral. Once he adopts a view of the market he does not readily admit he missed it, at least thats my perspective of him.

 

[Gone4Good]

Remember how well that worked in early 2008?

I agree.

One thing I learned in 2008 is how easily liquidity can masquerade as good fundamentals. Unfortunately, I know of no good way to disentangle the two. So the only thing I can do is apply a higher discount rate whenever the liquidity spigot is open . . . like now.

 

[clifp]

In my neck of the woods, I pay 2.5% of the monthly rent (less than 20bp of the property value) to have the property managed by a real estate company. They find new tenants when needed and deal with all requests, complaints, and issues. The only thing I've done in over a year is make sure the right amount is deposited into my account every month. Well worth the price.

My that is a very low rate. In Vegas property management runs about 8% and can be as high as 10%.

 

[clifp]

When I developed my strategy for retirement income I decided that I didn't want to rely on the stock market casino. So I bought a rental property. Once the mortgage is paid off it will have cost me $170k in mortgage, taxes and upkeep...but I get $15k a year from it and I could sell the place now for $250k. It will cover half of my basic retirement costs.

I am off to Vegas next week where my intention is to buy a rent property or two, with the distinct possibility of adding a few more in the next year.

It is interesting that during the 2000 real estate was the equivalent of growth stocks it was all about appreciation. Now days in many markets real estate is equivalent to a dividend or value stock, the growth prospects aren't all that exciting at least in the short-term, but the yield is quite decent near 10%

 

[MichaelB]

This may be true. However, I see my greater risk in continuing to hold all the equity that I feel income and taxation considerations recommend, rather than in being underinvested in equities.

If I were a tax free investor, I would be at least 80% cash right now, but I am not, so I am not.

Then why not sell? If your expectation is for a substantial decline in equity prices, the tax cost is less.

 

[Gone4Good]

It is interesting that during the 2000 real estate was the equivalent of growth stocks it was all about appreciation. Now days in many markets real estate is equivalent to a dividend or value stock, the growth prospects aren't all that exciting at least in the short-term, but the yield is quite decent near 10%

Here's something to get you excited . . .

when this construction cycle will have run its course, the United States will have first have spent an excess $300 billion, and then fallen short of trend by a cumulative $2 trillion of construction spending not undertaken. The net effect will be an at least $1.7 trillion construction shortfall in the United States: $1.7 trillion of houses, apartment buildings, offices, and stores not built.

. . . When incomes, production, and employment in the United States return to their trend levels, Americans will demand an extra $1.7 trillion worth of buildings to live in. And those buildings will not be there.

 

[haha]

Then why not sell? If you expectation is for a substantial decline in equity prices, the tax cost is less.

The usual reasons, one never knows for certain, my tax picture will be better next year, hard to replace the income especially after paying a substantial tax, etc.

Anyway, my expectation is not for a substantial decline. My "expectation" derives from that under these circmstances in the past, returns going forward were modest, but risks considerable. This is quite different from calling for a large decline.

IMO holding is different from new buying, and there are different burdens of proof.

Ha

 

[REWahoo]

[-]When[/-] If incomes, production, and employment in the United States return to their trend levels...

Fixed it for [-]ya[/-] him...

 

[clifp]

Then why not sell? If you expectation is for a substantial decline in equity prices, the tax cost is less.

I went through a tax analysis in earlier post. You have to be pretty much certain that equity prices are going to be lower in 5 years than they are now to sell and stick the money in a CD, since the CD rates are so low you'll loss 5% of your money after taxes. Back in 2007 if you were nervous of correction you could sell pay capital gains and stick your money in a 6% 5 year CD. In 2012 those CD would mature and you'd have ~25% more after tax money.

That's way HaHa strategy of selling off equities in tax deferred accounts makes so much sense, and why I started copying it today.

 

[Gone4Good]

Fixed it for [-]ya[/-] him...

Yup, an obvious fly in the ointment.

Although I don't expect 9% unemployment to last forever. And once those people find work, I imagine they'll want to move out of their relative's basements.

 

[arebelspy]

Here's something to get you excited . . .

I read too much Patrick.net to believe all that, but I sure hope it's true.

Though I think Real estate will be depressed for the next 4+ years, with the giant shadow inventory. Meaning low new construction for years to come. Meaning that graph will only get worse. At some point one figures it has to come back, unless our economy totally collapses...

 

[MichaelB]

Here's something to get you excited . .

From DeLong's post

When incomes, production, and employment in the United States return to their trend levels, Americans will demand an extra $1.7 trillion worth of buildings to live in. And those buildings will not be there. And demand for construction will come roaring back. The next decade will be likely to see--if we do recover to the previous long-run trend, that is--a construction boom to put the mid-2000s construction boom in the shade. But that is not now. And that is not for some years to come.

Brad DeLong frequently rails against the Greenspan monetary policies – but they inspired much of the rally ion housing investment he references. The implication of his analysis is a current unfilled demand of 8.5 million housing units ($1.7T @ 200K per unit). I am doubtful.

 

[samclem]

Here's something to get you excited . . .

But the whole argument hinges on the slope of that blue line. I couldn't find the original article at the St Louis Fed, but I'd bet it is based on average rate of new construction since WW-II or some such. Those were some fairly heady years for the US economy--it seems far more likely that we'll have reduced demand for new and bigger houses, folks will probably learn to like what they have longer. The same demographic trend that is hurting SS--oldsters getting older and fewer young-ones coming up, will lead to the availability of more existing houses in the future. I think in a future with more restrained earnings growth and a reduced government push for artificially low mortgage rates (if we've learned anything . . .), maybe folks will find existing houses to be entirely satisfactory. We'll build more houses, but there's a considerable stock of existing homes that will hurt the building biz.

 

[MichaelB]

Anyway, my expectation is not for a substantial decline. My "expectation" derives from that under these circmstances in the past, returns going forward were modest, but risks considerable. This is quite different from calling for a large decline.
IMO holding is different from new buying, and there are different burdens of proof.
Ha

My expectation is also modest equity returns. But I see that not as many years of low numbers but instead as lots of volatility. In that case it would make sense to lower risk when equity prices are high. Sell, pay taxes, and wait for buying opportunities.

I also think that many of us have an aversion to paying tax that is in part emotional and clouds our investing judgment.

 

[haha]

My expectation is also modest equity returns. But I see that not as many years of low numbers but instead as lots of volatility. In that case it would make sense to lower risk when equity prices are high. Sell, pay taxes, and wait for buying opportunities.

I also think that many of us have an aversion to paying tax that is in part emotional and clouds our investing judgment.

So are you saying that you have gone to 0% or near 0% equity? It is not really clear to me what you are saying, or what you are in fact doing.

I sometimes have a hard time understanding what people are saying about investing. On the one hand, there is a belief in efficient markets. A strong desire and more than a little success at paying very low tax rates. A belief that one cannot reliably pick one investment over another. I believe that you may have said in a post above that one must keep to his plan. This of course might mean anything from day trading to rebalancing into an invariant AA once per year.

How about some reciprocal sharing here? What are you doing, and how does this relate to your market view as advanced above?

Ha

 

[lovinglife1]

Exactly what I did....I had a somewhat different plan at first...I bought 3 rental properties in 2005, all new properties in the $175K range...The idea was to rent them out to support the mortgages over 8-10 years and then sell them all to fund my retirement home....Well, 5 years on, I have paid them all off and have recently purchasing my retirement home on Lake Travis....But, with a low interest rate, carryover losses (depreciation, mortgage interest) of 100K, and the new mortgage interest, I am reaping a much tax base and paying no taxes on $41K in rental income...So, for the moment, I will carry the new mortgage funded by rental income for awhile...

 

[Gone4Good]

The implication of his analysis is a current unfilled demand of 8.5 million housing units ($1.7T @ 200K per unit). I am doubtful.

It does sound like a lot. I haven't dug into his analysis. I just posted it because the comments here reminded me that I had seen it.

 

[Webzter]

it seems far more likely that we'll have reduced demand for new and bigger houses, folks will probably learn to like what they have longer.

I agree. I think the trend of continually trading up in hopes of the big cash payout at the end is correcting. At least in the short-term, we may see more multi-generational (or multi-family, as I've seen slightly represented in many 'big house' developments) that'll further suppress demand for new inventory.

On the other hand, more and more people are willingly owning two houses (gotta have the cottage up north!) that maybe there is a recovery coming

I did have a fun discussion with our Realtor in Minneapolis just after the crash, though. He thought that if one could get investors together to buy up tracts of fire-sale cheap housing close to the city center and rehab it into medium-density gated communities, one would make a killing.

 

[nun]

I am off to Vegas next week where my intention is to buy a rent property or two, with the distinct possibility of adding a few more in the next year.

It is interesting that during the 2000 real estate was the equivalent of growth stocks it was all about appreciation. Now days in many markets real estate is equivalent to a dividend or value stock, the growth prospects aren't all that exciting at least in the short-term, but the yield is quite decent near 10%

I couldn't do that. My criteria for a rental property was to live on the premises and buy in a place where there was mature housing stock, not much new construction and a strong rental market. I also only wanted to rent to a single person or a couple to minimize the effort. I bought in an expensive neighbourhood which has made renting easy and given me good capital appreciation. I'm down 10% from the highest price, but the house is still worth twice what I paid for it in 1997.

 

[brewer12345]

Remember how well that worked in early 2008?

Anyway, accurate information cannot be harmful, one can always use it or not. And, as a matter of history, Hussman was not saying the "same thing" in March of 2009 that he is now saying. Although he did accurately point out that valuations, while better than earlier, were not anywhere close to some prior long term lows.

IMO this history remains to be written.

Ha

Touche.

I have the same problem with Hussman that I have with Bill Gross: they have a product to sell and spend most of their time talking their book. So I don't spend a lot of time taking them seriously because they are plainly biased. See also: Meredith Whitney (stop laughing)

I guess I have a hard time worrying about the total market because I don't own the total market. I mostly own companies trading at 3 to 6X EV/EBITDA, hard asset owners trading at less than liquidation value, and bond CEFs trading at silly discounts to NAV. When something I own gets to what I feel is an extended valuation, I sell it.

 

[haha]

I guess I have a hard time worrying about the total market because I don't own the total market. I mostly own companies trading at 3 to 6X EV/EBITDA, hard asset owners trading at less than liquidation value, and bond CEFs trading at silly discounts to NAV. When something I own gets to what I feel is an extended valuation, I sell it.

That sounds like a very sound program. Handy to be able to just ignore the general market too.

Ha

 

[brewer12345]

That sounds like a very sound program. Handy to be able to just ignore the general market too.

Ha

Did not say I could ignore it. As I am still working I simply bear the general market risk. If I really wanted to shut that down I would spend money and buy hedges, most likely puts. Thus far I have chosen not to do so, but I might eventually change my mind, especially if the hedge is attractively priced.

 

[Ed_The_Gypsy]

What is QE2?