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Apparently Amazon is planning to deliver orders using flying drones. We are pretty excited up here in rural West Virginia – skeet shooting meets the piñata!

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My mother – nearly ninety, still fully functional and living by herself – decided to walk around a shopping mall on Christmas Eve to enjoy the music and decorations. As she walked through the parking lot, a hurried shopper in a minivan ran over her. Now she is fighting for everything and anything, and there is nothing I can do.

No one knows how to handle such times – maybe there is no way to handle them except just endure them. All I can say – and this is mainly for my kids, but maybe is also relevant for some of you guys – is that this kind of experience teaches us how to handle other times, times that are good. Treasure your loved ones, spend time with them and enjoy them; treasure your own health, and preserve it; use your time wisely, for important things.

So, what does one do now? I am not sure. I guess you turn on the autopilot and just move forward with the usual things. In this case, that means . . . .

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“John Hussman – you mean the perma-bear? The guy who predicted seven of the last five recessions? I think maybe it is time to stop listening to that broken record; he has cried ‘Wolf!’ one too many times!”

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It is fair to ask why anyone would pay attention to John Hussman at this point. I will address that question forthwith, but first we must deal with the “Boy Who Cried Wolf” issue.

We all know the story of “The Boy Who Cried ‘Wolf’,” a fable created by the humble and benevolent slave Aesop to teach us that liars never prosper: A lonely shepherd boy seeks company by repeatedly saying that wolves are attacking his sheep when in fact all is fine with his ovine mob. Eventually, when a real canis lupus shows up, everyone ignores the boy’s cries for help and the wolf enjoys a fine mutton meal.

Which is fine as far as it goes. But from Herodotus we know that Aesop was not a wise and benevolent teacher, he was a lackey and servant of mighty King Croesus of Lydia, doing the King’s bidding and implementing his will. And the famous fable?

Well, here in West Virginia, we know a bit about manual labor; it is pretty much all we do. And the first rule of manual labor is: “get out of sight.” If people are watching, you have to work hard; if no one is watching, that is what we call “break time.” So the idea of a shepherd getting lonely and trying to get people to come out and watch him work is an idea that could only be dreamed up by someone like Aesop – a trough-feeding diplomat who talked for a living.

As for the moral: “Liars never prosper” . . . well, it is easily disproven: I offer into evidence Goldman Sachs. In fact, this moral is exactly the kind of rule that is never followed but always taught by leaders. Aesop was doing his job – the King’s work -- by teaching hard-working serfs to be honest. For example:

Tax Collector: “Say, Hiram, your ledger here seems a bit short. Are you sure you don’t have a few extra drachmas lying around somewhere?”
Hiram: “Gee, Amos, I cannot tell a lie. Yes, look under the mattress; you will find some cash I stowed away for the daughter’s birthday.
TC: “Thanks, Hiram. I will tell Aesop what a good citizen you are.”

In the high hills, we have a more realistic version of this fable, known as the story of Nervous Ned Nogastakin. As you might suspect from his nickname, Ned was a nervous fellow, always twitching and jumping at the slightest sound and prone to worries and fears about all sorts of unlikely events. One of Ned’s main bugaboos was an unreasonable fear that he and his small terrier Bruce were being stalked by wolves – unreasonable because the last confirmed wolf sighting in West Virginia was more than 100 years ago.

Time and again, Ned would come running from his fields back into his small community, shouting that he and Bruce had seen a wolf and everybody should seek cover. At first, the other field workers would hear his shouts oif alarm and come racing in as well, but after numerous false alarms, they stopped coming in. Pretty soon, when Ned and Bruce would go racing by, shouting “Wolf!!”, they would just laugh, saying, “That boy don’t know there ain’t been a wolf in these hills in a hunnert years,” and “Ned’s got his drawers in a bunch again.”

Then one fine autumn day, when the crisp wind roared over the ridge and the leaves swirled and danced across the fields, Ned came running by, screaming “Wolf,” and dashed lickety-split into his cabin, followed closely by Bruce. All the other workers laughed, because everyone knows there are no wolves in West Virginia. And of course they were right! There are, however – contrary to scholarly wisdom – mountain lions in West Virginia, and a fine old mountain lion had chosen this particular day to come down to the fields looking for hors d’oeuvres. While Ned shivered and quaked in his cabin, the puma gobbled down all of the other workers – the ones who had ignored Ned – leaving only their boots and their wallets

After the gory feast was completed, and the catamount had departed, Ned came out and surveyed the scene. He as sad for his friends, but what could one do? He had tried to warn them. So he picked up their wallets, pocketed their cash, and wandered off to town to drink to their memories.

And the moral of the story? Well, I guess I would say that it is as follows:

“If you are going to ignore the boy who cries ‘Wolf,’ you had better be right 100% of the time.”

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Here is John Hussman’s main argument, in a nutshell (this is my summary; I apologize if I have gotten it wrong):

1. He has developed back-testing methods that are robust and that have correctly predicted the two most recent market collapses.

2. These methods also sent a “buy” signal at the beginning of the recent market run-up. He ignored this “buy” signal for other reason – which IMO does indeed qualify him as a “perma-bear” – but his methods performed accurately.

3. He asks that we not confuse an evaluation of his methods, which have been very accurate, with an evaluation of his behavior, which has resulted in significant under-performance during the recent “Manassas Market” (my term, but a good one, I think – remember the Civil War!).

4. His methods are now sending supernova-level signals of impending disaster. He fears that people will reject these signals for reasons that are not logical – namely, his recent behavior, which is unconnected to these methods.

Suppose you were wandering along a narrow path beside the Russian River in Alaska and, rounding a bend in the trail, came upon two cute little grizzly bear cubs. One of them begins to bawl, and your companion says, “How cute!” and unlimbers his camera . . . .

Or, suppose you are wandering along the shore on the north coast of Hawaii when suddenly the ocean recedes dramatically, exposing a vast expanse of dry ocean bottom. Your companion says, “Pink petunias in Paradise, Roger, there are fish everywhere! Come on, let’s take a look!” and dashes out onto the newly exposed ocean floor . . . .

Or imagine that you see your sweetheart having a good time with your best friend and, knowing her so well, better than she knows herself, you know what is coming next, and you don’t see how to stop it . . . .

Now you have a sense of how John Hussman feels. I have no idea if his views have any merit, but the asserted stakes are very high: he believes that the cataclysm is nigh.

Possibly it is worth looking at his recent weekly letters. Possibly it is a waste of time. I leave that determination to the reader.

Here is a sampling:


Noting the apparent capitulation of such noted pessimists as Jeremy Grantham and Hugh Hendry, Dr. Hussman calls up the ghost of Keynes, saying:

. . . . for anyone waiting for me to capitulate, it’s important to understand that my views shift when the data shifts.

More specifically, noting the continued failure of the predicted market collapse to appear, he says:

I have no question – at all – that the market has simply climbed a higher cliff from which to plunge, but I learned in 2000 and 2007 that there’s no hope of convincing many investors of this sort of thing – despite the fact that these reckless speculative peaks seem so “obvious” after the market collapses.

We are observing overvalued, overbought, overbullish extremes that are uniquely associated with peaks that preceded the worst market losses in history (including 1929, 1972, 1987, 2000 and 2007).

My belief that the present situation will end very badly is driven by the lessons from a century of evidence . . . .


The stock market is presently at valuations where not only cyclical but secular bear markets have started. . . . From the standpoint of a century of market history, equity valuations are obscene.

Last week, the percentage of bearish investment advisors plunged to just 14.3%, the lowest level in 25+ years. The Shiller P/E (the S&P 500 Index divided by the 10-year average of inflation-adjusted earnings) is now 25.4 [a very high number]. . . Among the litany of other classic features of a speculative bull market peak, margin debt on the NYSE has surged to the highest level in history . . . issuance of leveraged loans . . . has now hit a record high, already eclipsing the previous record in 2007 . . . . New equity issuance is also running at the fastest pace since any point except the 2000 bubble peak. At the same time . . . investors are plowing more into stock mutual funds than at any point since the 2000 bubble peak.


. . . investors are taking current earnings at face value, as if they are representative of long-term flows, at a time when current earnings are more unrepresentative of those flows than at any time in history . . . investors have embedded the assumption of permanently elevated profit margins into stock prices, leaving the market about 80-100% above levels that would provide investors with historically adequate long-term returns.


. . . what concerns us isn’t simply the parabolic advance featuring increasingly immediate impulses to buy every dip . . . the psychology behind log-periodic bubbles . . . . It’s that this parabola is attended by so many additional and historically regular hallmarks of late-phase speculative advances.

The full litany of present conditions could almost be drawn from a textbook of pre-crash speculative advances. We observe the lowest bearish sentiment in over a quarter century, speculation in equities using record levels of margin debt, depressed mutual fund cash levels, heavy initial public offerings of stock, record issuance of low-grade “covenant lite” debt, strikingly rich valuations on a wide range of measures that closely correlate with subsequent market returns, faith that the Fed has put a “floor” under the market (oddly the same faith that investors relied on in 2007), and the proliferation of “this time is different” adjustments to historically reliable investment measures.

. . . the “increasingly immediate impulses to buy every dip” that characterize market bubbles have now become so urgent that we have to allow for these waves to compress to a near-vertical finale. The present log-periodic bubble suggests that this speculative frenzy may very well have less than 5% to run between current levels and the third market collapse in just over a decade. As I advised in 2008 just before the market collapsed, be very alert to increasing volatility at 10-minute intervals. The bell has already rung. The diva is already singing.


. . . the increasingly severe overvalued, overbought, overbullish features of the market here are coupled with soaring margin debt as speculators accumulate stock with borrowed money; record issuance of low-grade “covenant lite” debt; heavy issuance of new stocks – particularly characterized by speculative narratives; and a price trajectory that is eerily well-described by the mathematics of a “log-periodic bubble” that . . . has regularly been observed in financial bubbles across asset classes and countries across history. . . the no-arbitrage condition also gives us the mathematical tool to estimate the “hazard rate” or crash probability over any finite horizon. Our estimate is that this probability is soaring here.

The immediate objection, of course, is that one does not observe an obvious “catalyst” that would warrant a market decline, much less a crash. . . . Our positions are always built on observable evidence rather than scenarios. We already have sufficient evidence to be fully defensive. Only later will we read in the headlines exactly why this defensive position was warranted.

I’m quite aware of how willing investors are to dismiss objective evidence here simply by pointing to the unfortunate miss that attended my fiduciary response to Depression-like risks. That miss was unrelated to the present ensemble of evidence – now validated across a century of history – that concerns us here . . . these are distinctions that are best understood sooner than later. It's quite late already, and as Rudiger Dornbusch once said, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

Given the unfortunate resolution of similarly extreme overvalued, overbought, overbullish, rising-yield periods in history, it's almost mind-boggling that investors actually expect the present speculative run to end well. The accelerating pitch and shallowing corrections of the recent advance are worth noting. As I wrote about the oil market in July 2008 as prices raced toward $150 a barrel . . . When you have to fit a sixth-order polynomial to capture price history because exponential growth is too conservative, you're probably close to a peak.” Oil prices collapsed as low as $35 a barrel shortly thereafter. The preceding advance to the speculative peak was very well-described by a “log periodic bubble” of the sort that characterizes the S&P 500 at present

Best wishes to everyone for the new year.


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