Business Insider: 'It Has Always Ended in Tears': A Market Bear Who Called the Dot-com Bubble Says
Article by William Edwards in Business Insider
It's become a common justification among investors for record-high current stock market valuations: it's Fed support.
The heightened liquidity in the market thanks to zero interest rate policy and the $120 billion per month in asset purchases from the US central bank explain and excuse steep valuations, so the argument goes. Another argument is that S&P 500 earnings have outstripped analysts' expectations since the depths of the pandemic last year.
But to John Hussman, the president of the Hussman Investment Trust, that's all wrong. And investors are making a grave mistake in believing this narrative.
Hussman, who called the dot-com bubble, wrote in a recent note that investors are misunderstanding how Federal Reserve stimulus actually props up markets. Its real effect is on investor psychology, he said. In other words, even if the Fed continues to supply liquidity, it doesn't necessitate that stocks will remain elevated or be immune to poor performance.
"The thing that 'holds the stock market up' isn't zero-interest liquidity, at least not in any mechanical way. It's a particularly warped form of speculative psychology that rules out the possibility of loss, regardless of how extreme valuations have become," Hussman wrote in a September 12 note.
"We've never seen this much zero-interest base money before, but we certainly have seen the speculative psychology it relies on, and it has always ended in tears," he added.
As implied at the end of the above quote, Hussman warned that this speculative investor mindset will have serious consequences.
In a more dire scenario, Hussman warns of the possibility that stocks drop 66% to return to normal valuation levels.
"At best, I believe [investors have] placed themselves in a position that is likely to be rewarded by a very long, interesting trip to nowhere over the coming 10-20 years," he said. "At worst, they may discover the hard way that a retreat merely to historically run-of-the-mill valuations really does imply a two-thirds loss in the S&P 500."
Before you dismiss Hussman as a wonky perma-bear, consider his track record, which he broke down in a recent blog post. Here are the arguments he lays out:
- He predicted in March 2000 that tech stocks would plunge 83%, then the tech-heavy Nasdaq 100 index lost an "improbably precise" 83% during a period from 2000 to 2002.
- Predicted in 2000 that the S&P 500 would likely see negative total returns over the following decade, which it did.
- Predicted in April 2007 that the S&P 500 could lose 40%, then it lost 55% in the subsequent collapse from 2007 to 2009.
Still, the amount of bearish evidence being unearthed by ......
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