Tags: Hussman | debt | margin | stock

Hussman: High Stocks Prices Depend on High US Debt Continuing

By John Morgan   |   Tuesday, 18 Jun 2013 07:55 AM

Investors are chasing stocks in the face of dangerous market distortions, according to fund manager John Hussman, who says that corporate profit margins are bloated 70 percent above historic norms because of soaring government and household debt accumulation.

Hussman, founder of the eponymous Hussman Funds and a frequent critic of the Federal Reserve, said in his weekly newsletter that the primary driver of corporate profits has been the willingness of the government and household sector to take on massive debt.

"Simply put, the deficits of one sector must emerge as the surplus of another," he wrote.

Editor's Note:
Economist Warns: 50% Unemployment, 100% Inflation Possible

"The government deficit alone recently blew out to 10 percent of GDP [gross domestic product]. Where did it go? Well, total U.S. corporate profits are normally only about 6 percent of GDP, but they recently blew out to 11 percent of GDP."

Hussman said the dominant investing concept today boils down to "don't fight the Fed" and an unquestioned faith that the central bank will continue its ultra-loose monetary policies.

Such faith rests on the assumption that stocks will advance until the Fed's quantitative easing (QE) program ends, he claimed.

"But this belief rests on the hope that tens of millions of investors can ultimately get out at prices that rely on all of them being in. Equilibrium is a tricky thing."

At its June meeting this week, the Fed — at least for now — will not dial back the pace of QE, Hussman predicted, but will instead turn the volume up on warning rhetoric about its eventual tapering.

"I don't see that [a reduction in QE] as something investors should completely rule out, but my guess is that the accompanying statement will instead include increased references to 'benefits' and 'risks.'"

Most bear market declines wipe out more than half of the preceding bull market advance, Hussman noted.

According to his research, the recent May 2013 stock market peak was close to the most richly valued bull market peaks in history, which in order of most overvalued on a profits-to-earnings basis came in 2000, 1929, 2007 and 1930. Each of those prior peaks was followed by a bear market loss that exceeded 40 percent.

Financial markets have adopted the view that the Fed will be cautious in its meeting this week, Reuters reported.

"Everyone wants clarity on what is going to happen and when it is going to happen, but I don't think we are going to get that because the Fed is not going to box itself in to something," said Dan Morris, a global macro strategist at JPMorgan Chase in London.

"This uncertainty is something the market is just going to have to get used to. ... Today the market is back up but does that mean everything is hunky dory again? I don't think so."

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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