Investors are ignoring at their peril the fact that it would require at least a 40 percent meltdown in the Standard & Poor's 500 for stocks to simply return to their historical average valuations, according to investment manager John Hussman.
Hussman, president of the eponymous Hussman Funds and a frequent Federal Reserve critic, recited in his weekly market commentary his mantra that the U.S. stock market is overvalued, overbought and overbullish.
The prospect of the Fed tapering its ultra-loose monetary policies and the looming selection of a new Fed Chairman both create significant uncertainty, Hussman said.
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"My concerns are more extended, and are specifically related to the likelihood that the present market cycle will complete in a way — as market cycles have historically — that wipes out more than half of the gains of the preceding bull market advance," he wrote.
"My impression is that the losses even in a not-so-terrible completion of the present cycle may come closer to three-quarters of those gains."
According to Hussman, there is no evident provable link between the nation's monetary base and stock prices — even with short-term rates near zero and trillions of dollars in idle reserves sitting in banks, more Fed easing would be unlikely to boost the economy.
There is also no demonstrable link beween Fed easing and the unemployment rate, he maintained.
"I don't believe that all of history has become irrelevant; only that speculators are enjoying the temporary benefit of deferred consequences," he explained.
"In my view, the recent [stock market] advance has rested on excessive confidence in monetary linkages that have no theoretical or historical basis, and I believe that there's an anvil floating on this bubble."
Hussman believes the coming tapering of Fed easy-money policy is the result not of economic improvements, but rather of the dawning realization within the Fed that its policies are fueling dangerous financial distortions.
Many investors are fretting that interest rates will spike and stocks will plunge as the Fed winds down its monthly bond purchases.
But Mark Mobius, executive chairman of Templeton Emerging Markets Group, isn't one of them. He believes the danger is highly exaggerated and emerging markets remain the place to invest.
"I believe that this fear of tapering is quite overdone," Mobius told CNBC.
"What people fail to realize is that the so-called tapering is on top of an incredible increase in money supply in the U.S. These QE [quantitative easing] programs have been cumulative. It's not a situation where one stops and all that money goes away. It stays in the system," he stated.
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