Tags: john | Hussman | Market | Ponzi | Scheme

Hussman: Current Market Is a Ponzi Scheme

Monday, 04 Oct 2010 12:41 PM

Economist John Hussman says the current market is a Ponzi scheme.

"To some extent, I view current market conditions as something of a 'Ponzi game' in that valuations appear neither sustainable nor likely to produce acceptably high long-term returns, and speculators increasingly rely on finding a greater fool," Hussman writes in a weekly note to investors.

“Undoubtedly, we have periodically missed returns due to our aversion to risks that rely on the ability to find a ‘greater fool’ in order to get out safely,” Hussman notes, but it is important to recognize that speculative risks aren't a source of durable long-term returns.

"As the mathematician John Allen Paulos has observed, "people generally worry only about what happens one or two steps ahead and anticipate being able to get out before a collapse... In countless situations people prepare exclusively for near-term outcomes and don't look very far ahead.
They myopically discount the future at an absurdly steep rate."

Meanwhile, Hussman says, “the U.S. financial system appears to be a nicely painted dam, behind which a massive pool of delinquent debt is obscured.”

“A significant correction in valuations and resolution of the growing backlog of delinquent debt may finally restore strong ‘investment merit’ to the U.S. stock market, but only after a greater amount of pain and adjustment than most investors seem to anticipate.”

Large corporations continue to borrow huge sums of money, but most appear to be sitting on their cash instead of spending it, which may benefit shareholders in the long run.

“They are still holding on to more cash in the same way that Noah built the ark,” David Rosenberg, chief economist at Gluskin Sheff told The New York Times. “It is very telling.”

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Economist John Hussman says the current market is a Ponzi scheme. To some extent, I view current market conditions as something of a 'Ponzi game' in that valuations appear neither sustainable nor likely to produce acceptably high long-term returns, and speculators...
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Monday, 04 Oct 2010 12:41 PM
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