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Hussman: Investors Guzzling Kool Aid

By    |   Monday, 17 Aug 2009 02:59 PM

John Hussman says if you look carefully at the economic data that shows improvement, and adjust it to reflect the impact of government outlays, it’s hard to see anything other than continued deterioration in private demand and investment.

"What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7 percent of GDP," Hussman writes in a note to investors.

"That sort of tab will undoubtedly buy some amount of Kool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down."

It is not at all clear that short-term, deficit-financed improvement spells economic growth, Hussman notes. “This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up,” he says.

And while imagining a return to 2007 S&P 500 returns is pleasant, Hussman points out that investors should remember that those highs were based on profit margins about 50 percent above historical norms, combined with an elevated P/E multiple of about 19 against those earnings.

“Even if the economy is poised for a sustained recovery here, the belief that those joint outliers will be quickly re-established goes against historical precedent,” Hussman says.

Recent data dulled hopes for a consumer-led U.S. recovery, a trend some forecasters see as part of the "new normal" economy.

Markets need to get used to "a world without the U.S. consumer as last resort," Alan Ruskin, chief international strategist at RBS Securities told Reuters.

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John Hussman says if you look carefully at the economic data that shows improvement, and adjust it to reflect the impact of government outlays, it’s hard to see anything other than continued deterioration in private demand and investment."What we do see is a government that...
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2009-59-17
Monday, 17 Aug 2009 02:59 PM
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