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John P. Hussman, Ph.D. Profile picture
@hussmanjp
Jul 17 • 7 tweets • 4 min read Twitter logo Read on Twitter
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As "quantitative tapering" continues, you'll see an enormous number of bad takes about "collapsing" M2, bank credit and so forth.

It will help to understand it's not loans that are declining, but idle cash reserves, held indirectly by depositors, well in excess of FDIC coverage. Image
2/ QE didn't encourage greater lending by banks. Bank lending since 2008 has grown at just 3.4% - slowest growth rate in U.S. history.

QE created a pile of (previously) zero-interest reserves that someone had to hold, everyone wanted to get rid of, and in aggregate, could not. https://t.co/fMqmjfPWBytwitter.com/i/web/status/1…
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3/ So what did QE accomplish? For more than a decade, someone - in aggregate - had to hold those Fed liabilities at zero. That discomfort caused investors to lose their minds trying to pass it off, buyer to seller, driving other investment assets to zero prospective returns. https://t.co/mj3ucsk0Xgtwitter.com/i/web/status/1…
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4/ The problem is that market cap is not "wealth." The wealth is in the cash flows. Extreme valuation only allows one holder to obtain a wealth transfer from some buyer who will hold the bag. Deferring risk does not eliminate risk. Here's what over a decade of ZIRP has created. https://t.co/JXYftA5lhztwitter.com/i/web/status/1…
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5/ Here is what people are calling a "new bull market." On our most historically reliable measure, equity valuations are more extreme than at any point in U.S. history prior to December 2020, with the exception of a few weeks surrounding the 1929 peak. Image
6/ Same valuation metric versus actual subsequent 12-year S&P 500 nominal total returns in data since 1928

More on valuations, popular "but what about" considerations, and other details here: https://t.co/LkOi7QndWhhussmanfunds.com/comment/mc2302…
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7/ Same metric with S&P 500 levels. The dotted lines use prevailing Treasury bond yields at each point in time to show levels that would be associated with varying "risk premiums" relative to bonds. The yellow bubbles show where estimated S&P 500 return vs bonds was negative. Image

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More from @hussmanjp

John P. Hussman, Ph.D. Profile picture
Apr 1
1/ The S&P 500 has suffered a total return of -10.3% since its steepest extreme in history.

The valuation measure best correlated with actual market returns is at levels never seen prior to Aug 2020, except a handful of months surrounding the 1929 peak.

I know you don't care.
2/ The chart below shows the relationship between our most reliable valuation measure and actual subsequent market returns, in data since 1928
3/ Presently, our estimate of likely 12-year total returns for a conventional passive investment allocation, 60% S&P 500, 30% Treasury bonds, 10% Treasury bills, is below 1% annually. The equity component is negative, which also means we expect bonds to outperform equities.
Read 11 tweets
John P. Hussman, Ph.D. Profile picture
Mar 15
The largest bank failure in U.S. history - Washington Mutual - is unmemorable because it was resolved correctly. The FDIC under @SheilaBair2013, took receivership. Depositors lost nothing. Stockholders and unsecured creditors weren't bailed out by a hyperactive Federal Reserve.
Under the “depositor preference” provision of Title 12, Section 1821(11)(A) of U.S. banking law, depositors receive preference over any other general or unsecured senior liability of the bank.

Stockholders and bondholders can and should lose, because they are supposed to lose.
If you're looking for assurance about the banking system, look to the FDIC.

As with the GFC in 2007-2009, the Federal Reserve is what CAUSED this bubble. It forced trillions of bank reserves (and associated deposits) into the system and encouraged a speculative reach for yield.
Read 6 tweets
John P. Hussman, Ph.D. Profile picture
Mar 12
The worst bank failure since the global financial crisis was basically a massive Fed-driven carry trade. The bank extended its maturities to chase any yield better than zero. Then rates left zero.

Over 60% of SIVB deposits were in cash, Treasury, and other govt securities.
Meanwhile, as everyone looks to the Fed to defend banks from balance sheet losses, one might consider that the @FederalReserve is in the same situation. It just doesn't mark-to-market. It will recover its losses by retaining interest rather than returning it for public benefit.
As the bubble unwinds, don't blame the Fed for raising rates amid high inflation. Blame a decade of deranged zero-rate policy that encouraged massive deficits (on both revenue and spending fronts), and long-duration, yield-seeking speculation by banks, pensions, and investors.
Read 8 tweets
John P. Hussman, Ph.D. Profile picture
Nov 28, 2022
1/ Quick status update

Our most reliable valuation measures remain extreme. Yes, they've retreated from the record blowoff the Fed encouraged by forcing the public to choke down 36% of GDP in zero-interest money, but that rate is now over 4%, and internals suggest risk-aversion Image
2/ Our most reliable gauge of market internals remains unfavorable. This can change, and we'll respond accordingly.

Valuations matter most when ragged/divergent internals suggest risk aversion (a trap door). Also, none of the gains during QE occurred amid negative internals. Image
3/ It's not a "burn" to note my error during this zero-interest rate bubble. I do it all the time. The lesson was about "limits," and it should be clear since 2019 that we've adapted nicely.

Just don't make the mistake of imagining that valuations and internals can be ignored. Image
Read 4 tweets
John P. Hussman, Ph.D. Profile picture
Nov 12, 2022
We like to call this the "pre-fraud" valuation.

At a bubble peak, valuation stands for nothing, and speculators will fall for anything. As Walter Bagehot wrote in 1873, "people are most credulous when they are most happy."

The S&P 500 is down just 16.75% from its bubble peak.
Read 4 tweets
John P. Hussman, Ph.D. Profile picture
Sep 5, 2022
My impression is "bubble" is often heard as "immediate collapse," but the current course is typical. Recall the S&P was still down only 14.5% from its March 2000 high by Dec of that year. Bubbles collapse, but it's enough shift with observables w/o relying on near-term forecasts.
Quick note on the distinction between responding to observables and relying on near-term forecasts and scenarios.
Meanwhile, a clip I wrote at the 2000 bubble peak, on how investor psychology tends to evolve over the completion of a market cycle.
Read 4 tweets

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