Hussman: Look for a Stock Market Plummet of as Much as 55 Percent

Wednesday, 31 Jul 2013 08:14 AM

By John Morgan

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Investment manager John Hussman offers a catalog of reasons why the stock market is doomed to have a meltdown of as much as 55 percent, including the facts that institutions are dumping shares while retail consumers are buying, and that margin debt is at historic levels. But that's only for starters.

"The U.S. equity market is now in the third mature, late-stage, overvalued, overbought, overbullish, Fed-enabled equity bubble in just over a decade," Hussman, president of the eponymous Hussman Funds and a frequent Federal Reserve critic, wrote in his weekly market commentary.

Like the 2000-02 stock meltdown of 50 percent and the calamitous 2007-09 decline of 55 percent, Hussman said the current uptrend is doomed to fail.

Video:
Economist Predicts 'Unthinkable' for 2013

In fact, he suggested the same syndromes of overvalued and overbullish extremes were present then, now and in the pre-crash peaks of 1929, 1972 and 1987.

Hussman wrote that he has particular concern for investors who entered the market at current levels when history repeats itself.

"Bank of America notes that institutional investors have never dumped as much stock onto the public than they have in the past four weeks," he noted.

"Margin debt remains at historic levels, exceeding 2.3 percent of GDP [gross domestic product] for only the third time in history — the other two times, not surprisingly, being at the 2000 and 2007 market peaks."

Hussman said the Shiller P/E is now 24.4 — ominously about the same level as in August 1929.

Another warning sign he sees for the stock market is the lofty level of profit margins, which are 70 percent above historical norms and therefore are destined to return to the norm.

Profligate government and citizens are yet another red flag, in Hussman's estimation. Combined government and household savings have almost always been in the black historically, averaging 4.8 percent of GDP. However, they have averaged a deficit of 2.5 percent in the past decade.

Hussman described the Fed's quantitative easing program as a "confidence game that has no financial mechanism except to make investors uncomfortable holding Treasury bills, and no theoretically valid or empirically supported transmission mechanism to the real economy at all."

Earlier this month, Moody's Investors Service elevated its outlook on U.S. debt to stable, discarding the negative outlook that it had maintained for almost two years.

Moody's also affirmed its top rating — Aaa — for the U.S. government, noting that the nation's "debt trajectory is on track to meet the criteria laid out in August 2011 for a return to stable outlook," CNNMoney reported.

A July survey of investment strategists and money managers surveyed by CNNMoney predicted the Standard & Poor's 500 should end 2013 with a 14 percent gain at 1,620.

Video: Economist Predicts 'Unthinkable' for 2013

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