Hussman: Recession Probability 'Near 100 Percent'

Wednesday, 09 Nov 2011 08:00 AM

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Economist John Hussman says the probability of another recession is almost 100 percent, and warns investors against holding risky assets in what he foresees will be a "significant downturn."

"Our broadest models (both ensembles and probit models) continue to imply a probability of oncoming recession near 100 percent," Hussman writes in a note to investors.

"It's important to recognize, though, that there is such a uniformity of recession warnings here ... that even an unsophisticated, unweighted average of evidence indicates a very high likelihood of recession."
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Hussman says he’s never seen a plurality of these measures unfavorable except during or immediately prior to U.S. recessions.

“Maybe this time is different?” he says. “We hope so, but we certainly wouldn't invest on that hope.”

Every traditional asset class is priced to achieve miserably low long-term returns, Hussman observes.

"While Wall Street remains effusive about stocks being cheap on a 'forward operating earnings' basis, that conclusion rests on the assumption that profit margins will sustain record highs more than 50 percent above their historical norms into the indefinite future," says Hussman.

"That assumption is terribly at odds with historical evidence (as it was in 2007 when Wall Street was gurgling exactly the same thing). Given that stocks are a claim on a very long-duration stream of deliverable cash flows, our money is clearly on more thoughtful and historically reliable valuation methods."

Bloomberg reports that capital spending at U.S. companies is at the highest level since 2008 as upgrades to plants, property and equipment show some executives embracing the likelihood that the economy averts recession.

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