Hussman Weekly Market Comment: Things I Believe

1) Investors dangerously underestimate the risk of an abrupt and possibly severe equity market plunge

2) Agreement among "experts" is not your friend

3) Downside risk tends to be elevated precisely when risk premiums and volatility indices reflect the most complacency

4) We did not avoid a second Great Depression because we bailed out financial institutions. Rather, the collapse in the economy and the surge in unemployment were the direct result of a gaping hole in the U.S. regulatory structure that prevented the rapid restructuring of insolvent non-bank financials. Policy makers then inappropriately extended the "too big to fail" doctrine to ordinary banks. Following a striking loss of public confidence that resulted from arbitrary policy responses, coupled with fear-mongering by exactly those who stood to benefit from public handouts, the self-fulfilling crisis was contained by a change in accounting rules that effectively disabled capital requirements for all financial companies. We are now left with a Ponzi scheme.

5) The U.S. economy is recovering, but that recovery is vulnerable to even modest shocks.

6) The U.S. fiscal position is far worse than our present $1.3 trillion deficit and nearly 100% debt/GDP ratio would suggest.

7) A long period of generally rising interest rates will not negate the ability of flexible investment strategies to achieve returns, provided that the increase in rates is not diagonal, and the strategy has the ability to vary its exposure to interest rate risk.

8) Stocks are a poor inflation hedge until high and persistent inflation becomes fully priced into investor expectations. At the same time, short-dated money market debt has historically been a very effective inflation hedge.

9) It will be harder to inflate our way out of the Federal debt than investors seem to believe.

10) It will be harder to grow our way out of the Federal debt than investors seem to believe

11) Based on a variety of valuation methods that have a strong historical correlation with subsequent long-term market returns, we estimate that the S&P 500 is presently priced to achieve a total return averaging just 3.6% annually over the coming decade.

12) The specific features of a given economic cycle don't change the mathematics of long-term returns - they simply affect the level of valuation that investors demand or are willing to temporarily tolerate.