The problem for the stock market is that the 13-year journey of underperforming T-bills – with wicked collapses and break-even recoveries – is most probably not over. Stocks remain overvalued on the basis of the probable long-term stream of cash flows they will deliver to investors, though the extent of this overvaluation is obscured by unusually high (but reliably mean-reverting) profit margins, which make current and forward P/E ratios seem pleasantly digestible.
There are two ways to think about this. One is to think of these rich valuations and low prospective returns as a durable feature of the market environment. That’s basically the vision that PIMCO’s Bill Gross recently suggested, noting that we have entered a period of “negative real interest rates and narrow credit and equity risk premiums; a state of financial repression as it has come to be known, that promises to be with us for years to come.” His take is well worth the read. That said, an alternate possibility is that we will see a more rapid adjustment as investors lose the apathetic overconfidence that they can ignore the risks of a global economic downturn, massive and recurrent sovereign debt crises, and an implosion of the European banking system. In that event, we are likely to observe a significant increase in risk premiums toward more historically normal levels, but followed by a more gradual recovery in risk assets than the one that followed the 2008-2009 crisis.
READ MORE HERE: http://seekingalpha.com/article/543631-john-hussman-release-the-kraken
