[P2P-F] Fwd: Hussman Report

Fri Oct 6 12:38:59 CEST 2017

Michel,

For your files.

The next recession is near and will be ferocious, just so it's on your
radar.Those prepared, of course, will make a ton of money

Kind regards,

Christopher

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*October 2, 2017*

*Blissful Delusion *

*John P. Hussman, Ph.D. All rights reserved and actively enforced.*
Reprint Policy <http://www.hussmanfunds.com/html/reprints.htm>

The present moment of blissful delusion is remarkable to witness. Take it
in. A few words and updated charts will do.

The first chart below updates our variant of Robert Shiller’s
cyclically-adjusted P/E (CAPE), where we’ve adjusted the measure to account
for variation in the embedded profit margin; an adjustment that
substantially improves the correlation of the resulting measure with actual
subsequent market returns across history. Few investors recognize that one
of the reasons why valuation multiples were so rich in 2000 is that profit
margins were actually *below* historical norms at the time. It's also worth
noting that the benefit of normalizing the embedded profit margin comes not
just from muting margins that are *above* historical norms, but also from
normalizing margins in periods where they are *below* historical norms.

The next chart shows the margin-adjusted CAPE on an inverted log scale
(left, blue line), along with the actual subsequent S&P 500 nominal average
annual total return over the *subsequent* 12-year period (right, red line).

The next chart updates our best estimate of the likely 12-year prospective
total return on a conventional portfolio mix invested 60% in the S&P 500
Index, 30% in Treasury bonds, and 10% in Treasury bills. The current
projection is the lowest in history, and I expect these weak passive
investment returns, as they unfold, to trigger a rather broad crisis of
pension underfunding in the years ahead. To estimate the S&P 500 component
here, we’re using another measure I’ve introduced over time: the ratio of
nonfinancial market capitalization to corporate gross value-added
(including estimated foreign revenues).

While we’re on the subject of corporate gross value-added (which
essentially measures corporate revenues without double-counting
intermediate inputs), I’ll add that another feature of Wall Street’s
blissful delusion is the notion that “U.S. corporate taxes are the highest
in the world.” It’s striking how disingenuous this claim is. The fact is
that among all OECD countries, *the U.S. is also the only country that does
not levy any tax at all on corporate value-added in the production of goods
and services*.

Without getting deep into the relative merits and challenges of a
value-added tax, suffice it to say that 1) the “incidence” of a value-added
tax (whether it’s paid by consumers in the form of higher prices, or
corporations in the form of lower profits) varies depending on the demand
and supply characteristics of each sector, and 2) because a value-added tax
tends to be “regressive” all by itself (hitting lower income individuals
proportionally more since it functions much like a tax on sales), the
appropriate way to introduce a value-added tax is to require additional
features of the tax code such as low-income exclusions. Countries can also
use policies such as tax credits for investment, R&D, job training, and
other arrangements to strengthen incentives for productive investment and
job creation.

The main point is this. The argument that U.S. taxes on corporate profits
are somehow oppressive relative to other countries is an apples-to-oranges
comparison. It wholly ignores that the U.S. levies no value-added tax on
corporations *at all*, whereas the value-added tax is the principal revenue
source for most other countries. The rhetoric on corporate taxes here is
unfiltered effluvium.

The chart below presents a clearer picture of U.S. corporate profits
taxation. Actual taxes paid by U.S. companies, as a share of pre-tax
profits, have never been lower, outside of the depths of the global
financial crisis.

As for the stock market, understand that total annual U.S. corporate taxes
presently amount to only about 1.2% of current U.S. equity market
capitalization, and even if a cut was to pass, it would be unlikely to
endure for more than a few administrations. The potential effect of even a
substantial percentage reduction in statutory rates for several years is
quite small when the present value of the tax reduction is compared with
existing equity market capitalization. The likely cumulative impact comes
to just a few percent of stock market value.

Against that, consider that the most reliable market valuation measures we
identify (as measured by their correlation with actual subsequent S&P 500
total returns in market cycles across history) are currently between 2.5
and 2.7 times their historical norms (that is, 150% to 170% above those
norms).

Put simply, it seems misguided to imagine that “tax reform” will somehow
make the most obscene speculative bubble in U.S. history something other
than the most obscene speculative bubble in U.S. history. Corporations are
*already* enjoying strikingly light tax burdens from a historical
perspective, and investors are *already* paying extreme valuation multiples
on elevated earnings.
We are observing an episode that will make future investors wince. Just
like the two closest analogs, the 1929 high and the tech bubble, I expect
that future investors will shake their heads in wonder at the stark raving
madness of it all, and ask what Wall Street could possibly have been
thinking. In any event, I've shared what I see as my truth, and I
experience no need to change anyone's mind. I remain content to abide our
value-conscious, historically-informed, full-cycle discipline, and to
follow our path. Others are free to continue along their own.

*The foregoing comments represent the general investment analysis and
economic views of the Advisor, and are provided solely for the purpose of
information, instruction and discourse. Please see periodic remarks on the
Fund Notes and Commentary
<https://www.hussmanfunds.com/wmc/wmpfn_recent.htm> page for discussion
relating specifically to the Hussman Funds and the investment positions of
the Funds. *

---

Prospectuses for the Hussman Strategic Growth Fund, the Hussman Strategic
Total Return Fund, the Hussman Strategic International Fund, and the
Hussman Strategic Dividend Value Fund, as well as Fund reports and other
information, are available by clicking "The Funds" menu button from any
page of this website.

Estimates of prospective return and risk for equities, bonds, and other
financial markets are forward-looking statements based the analysis and
reasonable beliefs of Hussman Strategic Advisors. They are not a guarantee
of future performance, and are not indicative of the prospective returns of
any of the Hussman Funds. Actual returns may differ substantially from the
estimates provided. Estimates of prospective long-term returns for the S&P
500 reflect our standard valuation methodology, focusing on the
relationship between current market prices and earnings, dividends and
other fundamentals, adjusted for variability over the economic cycle (see
for example Investment, Speculation, Valuation, and Tinker Bell
<http://www.hussmanfunds.com/wmc/wmc130318.htm>, The Likely Range of Market
Returns in the Coming Decade <http://www.hussmanfunds.com/wmc/wmc050222.htm>
and Valuing the S&P 500 Using Forward Operating Earnings
<http://www.hussmanfunds.com/wmc/wmc100802.htm>).

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