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The New Wolves Of Wall Street

Wall Street is in the midst of some pretty massive change right now. And I’m talking about Wall Street as it relates to Main Street. I’m talking about how individual investors are being courted (hunted) and cared for (killed) by the new wolves of Wall Street.

Brokers have now become an endangered species as the model has been attacked on two sides by fee-only investment advisers (aka, RIAs) and discount brokers advocating a DIY approach. And now there’s a third entrant attacking both the brokers and RIAs: robo-advisers. All in all this evolution is good for investors as it ultimately brings down costs.

But don’t underestimate greed’s resilience and its willingness and ability to adapt. As they say, “the more things change, the more the stay the same.” Many brokers are making the switch to RIAs. In fact, they’re doing it in droves (witness the growth of the likes of LPL Financial). Changing your title and even your business plan, however, won’t magically turn a wolf into a sheep but it does make him harder to identify.

Make no mistake. There are plenty of wolves left on Wall Street. They just don’t call themselves wolves anymore. In fact, they do everything in their power to look like innocent, cuddly sheep. They setup as RIAs now. Many even preach a low-cost, passive or index-based approach to investing, aligning themselves with the likes of Burton Malkiel, Warren Buffett and Jack Bogle, some of the most respected names in the business.

It’s the ultimate hypocrisy. You see, while they preach a low-cost approach and may actually use low-cost products like index ETFs, they’ll charge you an arm and leg for the privilege – as much as 2% per year. As Meb Faber put it, “you’re a predator if you’re charging 2% commissions and or 2%+ fees for doing nothing.” I’m sure the wolves, who normally brag about ‘eating what they kill,’ would take this as a compliment. Meb continues,

Anything more than 0.5% or so on top of fund fees is either paid a) out of ignorance, which is not always the investor’s fault or b) as a tax for being irresponsible.  For the latter I mean a fee to keep you out of your own way of chasing returns and doing something stupid, much in the same way someone pays Weight Watchers or any other diet advice program when you know what you should be doing (eat less, exercise more).

I’d say that anything more than 0.25% for “managing” a passive portfolio of index ETFs these days is obscene (it’s not even really “managing” if it’s passive – more like “overseeing”). And there are plenty of advisers charging nearly ten times that amount. And what’s the money for? What are you paying these fees for year after year? Because if the funds themselves do all the work and merely need to be rebalanced a couple of times it might take 15 minutes per year.

At the end of the day, you’re paying for the pleasure of their company. And that 2% fee might not seem like much but it really adds up over time. As Albert Einstein famously said, “compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Over 40 years, on $100,000 initial investment, that 2% fee you’re paying compounds into roughly $2 million. Even Kate Upton‘s company is not worth that much.

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That chart above shows the growth of $100,000 over 40 years assuming a rate of return of 9.68% for the index fund (the return over the past 40 years) and 7.68% for the investor paying 2% to his adviser. The DIY guy ends up with a little over $4 million and the guy with the wolf, I mean adviser, ends up with a little less than $2 million. That’s right, the wolf ends up eating over half of your profits.

So when I call these fees “predatory” or “obscene” this is why. Wolves preaching a low-cost, passive approach and charging these fees represent the height of hypocrisy – or the height of greed – take your pick.

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Taking A Shine To The Gold Miners, Part Deux

(If you enjoy reading my blog please subscribe to The Felder Report via email and follow me on Twitter @jessefelder.)

Three months ago I published a short piece titled, “Taking a shine to the gold miners,” and the ETF subsequently jumped a little over twenty percent. Recently, however, it has given back a good chunk of those gains and I’m once again intrigued by the trade.

Now I’m not going to try to make the fundamental case for owning gold. You can find great arguments being made on both sides of that debate (see “The Great Gold Debate“). Either you believe that gold is a unique store of value or that it’s just a shinier metal than most. What I’m interested in right now is the technical picture and general sentiment towards the asset after a three-year bear market that has seen the precious metal drop, in dollar terms, nearly forty percent.

On a long-term time frame gold is testing a pretty important uptrend right now. Actually, it’s fallen below the uptrend but I’ll be looking for a monthly close below the trend line and/or the 10-month moving average (both around 1275) to determine that the uptrend line is officially broken and there’s a lot of time left in the month of September for it to rally back and close above.

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The MACD lines at the bottom of the chart are also getting very close to turning higher. Notice they last crossed down back in early 2012 which turned out to be a great signal to get out if you owned any gold at the time.

Looking at the gold ETF on a weekly time frame (a chart I posted at the end of last year on my public StockCharts chart book), it’s clearly breaking down out of a bearish pennant but key support lies just below at the 61.8% Fibonacci retracement around 113.68 (roughly 1200 for the precious metal).

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So the metal is at a crucial juncture right here. Can it hold the monthly uptrend and the weekly 61.8% retracement level? Time will tell.

Should they both manage to hold these key leves, the best way to play it may be through the gold miners ETF. A look at the weekly chart here shows a potential variation of a head and shoulders bottom with a DeMark 13 buy signal. Technically, you could argue the price action is either basing for a reversal or flagging before continuing lower.

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But at the bottom of the chart I’ve included the ratio between the miners ETF and the gold ETF. After underperforming the metal for the past three years or so the miners have recently begun to outperform. If their underperformance back in 2011 was a warning signal that gold’s bull run was coming to an end (and it was) this recent outperformance could mean the bearish trend of the past few years may soon be ending, as well.

And a longer term look at the ratio between the miners and the metal (at the bottom of the chart below) shows the miners have not been this cheap relative to the underlying metal at any point during the past twenty years.

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Finally, not only are portfolio managers extremely underweight the precious metals right now, individual investors have pretty much abandoned them, too.

Screen Shot 2014-09-09 at 10.08.54 AMChart via SentimenTrader

While the so-called dumb money gives up on the trade, the smart money is getting aggressive on the long side. George Soros nearly doubled his position in the gold miners ETF last quarter to over two million shares. He also bought call options on the gold ETF equivalent to about 1.33 million shares.

For those of you who fall in the gold bug camp, the technicals and sentiment may finally be aligning in your favor once again. Stay tuned.

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The Only Guy On The FOMC With Any Experience Actually Managing Risk Is Sounding The Alarm

Below is a compilation I put together using excerpts from Richard Fisher’s speeches this year (emphasis mine):

There is no greater gift to a financial market operator—or anyone, for that matter—than free and abundant money. It reduces the cost of taking risk. But it also burns a hole in the proverbial pocket. It enhances the appeal of things that might not otherwise look so comely. I have likened the effect to that of strapping on what students here at USC and campuses elsewhere call “beer goggles.” This phenomenon occurs when alcohol renders alluring what might otherwise appear less clever or attractive. And this is, indeed, what has happened to stocks and bonds and other financial investments as a result of the free-flowing liquidity we at the Fed have poured down the throat of the economy. Here are some of the developments that signal we have made for an intoxicating brew as we have continued pouring liquidity down the economy’s throat:

  • Share buybacks financed by debt issuance that after tax treatment and inflation incur minimal, and in some cases negative, cost; this has a most pleasant effect on earnings per share apart from top-line revenue growth.
  • Dividend payouts financed by cheap debt that bolster share prices.
  • The “bull/bear spread” for equities now being higher than in October 2007.
  • Stock market metrics such as price-to-sales ratios and market capitalization as a percentage of gross domestic product at eye-popping levels not seen since the dot-com boom of the late 1990s.
  • The price-to-earnings (PE) ratio of stocks is among the highest decile of reported values since 1881. Bob Shiller’s inflation-adjusted PE ratio reached 26 this week as the Standard & Poor’s 500 hit yet another record high. For context, the measure hit 30 before Black Tuesday in 1929 and reached an all-time high of 44 before the dot-com implosion at the end of 1999….
  • Margin debt that is pushing into all-time records.
  • In the bond market, investment-grade yield spreads over “risk free” government bonds becoming abnormally tight.
  • “Covenant lite” lending becoming robust – surpassing even the 2007 highs – and the spread between CCC credit and investment-grade credit or the risk-free rate historically narrow. I will note here that I am all for helping businesses get back on their feet so that they can expand employment and America’s prosperity: This is the root desire of the FOMC. But I worry when “junk” companies that should borrow at a premium reflecting their risk of failure are able to borrow (or have their shares priced) at rates that defy the odds of that risk. I may be too close to this given my background. I have been involved with the credit markets since 1975. I have never seen such ebullient credit markets. From 1989 through 1997, I was managing partner of a fund that bought distressed debt, used our positions to bring about changes in the companies we invested in, and made a handsome profit from the dividends, interest payments and stock price appreciation that flowed from the restructured companies. Today, I would have to hire Sherlock Holmes to find a single distressed company priced attractively enough to buy. The big banks are lending money on terms and at prices that any banker with a memory cell knows from experience usually end in tears.

The former funds manager in me sees these as yellow lights. The central banker in me is reminded of the mandate to safeguard financial stability. We must watch these developments carefully lest we become responsible for raising the ghost of irrational exuberance.

Why isn’t anyone listening?

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Seeing The Forest For The Trees

Yesterday morning I came across a piece over at Harvard Business Review titled, “To Make Better Decisions, Combine Datasets.” I began reading it and realized that’s exactly the key to investment success and what I’ve tried to do with my market timing model: combine a variety of predictive datasets to create a holistic forecasting and timing model.

The stock market is driven not just by fundamentals or sentiment or technicals alone but by all of them in concert with one another. It follows then that an investor should try to incorporate each of them into her investment process in order to maximize its effectiveness.

And this is where I think many investors get lost. They try to focus on only one of these three. Fundamentals alone may work over the long run but cheap stocks can always get much cheaper in the short-term or they could just be cheap for a very good reason (I’ve learned this lesson more than a few times). Sentiment can also be very helpful but the crowd isn’t always wrong and markets can ‘stay irrational longer than you can stay solvent.’ And, as many traders know, the ‘trend is only your friend until it comes to an end.’

What I’ve found in my 20+ years of observing and trading markets is that looking at the forest, by putting all of these together, rather than the trees alone is absolutely crucial to making good decisions. So I thought it might be fun to look at the individual components of the model to see not only what they are saying about the markets but how they might be misleading when taken on their own.

For my fundamental component I use Buffett’s favorite valuation yardstick, total market capitalization-to-GDP. On its own it has roughly an 83% negative correlation with future 10-year returns in the stock market (based on 65 years worth of data). This means higher levels for this indicator are correlated with lower future returns and vice versa. Here’s what it looks like over the past 65 years or so:

Screen Shot 2014-09-05 at 9.38.05 AMEven considering the fact that the internet bubble has pushed the average higher over the past ten or fifteen years, this measure still suggests stocks are priced significantly above their historical range. Based on its high correlation with future returns this suggests investors should expect a very low return from present levels over the next decade.

BUT… this has been the case for most of the past 20 years! An investor looking at this measure alone might have sat out a couple of major bear markets but also would have missed a couple of the most massive bull markets in history! So it’s probably not smart to use this measure in isolation. Adding other related asset classes (like bonds – we’ll come back to that) and other, unrelated indicators should help give a bit more clarity.

My sentiment measure tracks the percent of household financial assets invested in equities. Believe it or not this measure is even more highly negatively correlated with future returns than Buffett’s valuation measure above (closer to 90% – hat tip, Jesse Livermore). Here’s what it looks like over the same time frame:

Screen Shot 2014-09-04 at 12.54.35 PMIt’s also currently sitting significantly above its long run average suggesting returns should be far below average going forward. As I mentioned this is a better forecasting mechanism than the fundamental measure but even if the incredible euphoria of the internet bubble got you out of the stock market you may not have gotten back in over the past 15 years because we haven’t seen anything like the pessimism witnessed at the 1982 low.

Finally, I’ve added a third component to the model, inspired by Doug Short: a simple trend regression model based on Robert Shiller’s data going back nearly 150 years. With a negative correlation of roughly 74%, it’s not quite as effective at forecasting future returns as these other two but I think adding it, as a third independent component based on a very long-term trend, helps to make the model more robust. So here’s what the S&P 500 looks like relative to a regression trend line over the full time period:

Screen Shot 2014-09-04 at 1.01.27 PMOnce again this indicator shows the stock market to be trading very close to the top of its historical range. Still, like the fundamental model this one might have had you sitting out of the stock market for perhaps the past 20 years!

So even though we have three independent models we need a way to put them together and then to put them into some sort of context. What I’ve done is used each indicator individually to create a 10-year forecasting model. Then I’ve simply averaged them together each quarter. All told, the combination results in a correlation to future 10-year returns of about 90%. Here’s a chart of the model’s forecast returns as compared to actual 10-year returns for the stock market:

Screen Shot 2014-09-04 at 1.05.21 PMWhere the model is farthest off the mark (where you see the yellow line far above the blue line) is in the late 80’s early 90’s. Stocks surged further and faster during the internet bubble than the model forecast they would. Removing those years, the model’s correlation value rises to about 94%.

So we know what the individual readings look like. What’s the model saying about future returns from here? As the chart below shows, the model forecasts a return of just 1.2% per year over the next decade:

Screen Shot 2014-09-04 at 1.10.16 PMTo add some context, in addition to the 10-year forecast I’ve put the yield of the 10-year treasury note on the chart, as well. Investors don’t look at potential returns in a vacuum; they compare potential returns of different opportunities, many times looking at the “risk-free” rate of treasury notes in the process. This next chart shows the difference between the model’s forecast return and the yield on the 10-year treasury note:

Screen Shot 2014-09-04 at 1.17.48 PMWhen the blue line is above zero, stocks offer the better return; when it’s below, bonds do. And as I’ve shown before in “How To Time The Market Like Warren Buffett” this timing model works very well. Just buy whatever asset class is more attractive – trading only once per year – and you’ll kill a buy-and-hold approach.

I think this alone is validation of a multi-disciplinary approach. But adding one more super-simple component makes it that much more effective: before we go and sell our stocks because bonds are more attractive, we want to make sure we don’t sell too early in a bull market or buy to early in a bear market. As the chart above shows this model would have had you sell your stocks and shift into bonds all the way back in April of 1996 and then miss all the gains of the next 3 1/2 years.

Adding a very simple trend-following approach solves this problem (hat tip, Meb Faber). Rather than sell right when bonds become more attractive it’s much more advantageous to wait for the trend to end. And as a representation of the trend, we can simply use a 10-month moving average. Below is a chart of the S&P 500 and this moving average:

Screen Shot 2014-09-04 at 1.23.36 PMTo be clear we’re not trend followers all the time with this model. We buy-and-hold until the model tells us that stocks are not attractively priced and then we become pure trend followers. Once the model tells us stocks have become less attractive than bonds we wait for the S&P 500 to close at least 1% below its 10-month moving average at which point we sell our stocks and sit in cash, buy bonds or even short stocks (the latter generates the best returns over the period studied).

Should the index at any point close back above its 10-month moving average by at least 1% we buy stocks again. Like I said, so long as stocks are less attractive than bonds we are pure trend followers. Only when the model suggests stocks are once again more attractively priced than bonds AND the trend has turned up (as indicated by a monthly close above the 10-ma) do we buy stocks and abandon trend-following for buy-and-hold.

Ultimately what this produces is a combination buy-and-hold/trend-following model that owns stocks roughly 80% of the time and seeks to avoid major bear markets precipitated by high valuations, high levels of bullishness and prices extended far above their regression trend. It doesn’t avoid losses entirely, though.

The model didn’t recommend a move out of stocks prior to the 1987 crash which resulted in a decline of roughly 26% (its largest drawdown). It did, however manage to avoid the ’73-’74, ’00-’02 and ’08-’09 bear markets, the latter producing about a 50% decline. In fact, this is where all of the model’s outperformance is generated: in recognizing these major turning points fairly early on – essentially giving a warning signal – and then switching from buy-and-hold to trend-following when that strategy is more effective.

The next chart shows the results of three different investors. The first is a simple buy-and-hold strategy (blue line). The second goes to cash when the model indicates (red). The third, rather than going to cash, shorts the index (green):

Screen Shot 2014-09-04 at 1.50.13 PMClearly there is significant benefit to abandoning buy-and-hold for a trend-following approach when our model suggests stocks are unattractively priced. Over the period the investor who just sits out major bear markets in cash ends up with twice as much as the investor who holds through the entire decline. And the investor who gets short, in turn, fares far better still.

I truly believe these superb results, hypothetical though they be, can be attributed to the holistic nature of the model. It combines datasets that are valuable independent of one another into something greater than its parts.

As of now, the model is telling us that stocks have once again become unattractive relative to bonds. However, the uptrend is still in tact. So it’s probably valid to be bearish for fundamental, sentiment and regression reasons. But the trend is also a valid reason to be bullish – even if it is the only reason. So I’m still looking at the market through a bearish lens right now but I’ll be watching for a monthly close at least 1% below the index’s 10-month moving average for the trend to validate the fundamentals and sentiment.

For reference I’ve put up all the spreadsheets, calculations and charts I used on a public Google Drive sheet here: Market Timing Model. I’ll be updating it as new data comes in.

Finally, I need to make the same disclaimer I’ve made over and over again during this series: because this is a hypothetical model that doesn’t incorporate taxes, transaction fees, etc. it is not representative of any real returns. It is merely for educational purposes. Clearly, past performance may not be indicative of any future results.

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All Eyes On The Bond Market

The most critical asset class in the world right now might just be the US bond market, as represented by the 10-year treasury note yield. So far this year bonds have performed very well as this rate has declined – foiling the best laid plans of all the bond bears (and there have been loads of them). But the bulls can’t quite plan their victory parade just yet because right now this critical interest rate is sitting at a critical technical level, a crossroads, actually.

The downtrend for this rate is well-established. It might be the longest tenured trend, in fact, of any major asset class out there right now. Here’s a look a the monthly chart:

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Clearly it’s not even close to breaking above that upper downtrend line that dates back to the mid-1980’s. So anyone making the case for higher interest rates is swimming upstream.

But take a look at the weekly chart and it’s a little bit different story:

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After briefly breaching the 2.25% level during the height of the financial crisis and then testing it again in the fall of 2010 this rate finally broke down to new lows during the summer of 2011. It wallowed below that key level for a couple of years before regaining it during mid-2013 – along with breaking the downtrend line on that time frame – in a year that amounted to a walloping for long bond holders.

Much has been made of the weakness in rates/strength in bonds since then but, in actual fact, the action over the past few months has only amounted to a 50% retracement of the surge in rates from last year. And that area between 2.25% and 2.4% serves once again as key technical support. A closer look at a daily time frame shows what might be described as a bull flag (for the price action year-to-date) that has taken the rate right to the 50% retracement of the 2013 rise:

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In any case the action this year has been corrective rather than implusive, as Elliott Wave aficionados would say, suggesting yet higher rates are in order. However, the trend is still pointing lower on all of these time frames so there’s something both bulls and bears can point to right now.

All in all, this 2.3%ish level serves as a technical line in the sand. Until it breaks meaningfully one way or the other bulls and bears are at a stalemate. Once it does break out, though, it could have major implications for both the stock market (in terms of relative valuations) and the economy (in terms of leading indicators).

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The Problem With Index Funds

I was glad to see on Friday someone (Yahoo! Finance Editor-in-Chief, no less) concur with my concerns over the growth of index-based investing strategies (see “One reason I’m worried about the rise of the robo-adviser“). In a piece appropriately titled, “Pride cometh before the fall: indexing edition,” Aaron Task writes:

Was ‘owning the index’ a good idea in 2000, when ~50% of the S&P 500 was in tech?

Was ‘owning the index’ a good idea in 2008, when 40% of the S&P 500 was in financials?

No, of course it wasn’t.

But that’s exactly what you did if you followed an index-based approach. So while index investing is probably better than many of the alternatives that doesn’t mean it doesn’t have its own problems. And being valuation agnostic is probably its biggest problem.

You see when you buy an index fund you put more money into the largest companies in the index and less money into the smallest, regardless of their valuations. So when investors bid tech stocks to the moon and they become the largest component of the index (as in 2000) they carry a larger weight in the index and, in turn, you end up buying a lot of them. In effect, you become greedy when others are greedy rather than becoming fearful, as Buffett would recommend (he also recommends indexing, though, so go figure).

And taken to the extreme, the growing popularity of index-based investing could possibly be the cause of yet another stock market bubble. When a growing class of buyers is willing to continue buying regardless of how high prices rise then valuations can conceivably rise infinitely (Sound familiar? Indiscriminate buying of internet stocks in 2000? Indiscriminate buying of housing in 2007?).

What index-based strategies don’t want you to know is that ‘the price you pay DETERMINES your rate of return.’ Pay too high a price and you literally guarantee yourself horrible returns. Forget owning too much of one sector within the index; was it a good time to buy stocks at all at March of 2000 or October of 2007? Hell, no. Sky-high valuations were a big reason for that. And we may have already reached that point once again (Jesse Livermore recently wrote a wonderful piece on the topic – see “Why is the Shiller CAPE so high?“).

Finally, I personally see the growing popularity of index-based investing as a good thing for individual investors over the long-term but also as a potential contrarian indicator over the intermediate-term.

Aaron again:

The pendulum has swung way too far where everyone thinks all you have to do is index and you’re going to do better [than actively managed funds].

Once the pendulum has swung so far that many investors come to believe that all you have to do is buy the index and it’s all peaches (cap gains) and cream (dividends) then it’s probably time to look out below. I just don’t know if we’re there yet.

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Mania, Part Deux

I continue to be amazed at the rampant rationalizing that is fueling this market. In my first “Mania” post, I began with a quote from professor Shiller regarding his CAPE ratio and what it currently suggests about stock market valuation:

“The United States stock market looks very expensive right now. The CAPE ratio, a stock-price measure I helped develop — is hovering at a worrisome level…. above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.” -Robert J. Shiller, Nobel Prize-Winning Economist and Author of “Irrational Exuberance”

Impersonating the rationalizers I mimicked the popular response: “the CAPE ratio is flawed and valuations don’t matter anyway; stocks are only worth what someone else is willing to pay.”

Lo and behold, somebody stepped up to the plate and took the rationalization to a whole new level (via CNBC):

[Charles] Dumas argues that including the Great Depression, two world wars and the Cold War into the long-run average makes it an “unduly poor comparator”. Instead, if you disregard this period, the CAPE is only 7 percent above the post-Cold War average, according to Dumas.

In other words, ‘if we take out all the bad stuff (decades and decades of market history) and focus only on the good times, the market is only 7% overvalued – AND that’s somehow bullish.’ How can this guy say this with a straight face? The whole purpose of the CAPE ratio is to adjust for cycles; it’s an acronym for “cyclically-adjusted price-to-earnings” ratio. Is he really suggesting we throw out professor Shiller’s Nobel Prize-winning work and only use a BLPE, “bubble-level price-to-earnings” ratio?

The article continues by quoting his cohort, Jack Boroudjian who writes the CAPE off as a, “strange equation.” I would literally pay money to hear these guys rationalize Buffett’s favorite yardstick right now. It’s incredibly entertaining.

Also, just off hand in my earlier piece, I mentioned the ad hominem attacks directed at John Hussman. Well Larry Swedroe subsequently jumped the shark in this regard (via ETF.com):

One investor recently asked me to comment on Hussman’s latest musings, which had made him quite nervous. Now, I knew that Hussman had been persistently bearish for quite some time, and I have been asked about his columns fairly frequently. So I went back into my files and dug up what I had written about his comments on the market from Jan. 14, 2013. It provides a great example of why he should be ignored, along with all other forecasters.

A reader asked you to comment on his “latest musings” so rather than read his “latest musings,” Larry, you went back 18 months and roughly 75 weekly reports ago. Ignore the argument put to you and resort to “genetic fallacy” to prove he’s an idiot: ‘he was wrong 18 months ago so he must be wrong today,’ is not logic. It’s simply avoiding the issue and it only makes you look like an idiot, Larry.

He continues:

As further evidence of why you should ignore market forecasts like Hussman’s, consider the following performance data on his flagship fund, Hussman Strategic Growth (HSGFX). As of Aug. 4, 2014, the fund had $1.1 billion in assets—less than 40 percent of what it had just 19 months earlier—as investors fled, unhappy with the poor performance.

Please take a quick peek at Wikipedia’s definition of “genetic fallacy,” Larry. Your argument clearly, “fails to assess the claim on its merit,” and relies solely on, “something or someone’s origin rather than its current meaning or context.” Oh, and also the bandwagon fallacy: ‘if people are bailing out of his fund he must be an idiot because mutual fund investors are always brilliant traders!’

If you take the time to actually read Hussman’s “latest musings” you’ll find he’s not making 1-year forecasts, as Larry would have us believe. He’s making 10-year forecasts, something even Warren Buffett does regularly to assess the future prospects of owning stocks. And Hussman uses indicators like Buffett’s favorite valuation yardstick which are very highly correlated to future 10-year returns.

I urge you to actually take a look at some of his “latest musings” and see what his indicators are saying right now:

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As the chart above clearly indicates a multitude of independent indicators (including Shiller’s CAPE and Buffett’s favorite yardstick, market cap-to-GDP), all of which are highly correlated to future returns, suggest that owning stocks over the next decade will yield close to zero annual return, one of the worst prospects in history – this based on simple math and statistics supported by nearly 80 years of data.

So rationalize it however you like. Or simply ignore it. That’s your prerogative. Just know this type of mental gymnastics only happens in the midst of a mania. And it’s just fascinating to witness.

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