Tuesday, May 17, 2016

Blowing Bubbles: 
QE & The Iron Laws
In his latest missive, John Hussman explains what the so-called Iron Laws of asset valuation to illustrate how overvalued the financial markets are today .. "Because of extended zero-interest policy by the Fed, security valuations have advanced to the point where prospective nominal total returns on a conventional portfolio mix are likely to average well below 2% annually, with negative real returns, over the coming 12-year period .. The key points are that QE has encouraged the dramatic overvaluation of virtually every class of investments; that these elevated valuations don’t represent wealth (which is embodied in the future stream of deliverable cash flows, not in the current price); that extreme valuations promise dismal future outcomes for investors over a 10-12 year horizon; and that until a clear improvement in market internals conveys a resumption of speculative risk-seeking by investors, the current combination of extreme valuations and increasing risk-aversion, coming off of an extended top formation after persistent overvalued, overbought, overbullish extremes, represents the singularly most negative return/risk classification we identify."
LINK HERE to the essay

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