Tuesday, June 14, 2016

Like Water Out Of A Sponge
In his latest missive, John Hussman makes the analogy of asset returns today being like water squeezed out of as sponge: "Understand that strong past returns, rich valuations, and low prospective future returns all go hand-in-hand. They are all part of the same phenomenon - one I often call the Iron Law of Valuation. The higher the price one pays for a given set of future cash flows, the lower the long-term return one can expect on the investment. With every increase in security prices, what was “prospective future return” a moment earlier is instantly converted into 'realized past return,' like water being squeezed out of a sponge. As a result, realized past returns always appear the most compelling at exactly the point where prospective future returns are the most dismal." .. Hussman sees the same reliable signal of bubble peaks that appeared in 1929, 2000 & the financial crisis - "The emergence of novel valuation measures encouraging investors to believe that current extremes are still reasonable. This practice repeats because, to use John Kenneth Galbraith’s timeless phrase, 'as in all periods of speculation, men sought not to be persuaded by the reality of things but to find excuses for escaping into the new world of fantasy.'"
LINK HERE to the essay

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