Tuesday, August 16, 2016

The Decade of Zero & Its Chaotic Unwinding
"Most apparent 'opportunities' to obtain investment returns above zero in conventional assets over the coming decade are based on a misunderstanding of valuations, total returns, and historical yield relationships. At current valuations, virtually everything is priced for a decade of zero. The unwinding of these speculative extremes is likely to be chaotic, and will likely occur over a shorter horizon than investors imagine. That chaos, driven not by central bank tightening but by an emerging default cycle, will usher in fresh investment opportunities in conventional assets, where presently there are none .. The outcome of years of yield-seeking speculation induced by central banks is that investors across the globe have now locked in zero prospective total returns in virtually in every asset class for the coming decade. In an environment of perfect economic stability, perhaps these zero returns might come as they have in the U.S. stock market since about mid-2014, with meager overall progress and moderate intermediate-term volatility, but without an intervening bear market collapse. The broad NYSE Composite remains below the level it set in June 2014, and the S&P 500 is scarcely 2% above its May 2015 high. We actually view this period as the extended top-formation of the third speculative bubble in the past 16 years, not as a representative sample of things to come. We don’t rule out a near-term continuation of this sideways market behavior, but we doubt it will continue longer-term. .. We will see a violent unwinding of recent speculative extremes over the completion of the current market cycle, even if central banks ease aggressively .. . It will arrive precisely because they have sustained yield-seeking speculation for too long already; because they have amplified the vulnerability of the debt and equity markets to normal economic fluctuations; and because the consequences of this fragility are now fully baked in the cake."
- John Hussman
LINK HERE to the essay

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