JohnP.Hussman,Ph.D. WineCountryInvestmentConference TobenefittheLesTurnerALSFoundation LesTurnerALS.

org4/5/2013

ConceptsofEquilibrium

Flow Stock Robust Fragile Stable Unstable Static Dynamic Commonelement: Astateofbalancebetweenforces,howevertemporary

Insights
Nosuchthingasmorebuyersthansellers Everyshareofstockissuedmustbeheldatalltimes Everybondcertificatemustbehelduntilitisretired Thereisnosuchthingasmoneymovingintoorout

ofasecondarymarket EverydollarofmonetarybasecreatedbytheFed remainsabunchofbitsandbytesonsomebank computer thatsomeonehastoclaimasanasset untilthosebitsandbytesareretired(thoughasmall amountfluxesfromreservestocurrencyandback)

QuantityTheoryandMultipliers
Assumeawaytheeconomicissuesthatmatter
Developmentandavailabilityofproductiveinvestment

opportunitiesthatinitiateborrowing Abilityofborrowerstoservicenewdebt Willingnessoflenderstofinancecreditworthy, productiveopportunities Importanceofrefrainingfromloanstounworthy, unproductivespeculations

Createmore monetarybase Reducetheturnover ofthemonetarybase ThefailureofQEto provokedurable economicgrowthis notafailureof effort;itisafailure ofideasand understanding

MonetaryEquilibrium
Everyzerointerestdollarmustbeheldbysomeone atalltimes QEprovokesaspeculativereachforyield

FiscalEquilibrium
Thedeficitofonesectormust emergeasthesurplusof

another

Result:Record ProfitMargins
Corporateprofitmarginsare presently70%above historicalnorms,precisely becausecombined governmentandhousehold savingsareinarecord negativeposition. Thedeficitofonesector must emergeasthesurplus ofanothersector Corporationsbenefitfrom deficitspending despite wages atrecordlowsasa shareofeconomy

Changes in governmentand householdsavings leadchanges in corporateprofits

Evenwithout significantmean reversionin margins,we shouldalready anticipateweak profitgrowthin theimmediate future

Elevatedmargins,weak4yearprofitgrowth

ADistorted,UnstableEquilibrium
MonetaryPolicy:creates FiscalPolicy:createsa

anoceanofzerointerest monetarybasethatmust beheldbysomebodyat everymoment.Base moneyisahotpotato thatencouragesa speculativereachfor yield.

deficitthatmustemerge elsewhereasasurplus specifically,aselevated corporateprofitmargins, creatingtheillusionof yieldthatisnot,in fact,durable.

Whichapproachactuallyworks?
Smoothfundamentals (calculationsnextslide)
FedModelandnaverisk premiumestimates

Hussman's ShorthandEstimatesofS&P500 Expected10YearNominalAnnualTotalReturns

1)ForwardEarningsModel seeValuingtheS&P500UsingforwardOperatingEarnings:

(1+g)(12.7/FOPE)^(1/10) 1+Dividend_yield*(FOPE/12.7+1)/2 g=1.063x(0.072/(FOE/S&P500Revenues))^(1/10) 1 FOE:forwardoperatingearnings.FOPEistheforwardoperatingP/E. Underlyingeconomicgrowthismodeledat6.3%(alloftheconstantsshouldberevisitedovertime)

2)ShorthandShiller Model seeTheSirensSongoftheUnfinishedHalfCycle:

1.063*(15/ShillerPE)^(1/10) 1+Dividend_yield (decimal)

3)DividendModel seeEstimatingtheLongTermReturnonStocks(1998):

1.063*(Dividend_yield /.037)^(1/10) 1+(Dividend_yield +.037)/2

4)ShorthandMarketValue/GDPModel:

1.063*(0.65/(MV/GDP_Nominal))^(1/10) 1+Dividend_yield (decimal) MarketvalueofequitiesofnonfarmnonfinancialcompaniesfromZ.1FlowofFundsdata

Anunfortunatemenu butthemenuwill change