A Difference of Opinion on Strategy…But Big Picture Alignment

John Hussman has a nice piece here titled ‘Eating the Future.’ Hussman and I might share differing views on the best trading strategy, but his big picture view of eating the future for current consumption is spot on. An excerpt:

The elevated prices of financial assets have already eaten the future. At present, a 10-year investment in U.S. Treasury debt is associated with a prospective total return of just 1.7% annually over the whole of that investment horizon. A 30-year investment will achieve a 2.9% annual total return over three decades. An investment in bonds comprising the Dow Jones Corporate Bond Index will achieve an annual total return of 2.8% annually. We estimate that the S&P 500 is likely to achieve a 10-year average annual total (nominal) return of about 4.1% annually. What has happened here is that the prospect for future returns has been removed, in order to elevate prices in the present.

Unfortunately, this does not mean that real output will be more plentiful in the future, or that savers who are hoping to provide for the future will be prompted into consuming much more today. Historically, a 1% increase in the value of the stock market is associated with a transitory increase of just 0.03-0.05% in GDP over the following year, quite to the contrary of what Mr. Bernanke wishes the public to believe. As former Fed Chairman Paul Volcker said last week “Another round of QE is understandable, but it will fail to fix the problem. There is so much liquidity in the market that adding more is not going to change the economy.”

2 thoughts on “A Difference of Opinion on Strategy…But Big Picture Alignment

  1. another negative piece from him, interesting. he mentions inflation 7 times in the article, yet never mentions deflation, or what would happen should the spending value of the investment actually rises. scores of phd investment types, CNBC wonks, et al have been calling for inflation, all the way in one of the great long trend opportunities of all time, the 10 yr bond. now i understand that most every action we and the world are taking is inflationary, but remember, we are up against a debt-driven asset bubble that burst, and that entails many years of debt paydown, lowering the velocity of money. maybe a 1.7% 10 yr note is the buy of the century still – who knows? but i know that hussman clearly can’t predict anything, nor can the ben bernanke, or any other guru.

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