maandag 17 juli 2017

John Hussman; "Like A Wrecking Ball"

I’ve periodically framed market action from the perspective of Didier Sornette’s model of log-periodic power-law bubbles (see my recent comments in Fair Value and Bubbles: 2017 Edition). Our current best-fit to this structure is presented below. Based on recent market dynamics, I’ve refined the date of the “finite-time singularity” in this model. That “critical point” is not necessarily the date of a peak or the beginning of a crash, but what Sornette describes as “an inflection point from self-reinforcing speculation to fragile instability.” It’s also worth remembering that the “catalysts” associated with sharp market losses have often been fully recognized only after the fact, if at all. As Sornette observes, “The collapse is fundamentally due to the unstable position; the instantaneous cause of the crash is secondary.” There’s a Wall Street aphorism that one can talk about time, and one can talk about price, but never about both.
For that reason, feel free to take the following chart with a grain of salt. From our perspective, we would be inclined to take far more salt if our own measures of valuations, market internals, and overextended conditions were not so hostile as well. As conditions stand, the overall analysis contributes to our general view that the speculative pendulum is dangerously overextended. In any event, the estimate that best fits recent market dynamics would place the critical point in the first week of August, within less than 2% of current levels. Indeed, the 30-day crash probability that we estimate from this particular model is rising vertically, and will continue to do so with every market advance from this point. In practice, based on a much broader set of historically reliable evidence, we already view the market as highly vulnerable to steep, abrupt losses...

There will be no avoiding the completion of this market cycle for investors in aggregate. The pendulum of speculation has swung far and has grown increasingly grotesque in order to reach this point. It will be a wrecking ball when it returns to earth....

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