John Hussman (Hussman
Funds) wrote in his February 3, 2014, Weekly Market Comment:
"The latest data from the NYSE shows equity margin debt at a new all-time
high. Relative to GDP, the current 2.6% level was eclipsed only once - at the
March 2000 market peak."
The ratio of margin debt is usually - at least, often - calculated in
comparison to the market value of stocks. Later in his Comment, Hussman
explains his choice: "We use GDP here because margin debt to GDP has a
much higher correlation with actual subsequent market returns than say, margin
debt/market capitalization (which destroys information by muting the indicator
exactly at points when prices are extremely elevated or depressed)."
The March 2000 peak was an example of our so-called policymakers clamming up.
Their duty is exactly the opposite. Quoting from Greenspan's Bubbles: The
Age of Ignorance at the Federal Reserve, by William A. Fleckenstein and
Frederick Sheehan: "On February 17, 2000, the subject of margin debt came
up when the chairman testified before the House Banking Committee, just as it
had three weeks earlier, when Greenspan had appeared before the same committee
of the Senate. Despite having been thoroughly interrogated on the subject by an
obviously concerned Senator Schumer on January 26, Greenspan reiterated the
view that he shared in his previous testimony, that raising margin requirements
would have no effect on stock prices.
"In response to the question from Senator Schumer during the January
Senate appearance, Greenspan had staked out his views on the subject, stating
that raising margin requirements would discriminate against the small investor
and, furthermore, studies had 'suggested the level of stock prices has nothing to
do with margin requirements.'
The Fleckenstein
& Sheehan response: "I have no idea what studies he was
referring to...." We then wrote of a couple of possibilities, far-fetched,
instead of writing that Greenspan had lied. After the crash, Greenspan gave the
most noxious speech of his life at Jackson Hole, Wyoming, on August 30, 2002.
Blameless as always, the worm tacked on a footnote: "Some have asserted
that the Federal Reserve can deflate a stock-price bubble - rather painlessly -
by boosting margin requirements. The evidence suggests otherwise. First, the
amount of margin debt is small, having never amounted to more than about 1-3/4
percent of the market value of equity..."
First, the amount
does not matter, since the problem lies with the level of the ratio and
rate of advance. Hussman writes: "[T]he main usefulness of this measure isn't
for any fixed correlation with subsequent returns - numerous valuation measures
do much better - but for its extremes. This is particularly true when margin
debt advances rapidly over a span of several quarters relative to prices, GDP
and other measures." Hussman's chart shows advances similar in 2000, 2007,
and in 2013 and 2014. (Total margin debt had risen 45% between October 1999 and
February 2000.)
Although
"numerous valuation measures do much better," Hussman notes:
"Prior spikes in margin debt/GDP in June 1968, December 1972, August 1987,
March 2000, and October 2007 were followed by a bear market losses of at
least one-third of market value shortly thereafter."
As to valuation
measures: "In the context of the most extreme bullish sentiment in
decades, and reliable valuation metrics about double their historical
norms prior to the late-1990's bubble (price/revenue, market cap/GDP, Tobin's
Q, properly normalized price/forward operating earnings, price to
cyclically-adjusted earnings), we view present market conditions as dangerously
speculative."
Most everyone knows
we are at the edge, in their gut, if not their mind. Experts are paid to say
otherwise. Again, the closer the cliff, those who are paid to keep investors in
the game, and at necessarily greater feats of leverage, will make ever more
reassuring claims.
It is my sense the
Federal Reserve is losing its credibility with the public. Woe betide us the
day it loses credit-ability. As with anxiety about stocks, this may be latent.
It will pour forth when leverage retreats. Newly inducted Federal Reserve
Chairman Janet Yellen offered testimony before the Senate Banking Committee for
the first time yesterday, February 11, 2014. She was full of reassurances:
"The economic recovery gained greater traction in the second half of last
year." Asset prices are not at "worrisome levels." In questions
and answers, she said something like "stocks are savings." (If anyone
has the actual quote, please let me know.) This is to be expected. To forestall
the complete loss of Fed creditability, more direct contradictions to the truth
will be asserted.
In September 1996,
bespattering his fellow FOMC comrades with an excess of machismo (should such
be possible), the "greatest central banker who ever lived" - Alan
Greenspan, in the words of Alan Blinder - claimed: "I recognize that
there is a stock market bubble problem at this point. . . . We do have the
possibility of raising major concerns by increasing margin requirements. I
guarantee that if you want to get rid of the bubble, whatever it is, that will
do it."
From John Hussman's February 3, 2014, Weekly
Comment:
"Just a note - I'll be speaking
at the Wine Country Conference in Sonoma, CA on May 1st
& 2nd, 2014, along with Mike "Mish" Shedlock, David Stockman,
Stephanie Pomboy, Steen Jakobsen, Chris Martenson, Mebane Faber, Jim Bruce and
others. This year's conference will benefit high-impact programming for
individuals on the autism spectrum and their families, primarily local efforts
through the Autism Society of America. As many of you know, my 19-year old son
JP has autism, so the cause is very close to my heart. Last year's conference
benefited the Les Turner ALS Foundation. It's a great event in a beautiful
location. Hope to see you there. For more information, please visit www.winecountryconference.com. Thanks -
John"
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