A famous analyst who predicted the collapse in 2000 and 2008. accuses the Fed of “the biggest financial bubble in US history.” Warns of a possible 70% drop in the S&P 500

When the Federal Reserve decides on its monetary policy – such as stepping up its quantitative easing efforts, lowering interest rates or reversing these measures to cool the economy – John Husman believes they are acting chaotically.

For Hussman, president of the Hussman Investment Trust, these actions seem to have been taken on the go, without any framework for a consistent policy-making system. And it poses a huge risk to investors in terms of prospects for future returns, he said in a recent comment.

Husman has built a reputation in the financial community for being able to anticipate moments of speculative surplus. He did it right in 2000 and 2008. Things are worse now than in those cases, he said.

“We are entering 2022 against the backdrop of the most extreme financial bubble in US history, driven by profitability-seeking speculation, boosted by the Federal Reserve, which has abandoned any link to systematic monetary policy,” Husman wrote.

This is a great statement. Husman supports it with several charts showing the current state of assessments.

One is the ratio of the total market capitalization of American companies, excluding the financial sector, to their total revenues. Husman called it his most reliable measure of estimating future returns. It is currently at its highest level so far.

He then looked at the rating levels of each decile in the S&P 500. This is a way to measure the width of the balloon. Note, for example, during the dotcom balloon, that the upper decile was much more pronounced than the other nine than it is now. Every decile is currently at historic highs.

Another option for measuring breadth compares the price / income ratio of the top 10% of companies in the S&P 500 by market capitalization with the bottom 10%. The average value of the index, as well as the bottom 10% of companies, now have much higher estimates than in 2000 or 2008.

According to Husman, these high estimates create the conditions for a sad return on the market over the next decade. The outlook for returns over the next 10 years is worse than for previous bubbles, he showed in the chart below. Prospects improve after the bursting of bubbles and the bottom of the market.

To return the ratings to their normal level of trend, the S&P 500 will have to fall by about 70%. With the sale of shares since the publication of the comment on January 14, there are still 68% to about 1,400.

“Once we have correctly predicted the rate of future market losses at the extremes of 2000 and 2007 (including the March 2000 forecast of a 83% loss in the technology sectors), we can predict that the S&P 500 will have to lose around 70% of our value here is just touching the standard valuation rates that have historically been associated with an expected long-term nominal return of around 10% per year, ”said Hussman.

Markets are in uncertain territory. Shares have sold out for more than a year, with the S&P 500 down 8.3% since early 2022 as the Fed prepares to tighten and bond yields jump.

Markets are in uncertain territory. Shares have sold out for more than a year, with the S&P 500 down 8.3% since early 2022 as the Fed prepares to tighten and bond yields jump.

Before dismissing Husman as a “weak bear,” think again about his experience. Here are the arguments he put forward:

• In March 2000, he predicted that technology stocks would fall 83 percent, after which the Nasdaq 100 technology index lost an “incredibly accurate” 83 percent between 2000 and 2002.

• In 2000, she predicted that the S&P 500 was likely to have a negative overall return over the next decade, which it did.

• Estimated in April 2007, the S&P 500 could lose 40%, then lose 55% in the subsequent collapse from 2007 to 2009.