A research report, Hallmark of an Economic Ponzi Scheme, by John P. Hussman, Ph.D., is going viral.
Even Wiki, which is supposed to be impartial, does not paint a flattering picture:
John Hussman (born October 15, 1962) is a stock market analyst and mutual fund owner. He is known[by whom?] for his criticism of the US Treasury and the Federal Reserve. Among his many predictions was the 2008-2009 US Recession. However, many other of Hussman’s pessimistic predictions, have been inaccurate. Hussman has been predicting another financial crisis and a stock market collapse since 2009 , and is yet to be proven correct on that assertion after a 10 year secular bull market in stocks.
So given his terrible track record, him being right in 2008 is likely attributable to luck than any sort of skill. Anyone who heeded Hussman’s advice and sold their stocks would not only sold at the bottom, but missed out on what has been the greatest wealth creation boom ever–even surpassing that of the 80’s and 90’s in magnitude on an inflation-adjusted basis. What I mean by this is, in the 80’s and 90’s there was more inflation, so inflation-adjusted GDP and stock market gains were lower. 5% annual GDP growth and 10% annual stock market gains against the backdrop of 4% annual inflation is less impressive than those same gains in a 1-2% inflation environment (which is what we’ve had since 2009). This is evidence having PhD after your name does not make you smart (if intelligence means good investment advice or ability to predict, which is a narrow and technically incorrect of intelligence, but if appending the title PhD is supposed to lend credibility, any such credibility is lost when one actually sees the results).
This blog, however, has a near-perfect track record, predicting as early as 2011 (on a different website) that the bull market would continue and that post-2009 bull market and economic expansion would be the longest ever (which it officially is). He arrived at this conclusion, in part, by noting in 2011-2013 that interest rates were (and still are) very low and that bull markets tend to end when rates rise above 6%. Also, by how profits & earnings are so strong, the huge growth of technology stocks (such as FANG, which he predicted many times here would go up). Reading through the blog post archives, one can see he predicted as early as 2014, when the blog began, that the post-2009 bull market and economic expansion would continue uninterrupted, which it has. He was right about Facebook, Amazon, Google, and Tesla stock, all of which keep going up to no end, and will continue to go up, due to market share dominance, huge growth, and in agreement with the ‘HBD investing thesis’ (which he also created) and the hbd-as-destiny thesis (the idea being that, high-IQ companies and people are preordained, as if my destiny, to rule and that the perpetual, unending nature of the bull market and tech boom is the manifestation of this preordination).
This is possibly the first time HBD has been applied to investing, with exceptional results as evidenced by the performance of high-IQ sectors (such as information technology) and the relative poor performance low less intelligent ones (mining, housing, low-IQ retail [such as Target and Kmart], energy, and low-IQ emerging markets such as Brazil). This blog and those who heeded its advice made in excess of 30% annual returns for the past 4 years. That puts it in the highest tier of performance of any fund in existence, surpassing firms such as Ray Dalio’s Bridgewater, that are staffed by PHDs. But that is not a totally fair comparison, because hedge funds, by definition, tend to have more conservative investment objectives, but the point is, HBD investing is really powerful and a hypothetical index of high-IQ stocks and sectors beats the market by a large margin in terms of absolute returns and on a risk-adjusted basis.
So who should you listen to: someone with a doctorate but is clueless (and whose contributions are so trivial that Wikipedia doesn’t list his PHD thesis nor mention any original contributions or insights he has produced, but devotes much of the short entry to bringing his terrible track record to light)…or someone with a demonstrable top-tier track record?
Meanwhile, lopsided corporate profits generate a great deal of saving for individuals at high incomes, who use these savings to finance government and household deficits through loans. This creation of new debt is required so the economy’s output can actually be absorbed. Businesses also use much of their profits to repurchase their own shares, and engage in what amounts, in aggregate, to a massive debt-for-equity swap with public shareholders: through a series of transactions, corporations issue debt to buy back their shares, and investors use the proceeds from selling those shares, directly or indirectly, but by necessity in equilibrium, to purchase the newly issued corporate debt.
Yes, like how all those rich people bought McMansions and crashed the economy…note how the author engages in revisionist economics to advance presumably a left-wing agenda. In reality, the crisis was caused by low-income borrowers taking on too much leverage to buy homes that could not afford. Although wealthier borrowers defaulted, the 2008 crisis was precipitated by low-income and middle-income borrowers. The resulting stock market downturn and economic contagion later rippled to the higher classes. Also, share buybacks were NOT a contributing factor to the 2008 crisis even though share buybacks peaked in late 2007. To repeat a trite saying, correlation does not mean causation.
The second of these economic systems is effectively a Ponzi scheme: the operation of the economy relies on the constant creation of low-grade debt in order to finance consumption and income shortfalls among some members of the economy, using the massive surpluses earned by other members of the economy. Notably, since securities are assets to the holder and liabilities to the issuer, the growing mountain of debt does not represent “wealth” in aggregate. Rather, securities are the evidence of claims and obligations between different individuals in society, created each time funds are intermediated.
But I thought the debt is used to fund share repurchases and loans, funded by ‘productive activity’. Which is it. His argument is convoluted. Not all the debt being created is low-grade. Some is high-grade such as investment-grade corporate debt and treasury bonds.
I emphasized the same considerations in August 2007, just before the global financial crisis:
A model that is right once (2008) but wrong all subsequent times it is applied, is useless.
Let’s return to the concept of a dysfunctional economy, where consumption is largely financed by accumulating debt liabilities to supplement inadequate wages and salaries, where government runs massive fiscal deficits, not only to support the income shortfalls of its citizens, but increasingly to serve and enhance corporate profits themselves, and where corporations enjoy lopsided profits with which they further leverage the economy by engaging in a massive swap of equity with debt.
No one denies that debt plays a role in economic contractions and bear markets, but just saying that something could happen is of no use to anyone. Predicting when is much harder and something the author has evidently failed at given his abysmal track record. But also, given the increasing size and importance of high-IQ mega-sized tech companies (such as Google and Facebook), which tend to have very high operating profit margins, market dominance, and low debt, a debt-induced crisis less of a concern, unlike an economy that is dominated by debt-ridden low-IQ sectors and companies that lack such market dominance. Economic growth and activity is concentrated among a shrinking pool of increasingly strong and dominant companies, making the risk of a debt crisis less likely (I expand on this in the wealth concentration article, part 3 of the HBD investing series).
But also, capitalism has gotten much smarter and choosier since 2009, with capital chasing an shrinking small pool of high-quality companies and sectors. Most bubbles form when capital becomes indiscriminate, but that has not happened. Like in 2003-2006 when lenders were indiscriminate about mortgages. Or in 2013-2015 when scrappy, tiny mining and energy companies (and also energy junk bonds) were bid-up indiscriminately, only to implode spectacularly in 2015-2016. As evidence of this, although valuations for some Web 2.0 companies are huge, the median (instead of the mean) is actually lower than it was in 2000, meaning that the vast majority of start-ups are getting very little funding and are worth very little. Everyone wants to invest in Uber (or what they think will be the next Uber), so that means more money chasing a small pool of companies. Capitalism (but also central planning and central banking) may become so smart, if it hasn’t already, that economic cycles may become a thing of the past, and the record duration of the post-2009 economic boom and bull market is evidence of this.