Can We Expect an Outlier Level of Returns for the next 12 years?

John Hussman of does a great job taking data and showing us projected returns over time.  He now shows charts going back to 1926 (see below) showing the projected and actual 12 year returns of the stock market based on some slight variation of market cap to GDP ratio.  See the image below and also on his website (

Screen Shot 2016-05-23 at 2.39.42 PM













As you can see, there is quite the correlation between projected returns (blue line) and actual returns (red line) going back 90 years.  These returns INCLUDE dividends and as you can see, right now, we are at less than 2% total returns over the next 12 years INCLUDING dividends.  Dividends are currently above 2% so that means that 12 years from now, the nominal level of the S&P 500 should be LOWER than it is today.

Another chart he shows on his website is a scatter plot of all the results over the past 90 years to show their correlations.  See below.  Screen Shot 2016-05-23 at 1.52.00 PM














As you can see, there is a pretty obvious negative correlation between Market Cap to GDP and the total subsequent 12 year returns.

The interesting part, though, is what has been aggravating.  As much as I show people the first chart, everyone says “yeah but this time could be different.” Yes, it could.  I do not deny that at all.  However, look at the outliers. There aren’t any CRAZY outliers.  Are there fluctuations? Absolutely, but there are no 10% returns where there are a cluster of 0% returns and to the same token, when the actual returns were large (15% to 20%) you don’t see a random occurrence of 0% returns.  It shows that these results are pretty much in tune with what is expected.

I had an accountant in my office two weeks ago telling me that there has never been a 10 year period in which stocks didn’t go up at least 10%.  First off, he is MASSIVELY off, but second, I asked him if he then thought that 10 years from now he thought that the S&P would be at 4500 and he said “No, probably 3500.”  Which contradicted what he said about the 10 year returns never being below 10%, but also, this scatterplot shows that when the projection is as bad as it is now, we are NOT going to see a very large return compared to what was expected.

I get it…it’s data and everyone thinks all data can be manipulated to show you what you want to see.  I agree with that…to a certain level.  Definitely not here.

Proof That Prices Won’t Go Up Forever

The great thing about bubbles or euphoric market price increases is that they feel invincible.  Yeah yeah yeah.  Ok. You don’t feel that way now…or so you say.  The pundits all try to say that they don’t feel that now which is why we aren’t in any big danger.  But listen to what everyone says when times are good.  Their logic is that certain companies are changing the game so their prices will continue to go up. When it comes to real estate, “Look at how much this city is growing by! Real estate will continue to go up!”

Ok.  So let’s take a look at both of these kind of attitudes and why they are eventually proven wrong…

Recently, start-up companies have been taken public at an alarming rate similar to the late 1990s with valuations that are obscene…are they as obscene as 1999?  I don’t think so.  Back then, you literally could have a business plan and get a $1 Billion valuation.  Nowadays, you do need sales, but it’s ok if you are losing more money than revenue you bring in (Yes…I said that right…like Uber) and you will still get multiple tens of billions in value…and then Square went public at a value 33% LOWER than it’s last round of private financing.  Now, you are seeing more tightness in valuations of start-ups and less hype around them.  Look at stocks like Twitter and Square and other companies that have gone public in this new start-up world…they are at or below their IPO prices.

EVENTUALLY “investors” stop caring about the things that drive prices up considerably . Always.  Look at every market mania in the last 100 years…there was always a capitulation point where all of a sudden, people cared about profit and valuation. We have seen it twice before in the last 15 years (stocks in 1999 and real estate in 2007) and we are starting to see it again now with stocks and real estate.  Does it mean that stocks will crumble and real estate will crumble?  Not necessarily but I wouldn’t bet against that either.

There was an article this week from Bloomberg ( that talked about how people are now moving AWAY from San Francisco because of the increased cost of living because of rent and home prices.  This is the first I have heard of this, but it is the start of something.  This is proof of how real estate can’t just go up forever no matter how much demand you have (within reason).  At some point, it becomes too expensive to rent or buy and prices level off and/or start to fall until an equilibrium is hit…or sometimes worse.

What I am saying is NOT new.  It is a reality of all market increases. At the end of the day, when you pay less for an asset today, you are giving yourself more return in the long run.  That’s a fact.  The assets future price is NOT due to today’s price…if it was, we would pay whatever it takes for EVERYTHING in the world…but as we have seen in history, eventually markets capitulate and prices drop when euphoria is at play.



Today Was Beautiful – AMZN and MSFT

So today was beautiful because it reaffirmed two of my calls.  Granted, one is still greatly in the negative, but it’s starting to break.

As anyone who reads this thing or talks to me for 5 seconds knows, I am very anti-Amazon stock.  I shorted it back in the high $200s and I have been beaten to a bloody pulp on it but the higher it went, the less sense it made.  It peaked at $696 (so far, it’s a peak) on December 28, 2015 and it is now, after hours, as low as $542 per share.  Yes, they missed earnings, by a lot, but this company is headed for a major tailspin.  The valuations were crazy and it is finally starting to crack.

This is just the start.  All the people who support Amazon only have one response: It’s growth! Well, just like I always say, growth is great, but at what price?  You can’t just pay whatever because it’s growing fast! You still need to figure out what it’s worth AFTER all the growth and work backwards from there, but the euphoria kicks in and people make it go up and up and up! Amazon will be below $200 a share in the near future.  That’s my call.  And I will exit my short at $150 per share.

And for the other extreme…Microsoft (MSFT).  Two years ago, everyone thought I was STUPID for buying this blue-chip tech company.  “It’s dead!” everyone said. If it was dead, why was its revenue and profit both increasing year after year after year by 8-11% consistently?  It was almost like Bernie Madoff with how consistent it was with its profit.  Even I wondered if it was all a farce because how could a company that EVERYONE told me was dead still consistently increase profit and revenue?  One local tech “guru” even told me that he wouldn’t buy Microsoft if it cost him $50Billion and it had $100Billion in a bank account and he could shut it down.  That’s how stupid investors are on both extremes.  At that time, it was trading for $23 per share. I sold the shares this month for $55.  Hmmm.  Interesting.

Bottom line is…I am not done with Amazon yet. And there will be a price that I am a buyer of Amazon.  Why?  Because investing isn’t about the company, only. It’s MOSTLY about the fundamentals from a long term perspective.

Apple is one of the most fundamentally sound companies out there and a few years ago it went from $720 per share down to $350 or so when it couldn’t make iPhones as fast as they were selling them.  Now it makes $50Billion in one year and it’s down 5-8%.  How do you figure that?

Yes, fundamentals don’t matter in the short run, but they matter with a VENGEANCE in the long run.  This is probably the start of something for Amazon and the entire market when it comes to valuations.

I’ve said this all before and I keep repeating it.