There are a number of troubling signs of underlying economic weakness that could make the next downturn one of the worst ever. From Joe Ciolli at msn.com:
When it comes to predicting a stock market crash, all roads lead back to the economy.
That’s why it’s so jarring to hear someone claim that today’s economic system is “dysfunctional,” which is what the world-renowned market skeptic John Hussman just did.
Hussman, a former economics professor who is now the president of the Hussman Investment Trust, is no stranger to such bearish proclamations, having made a name for himself by repeatedly predicting a stock market decline exceeding 60% and forecasting a full decade of negative equity returns. He has now turned his sights on the economy, which he says is setting the market up for unprecedented failure.
In a recent blog post, Hussman paints a grim economic picture, lamenting labor-market slack that has kept wages low, massive deficits being run by the market, and lopsided corporate profits he says favor high-income people.
To drive this point home, Hussman uses the chart below to show that wage and salary compensation are near an all-time low relative to gross domestic product. He notes that while it appeared to be rebounding, it has since faded.
© Hussman Funds
But perhaps Hussman’s biggest worry is how indebted consumers and companies have become as they’ve attempted to navigate a difficult economic landscape. In his experience, this instability can only end one way: with mass defaults and copious investor tears.
“The hallmark of an economic Ponzi scheme is that 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,” Hussman wrote in a recent blog post. “The debt burdens, speculation, and skewed valuations most responsible for today’s lopsided prosperity are exactly the seeds from which the next crisis will spring.”
Add this to past arguments from Hussman that investors are too complacent, and that adverse valuation and sentiment conditions are brewing ahead of a meltdown, and you get an increasingly well-rounded view of the hurdles facing the nine-year bull market.
‘This time feels different’
Even though investors have two relatively recent market crashes to which they can refer, Hussman says they’re largely ignoring that helpful historical precedent. They’re instead telling themselves that the same excesses and glaring issues that destroyed the market last time around don’t apply now.
His take can be summarized simply as: “Nobody learned anything from the global financial crisis.”
To continue reading: The stock market’s biggest bear unloads on the ‘economic Ponzi scheme’ he says will cause the next crash — and explains why this meltdown feels different