Broken clock theory— he might be right this time!

To be a bit more generous to the vellow, maybe he's more like one of those clocks that just shows the day of the week. (I have one in my office). He just doesn't change stances very often.

He was pretty bearish in 2007, and pretty bullish in 2008, not an entirely broken clock.

The problem is that assuming that market valuations will average at around the same level of any specific past time interval is a very tricky assumption. Even the slightest changes of the history you look at give very different conclusions about what would constitutes "normal". I think the line of reasoning is meaningful, but much less precise than inspecting history might suggest.

I certainly agree that medium to long term forward returns for the broad US market are certain to be poor, for the simple reason that one is not getting very much in the way of long run future average earnings for your dollar today. The total real corporate earnings can't grow over the long run any faster than the economy, which has a speed limit. It's the earnings that ultimately drive the value, that ultimately drives the slope of prices. But I no longer think that says much about what future market multiples will be like in any particular time frame.

For a fun geeky paper about why valuations can get crazily high so easily in recent years, more or less the antithesis of Mr Hussman's implied foundation in mean reversion, read this paper
nber.org - Working papers
If research papers aren't your thing, here is a blog post that captures a bit of the thinking
investing.com - What is the inelastic market hypothesis
Or, if you want an even shorter introduction to the key notion:
"G&K solve this riddle by defining an inflow as an investment into an investment fund that must be put to work in the stock market, and which was not funded by a stock sale. And their key insight is about that “must”. The great majority of stock market investment takes place though funds that have rigid mandates governing their mix of stocks and other assets. The result is that when they put money to work in stocks, the funds are price insensitive. Oddly, this means that $1 of flows can drive up the capitalisation of the stock market by a lot more than $1. "
from Financial Times: Content Edbd1838 6f18 46dd a080 d5d2abf6d0fb

Jim