Excerpted from John Hussman's Weekly Comment,

Investors who feel that zero interest rate policy offers them “no choice” but to hold stocks are likely choosing to experience negative returns instead of zero. While millions of investors appear to have the same expectation that they will be able to sell before everyone else, the question “sell to whom?” will probably remain unanswered until it is too late.



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It’s an unfortunate situation, but much of what investors view as “wealth” here is little but transitory quotes on a screen and blotches of ink on pieces of paper that have today’s date on them. Investors seem to have forgotten how that works. Few are likely to realize that apparent wealth by selling, and those that do will essentially be redistributing it from the investors who buy. Meanwhile, don’t confuse time to sell with opportunity to sell. Trading volume remains quite tepid, and the majority of that volume represents existing owners exchanging what they hold rather than outright entry and exit. The investors who successfully leave the equity market at current valuations will exit through a needle’s eye.



Implied volatility in S&P 500 index options fell to just 10.3% last week, indicating enormous complacency about potential risk. I’ve noted before that extreme overvalued, overbought, overbullish conditions tend to feature “unpleasant skew”: the raw probability of an advance is typically greater than the probability of a decline, so the market tends to achieve a series of successive but fairly marginal new highs, which can feel excruciating for investors in a defensive position. The “skew” part is that while the raw probability favors an advance, the remaining probability often features vertical drops that can wipe out weeks or months of market gains in a handful of trading days. We’ve certainly seen an unusual persistence of overvalued, overbought, overbullish conditions without consequence in recent quarters, but it is notable that the implied skew in S&P 500 index options has soared.

Indeed, the ratio of implied skew to implied volatility spiked to the highest level in history on Friday.



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The ratio of market capitalization to GDP, which Warren Buffett (correctly) observed in a 2001 Fortune interview is “probably the single best measure of where valuations stand at any given moment” is now about 150% (not just 50%) above its pre-bubble norm, even imputing a rebound in Q2 GDP growth. Of course, Buffett also wrote "A group of lemmings looks like a pack of individualists compared with Wall Street when it gets a concept in its teeth" - which may explain why Wall Street seems so entranced with the concept of QE instead of actually doing the math.

The ratio of market capitalization to GDP, presented below on an inverted scale, is beyond every point in history except for the final quarter of 1999 and the first two quarters of 2000.



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As The BIS warned recently...