Adding to the gloom of Jeremy Grantham’s shareholder letter last week warning 3%-plus U.S. GDP growth is “gone forever,” permabear portfolio manager John Hussman argues that, regardless of long-term trends, stocks currently are vastly overvalued.
In his latest letter to Hussman Funds investors, the former finance professor joins the fray of gloom-mongering characterized by Grantham’s letter, surprisingly taking the “optimists’ side.”
Grantham, and before him Research Affiliates’ Christopher Brightman and Northwestern University economist Robert Gordon, compiled data on population, employment and productivity all suggesting that U.S. economic growth has slowed to a new normal of around 1%.
Hussman has a different take on these trends. “My impression is that what Gordon and Grantham see as a precipitous decline in per-capita productivity and growth over the past quarter century is actually the product of distorted capital markets and misallocation of capital,” he writes.
Citing Nobel economist Robert Lucas, Hussman says the true long-term problem is a central bank that is set upon eliminating any short-term pain in the economy even at the cost of growth that correctly allocated capital would provide.
“… Lucas once calculated that the gain in economic welfare from an increase of just a fraction of a percent in long-term economic growth would exceed the benefit of entirely eliminating business cycle fluctuations,” Hussman (left) writes.
Yet while Hussman is an “optimist” in the sense that a differently managed Fed might in theory improve the economy’s long-term growth prospects, the main thrust of his letter is that in the short-term, at least, the stock market is doomed based on valuation fundamentals, correctly understood.