
Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin - thisisit
https://www.hussmanfunds.com/comment/mmc171218/
======
pdog
This guy expects a market loss of about -65%, which would send the S&P 500
back down to 900. He also expects negative total returns over the next 12
years.

Of course, his _Strategic Growth Fund_ has not only underperformed its
benchmark (the S&P 500 index), the fund actually has negative returns over the
past 1, 3, 5, and 10 year periods[1].

Losing money in this market is a truly remarkable feat.

[1]: [https://www.hussmanfunds.com/strategic-growth-
fund/](https://www.hussmanfunds.com/strategic-growth-fund/)

~~~
runako
This company has ~$750mm under management, and has several funds that manage
to have both a) high expense ratios and b) horrible performance over the short
and long terms.

Serious question, for those who work in finance: how do companies like this
stay in business? Shouldn't the transparency of their poor performance have
long since driven them out of business?

Semi-serious question, also for those who work in finance: what are the
barriers to entry to starting funds for those of us who could do better than
this guy?

Edit: I'm also stunned that anyone running any kind of "growth" fund could
manage to lose money the last few years.

~~~
aaavl2821
Funds like this tend to outperform in bad to normal markets and underperform
in highly bullish markets as they have more discipline around valuation.
Warren Buffett famously underperforms in very bullish markets as well

The pitch of funds like this is that for a few years out of 10, they'll
underperform, and then massively outperform when everyone else is sucking.
People invest in funds like this (note I don't know too much about his fund in
particular but know many funds with similar styles) because when all the
people who think they are expert investors bc they rode a bull market crash,
these funds will be making lots of money

~~~
b4lancesh33t
But it didn't outperform in 2008. At least not by much.

~~~
kgwgk
Losing 9% instead of 37% is quite some outperformance. Let’s say you started
with $100: ending with $91 is 44% more than ending with $63.

------
sdy
I believe the man is essentially saying that past performance does not
indicate future performance. Ironically, most of the comments here are saying
he is wrong, because of his past performance.

Can we instead talk about his specific points and why they are wrong instead
of just focusing on his past performance?

Also, it looks to me that his performance was good during the great recession.
So if another recession is coming, shouldn't the critics here be flocking to
him? Or is everyone stuck in the current bull market feedback loop?

~~~
jjeaff
Seeing as the market always recovers and then some, you are going to need to
make very, very good returns in the downturns to make up for all the list
potential on the upside.

In other words, the overall return of the markets over their entire lifetime
is positive, not negative.

It would be great to ride the bull and then switch to the bear in a down
market. But that would require timing the market.

~~~
BadCookie
The market always recovers? Japan must not have gotten the memo. Or is the
U.S. too special to ever have the same problems as Japan?

~~~
jjeaff
By "the market", I was referring to the US Markets. We have a few hundred
years of history of always recovering. Japan is the special case though. Small
and landlocked, rather xenophobic with an aging population. Things that could
happen in the US, but the US is just a completely different, and much larger
animal.

------
philiphodgen
I look beyond the “there’s a crash coming” sentiment. In that opinion, he is
like all other pundits yammering on CNBC: entertaining rather than
enlightening.

What I like about his article is the insight — new to me — about the nature of
paper wealth vs real wealth. He described it in a way that is useful and
enlightening to me. The assertion that a security (stock, bond) is not an
addition to net wealth — just a zero sum transfer between individuals over
time — is a provocative statement that I will ponder for some time.

~~~
lmm
Trade is a wealth creation mechanism, because different people assign
different values to things. When a baker exchanges some loaves of bread with a
carpenter for a table, wealth is created: they're both rational actors who
know that the thing they're getting is worth more (to them) than the thing
they're giving away. The same is true when the baker sells bread for money.
The same is true when they issue a bond for their baking business. Of course
the bond just moves money around, but a lot of wealth creation consists of
moving things around rather than directly building a physical thing.

~~~
dpiers
Correct, but the article specifically referred to securities as zero-sum
transfers. A security is linked to something that has value, and exchanging
the security doesn’t alter the value of what the security is linked to.

~~~
lmm
A particular stream of payments with a particular risk profile is an asset
that has different (present) value to different entities like any other.

~~~
shostack
I may not be using the proper terminology here, but would I be correct in
restating this as:

The underlying value of the asset is just one component, but the vehicle the
asset is traded through can change that value equation by adding or removing
its own value.

~~~
lmm
No, I don't think that's correct. A security doesn't have its own value
independently of the payment stream it represents, any more than the deed to a
house has its own value independently of the house. But the same payment
stream (or house) might be of different value to different people, so buying
or selling it can create wealth.

~~~
shostack
So the risk and form that the payment stream takes (ie. bond coupons are
different from rental property income) might both be $100 for example, but if
someone is overindexed in real estate in their portfolio, there may be more
value to them in the bond?

~~~
lmm
Yeah. A risk profile isn't just a percentage, it's also a question of what
it's correlated with.

------
VMG
Understanding Bitcoin is hard. Here is a response to some of the criticism:

> Every time a block is validated, a single node in the network gets a reward,
> and everyone else’s computing time is completely wasted.

This is a misunderstanding of what PoW is [http://www.truthcoin.info/blog/pow-
cheapest/](http://www.truthcoin.info/blog/pow-cheapest/)

> The system already features a rather steep cost per transaction, and hardly
> any of those transactions are for the purchase of goods and services

Second-layer scaling allows an arbitrary number of off-chain transactions
based for a single on-chain transaction. See
[https://lightning.network](https://lightning.network)

~~~
alex_young
>> Every time a block is validated, a single node in the network gets a
reward, and everyone else’s computing time is completely wasted.

>This is a misunderstanding of what PoW is
[http://www.truthcoin.info/blog/pow-
cheapest/](http://www.truthcoin.info/blog/pow-cheapest/)

Honest question: I tried to find the problem with that view in the link you
provided, but couldn't. Can you explain it to others who may share the same
belief? I think that's what the Bitcoin white paper describes, but could be
mistaken.

~~~
VMG
You need opportunity cost in order to secure the network. Without that, there
is no incentive to keep the network secure. There is no cheaper solution to
solve this problem, therefore there is no waste.

~~~
smogcutter
"Bitcoin is inherently wasteful, therefore it's not wasteful." What?

~~~
spookthesunset
Welcome to Bitcoin advocate logic. Clearly using more energy than a moderate
sized european country in order to process 3 or 4 transactions per second
isn't wasteful. Right?

I mean in absolute numbers, says the bitcoin advocate, the fiat banking system
has to use more, right?....

....nevermind the fact they do something that is not driven by pure
speculation and do it at thousands of times larger scales.

Bitcoin -- the perfect intersection of people who don't understand finance,
economics, computer science, scaling, politics, socio-economics, or math.

PS: People only quote Bitcoin's energy use and often times they leave out
things like air conditioning. Nobody seems to sum up the total energy required
to power the entirety of the crypto "space" including Ethereum, Litecoin, etc.

~~~
ratacat
Yes our financial system isn't based on speculation. Good one

------
squozzer
I find myself in agreement with most of the author's statements, especially
regarding bitcoin and paper wealth.

I also like the following statement -- "If our policy makers are interested in
boosting long-term structural U.S. GDP growth, they should be providing direct
and targeted tax incentives for real investment, education, research &
development, and other factors that could, over time, increase our nation’s
productive capacity."

Too bad our political system no longer has that capability, if it ever did. It
seems tax incentives find their way to the most powerful factions instead of
the most productive ends.

Real Investment - too many parasitic factors. Education - too many parasitic
factors. R&D - too many parasitic factors.

~~~
lmm
Education is in a bubble of its own at the moment, partly because it's fun out
of proportion to its economic value. We're churning out PhDs who then have
nothing to do. "Innovation" tax incentives reward companies for registering
patents, but if patents ever did reflect innovation that's long since fallen
to Goodhart's law.

Infrastructure investment is usually a good idea; so is direct government
funding of real research, the kind that NIH or DARPA put out. But if, as the
article claims, the biggest issue is the number of people in the labour force,
then the best way to improve growth would be to ensure more people can
participate in the labour force. That means encouraging things like public
transport and flexible working hours, and finding a way to square our current
approach to unemployment and medical insurance with the so-called gig economy
(i.e. people working multiple part-time jobs). That would be win-win, and is
unquestionably the government's area of responsibility.

------
neolefty
The economy is just a mechanism to have a predictable environment in which to
raise children.

~~~
ashark
The most striking moment to me in my IPE class was when the professor, after
we'd covered how governments and, in democracies (by proxy), We the People,
bring modern economies into being and choose, to some degree (other
governments and a variety of natural factors have more than a little say), the
shape they'll take, innocently asked, "so, why have an economy?"

Yours is a better answer than what any of us came up with at the time.

~~~
emodendroket
Every society has to have some kind of apportionment and exchange of
resources, which might be called an economy, so I find the question strange.

------
dreamdu5t
Fund managers are just scammers - plain and simple. He loses his clients
money, he makes money. He earns his clients money, he makes more money. Either
way he wins. It’s all sales and bullshit.

Source: worked at a hedge fund

------
todipa
There is a lot to dissect but I would focus on labor force. Our labor force
used to be all human labor. Now it includes a large number of bots, both
physical and software, that take care of business. The (output = labor . x)
doesn't work anymore.

~~~
kyaghmour
Great. But that begs for more questions. Money is a unit of trade between
humans for getting something from the other human in exchange for your money.
If an entire class of humans is no longer needed, how will they receive money
to pay for what they need? How much is your legal tender worth when large
swaths of the country whose denomination you claim your wealth from are no
longer "part of the economy"?

Not that I have answers to these questions. But we do live in interesting
times.

~~~
erikb
I believe these questions are exactly what is driving the current crisis.
Let's not be confused here. People getting more rich, and prices rising
doesn't mean we don't have a crisis.

The problem is that nobody knows yet, what this world will look like, where
the formula value = number_of_people * output_per_person holds true. So where
to put all the capital, power, and information wealth that one has created in
a system based on that formula? So everything that gives the impression it may
make it over the leap into the next system, start-ups, new currency, tech
gimmicks, gives some of the people hope that they have finally found something
that will protect them and bring them into a good position for the next cycle
of politcal evolution.

Truth though is, there are no systems that hold forever, or which could
predict something which is not part of their system. There is only
flexibility, intelligence, and a few tricks that sometimes work. E.g. making
fire will probably the same, even if capitalism has ended. A useful trick to
surivive cold and food-sickness. Also the ability to build trust relationships
may survive as long as humanity survives. But few of these really enable one
to continue living in the luxuries wealthy people are used to.

------
Yen
His chart "Nonfarm business sector: Real output per person" shows a notable
_slowing_ of the growth rate of per-capita productivity, consistently, over
the last 70 years.

I was under the impression that the opposite has occurred - we've achieved
mind-boggling amounts of per-person productivity, and rapid rates of growth in
productivity, fueled by advances in automation and communication technologies.

Is this chart wrong? Is my impression opposite to reality?

~~~
FabHK
I'd say yes, your impression is wrong, but you're not alone.

Productivity growth in the 50s and 60s was consistently higher than it is now.
Then it did slow down while IT was taking off, which is known and studied as
the _productivity paradox_ [1]: "Academic studies of aggregate U.S. data from
the 1970s and 1980s failed to find evidence that IT significantly increased
overall productivity."

There are many attempts to explain it, including

* lag: productivity started to pick up in the 90's (which you can see in Hussman's graph, but it's fallen back now...)

* "hedonistic" improvements: IT makes many things better, but they do not show up in GDP measurements

Bottom line, though, that arguably earlier technical advances (electricity &
machinery, assembly lines & mass production, etc.) had much bigger impact than
yet another Tinder for dogs.

[1]
[https://en.wikipedia.org/wiki/Productivity_paradox](https://en.wikipedia.org/wiki/Productivity_paradox)

------
maneesh
The writer makes a few good points -- I liked his quoted selection "Faced with
extreme valuations, the first impulse of investors..."

However, I think there is a fundamental flaw in his analysis -- specifically
when he makes this a majority foundation of his point:

"Every security is an asset to the holder, and an equivalent liability to the
issuer."

That's not true right? A few moments reflection makes me think of stocks --
which are equity, not a asset nor liability. [1]

What do you guys think? That point seemed to be a big part of his analysis,
right?

[1] [https://www.quora.com/What-makes-a-common-stock-an-asset-
or-...](https://www.quora.com/What-makes-a-common-stock-an-asset-or-a-
liability)

~~~
wmrowan
Companies issue shares. These shares are listed as a liability on the
company's balance sheet. Each share represents a liability to the company
because it entitle its holder to a share of any dividends paid by the company.

The intrinsic value of a share is the net present value of this future stream
of dividend payments, not its current market price. OP's point is that the
market price of a share can be significantly above its intrinsic value in
periods of irrational exuberance, such as now, creating "paper wealth" that
doesn't really exist and which will evaporate when the speculators head for
the exit.

~~~
perl4ever
The present value of future dividends is highly dependent on the terminal
state of the company, and the future of the economy. So I don't find wild
fluctuations in stock prices to be _proof_ that the market is inefficient or
over/undervalued because the far future is very uncertain.

Every stock chart is an invitation to assume false precision, because unlike a
scientific measurement there is no explicit +/\- range. But the true value
_must_ have a range of uncertainty, and it can easily be many orders of
magnitude.

Also, every time I see the phrase "irrational exuberance" I am reminded that
while there _was_ a bubble in the late 90s, at the time Greenspan famously was
worrying about the market in public, the Dow was around 5,000 or so IIRC, a
_long_ time before the peak.

~~~
maneesh
Wait till you see how much more money is in the world's money supply since
2001, thanks to derivatives [1].

[1] [https://pavlok.com/moneysupply](https://pavlok.com/moneysupply)

------
apo
What the bubble callers miss is that in the middle of a bubble, only cranks
call bubble.

The opposite is the case now. Every other armchair investor (and their ivory
tower counterparts) is calling bubble now: on Bitcoin; on stocks; on bonds.

Here's how to identify a real bubble. The conventional wisdom says go all in
on a single asset. If you don't, you will get rekt. The only people who
disagree with this position are cranks.

That's a bubble. It happened in 1999 with stocks and it happened in 2007 with
real estate.

No asset is in a bubble at the moment based on this definition because the
conventional wisdom is against all of them.

------
squozzer
What matters more - the size of the theatre or the size of its exits?

~~~
chickenfries
Coinbase sent me an email saying that they cannot guarantee uptime during high
volatility. The exits are locked.

~~~
Zarath
Oh please, people have had months and months to cash out nearly any time they
please.

~~~
chickenfries
Yep, except for when they might want to... y'know. When the price is crashing.

[https://www.theverge.com/2017/12/22/16810614/coinbase-
tradin...](https://www.theverge.com/2017/12/22/16810614/coinbase-trading-buy-
sell-unavailable-bitcoin-price-drop)

------
brooklyntribe
Ok, so if you think the hell thing is going to hell, just go SHORT, it's one
click away. How simple is that?

And that's why these predictions never pan out, if it's SO EASY to make a ton
of cash off a crashing market, then EVERYONE will go short, since it's so EASY
to make money.

And that's why markets are generally stable and it's what humans do best, we
go LONG. :-)

~~~
chickenfries
> Ok, so if you think the hell thing is going to hell, just go SHORT, it's one
> click away. How simple is that?

Uh, how? Also, the hard part about making money on a short is knowing WHEN the
price is going to crash. You can call an obvious speculative bubble what it is
without knowing exactly when it's going to pop.

> if it's SO EASY to make a ton of cash off a crashing market, then EVERYONE
> will go short, since it's so EASY to make money

If the market is already crashing, why would someone sell you the stock to
short sell? Don't you have to short before the price starts to drop?

> And that's why markets are generally stable and it's what humans do best, we
> go LONG. :-)

What?

------
simonebrunozzi
I found this reading very interesting, and novel.

However, he lost me when he wrote: "With regard to Bitcoin, my view is that
the Blockchain algorithm itself is brilliant. Bitcoin itself, however, is just
one application of Blockchain, and a rather awkward one."

Every time I read a comment like this, my eyes roll up.

------
junkscience2017
Lots of permabears will go long when it's obvious markets are headed up, not
Hussman.

[https://www.hussmanfunds.com/strategic-growth-
fund/](https://www.hussmanfunds.com/strategic-growth-fund/)

As always, Hussman manages the near impossible feat of reliably losing money
in virtually any market environment

The Dow has risen 5k in a year and Hussman still manages to be in the
red....I'm sure his clients are thrilled

on top of the how-is-that-possible string of losses in every fund he manages
across any time frame...his expense ratio is insane! 5% fee ratio to lose
money in a bull market...sign me up?

his clients would be better off maxing out a string of savings accounts to
earn 0.1% interest but get FDIC coverage

most permabears since the 80s realized you can't fight the Fed, even if the
whole system is based on BS

~~~
exelius
It’s a canary in the coal mine IMO. Sure, he’s early; but he’s not wrong. A
very significant portion of growth over the last decade has been the growing
ability of US companies to avoid paying US taxes. That growth eventually caps
out until you reach a 0% corporate tax rate — the problem here is that shifts
the tax burden 100% onto the populace, which absolutely destroys consumer
spending and ultimately the economy as a whole.

Right now they’re just turning these changes in the tax rate into enterprise
value, but it’s a one-time shot. And if you do too much of it, you undermine
the economy. But the corporations can’t help themselves, so we will have yet
another boom-bust cycle.

~~~
junkscience2017
sorry but the only answer any investor should care about is achieving their
financial goals over the expected investment timeframe.

markets tend to rise and as a result market declines tend to be temporary

the permabear thesis appeared in the early 80s when the US was in a rut and we
also became a debtor nation. the permabear thesis -that debt and fiat currency
would produce an economy favoring the pessimistic (but not completely
imploding to the point of collapse, because you can't invest in that), proved
to be wrong over a thirty year window

if you have an axe to grind, you will always find a permabear manager willing
to tell you tales of doom...it will cost you your financial goals though

~~~
exelius
I think these funds are useful as a risk hedge — there is some non-zero risk
every year that the economy will collapse. If you invest in a fund that will
help offset some of that risk by performing above average in a downturn, you
might want to do it as part of a portfolio strategy.

Nobody should be putting their life savings into one of these. Hedge funds
like this aren’t for that; they’re a risk management lever that gets set
according to the economic model an investor is using.

~~~
junkscience2017
lots of people here keep using the term "hedge"...none of the permabears
market these as hedge funds...they do not internally hedge their own risk
positions

these are what they appear to be - bear market funds

~~~
oarsinsync
Giving a bear market fund a % of your total investment capital is the hedge.
They don't need to be hedging their positions, you've already done that on the
macro level by diversifying your investment portfolio.

------
elmar
I should add Fiat currency...

~~~
sdfadfa
Sure, but that'll get downvoted in a jiffy in HN.

