I have been aggressively adding to short positions. Interestingly, John Hussman’s January Market Commentary out today in part addresses what I think is the Bullish mistaken assumption.
“As the Buddha taught, “All things appear and disappear because of the concurrence of causes and conditions. Nothing ever exists entirely alone; everything is in relation to everything else.” With interest rates now well above zero, the primary causes and conditions of the recent speculative bubble are no longer in place. The persistence of rich valuations here are, in my view, largely the result of psychological anchoring and hindsight that treats past prices as a standard of value. We saw the same thing during the 2000-2002 collapse, and it’s dangerous. I had friends who were wiped out, not by buying at the top, but by assuming that once prices had declined by 15%, or 20%, or in some cases 50% from the highs, the retreat somehow represented “value.”
I’ll say this again. Value is not measured by how far prices have declined, but by the relationship between prices and properly discounted cash flows. We presently estimate that the S&P 500 would have to drop to the 2800 level simply to establish prospective 10-year returns equal to those of 10-year Treasury bonds. Restoring a historically run-of-the-mill 5% expected return over-and-above Treasury bond yields would require a decline to the 1850 level. Restoring historically run-of-the-mill 10% expected long-term returns for the S&P 500 would require, by our estimates, a decline to the 1600 level.”