Vulnerable windows and swinging trap doors

Hussman Funds/John P. Hussman/June 2019

“Why do economies collapse into recession in ways that seem so difficult to predict? Why do financial markets collapse into free-fall with timing that’s so loosely related to market valuations? Much of the reason is that complex systems usually aren’t linear. In a linear system, a given change in some variable X always has the same expected effect on variable Y. In the economy, and in the financial markets, the same event can have zero effect in some conditions, and profound effect in another, often depending on much broader conditions that make the system vulnerable or resilient to shocks.”

USAGOLD note:   John Hussman begins with the insightful quote above and ends with a reprise of his market meltdown call in early 2008.  Sandwiched in between is a ton of supporting logic and analysis that will enrich the understandings of the deep thinkers out there. In January 2008, Hussman said “[I]nvestors should evaluate their risk exposures and tolerances now, in order to allow for substantial further market weakness. Market conditions presently feature a Pandora’s Box of rich valuations, vulnerable profit margins, rising default risk, rapidly deteriorating market internals, failing support levels, and accumulating evidence of oncoming recession.” His advice today, he says, “is exactly the same.”

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