"Why do investors seem to be “underweighted” in equities relative to debt (especially compared with the allocations over the past fifty years)? Very simply, because there is so much more debt to be held, and someone has to hold it. The chart below shows the expansion of both equity and debt outstanding since 1950.
Notably, the market value of U.S. equities relative to GDP – though not as elevated as at the 2000 bubble top – is not depressed by any means. On the contrary, since the 1940’s, the ratio of equity market value to GDP has demonstrated a 90% correlation with subsequent 10-year total returns on the S&P 500 (see Investment, Speculation, Valuation, and Tinker Bell), and the present level is associated with projected annual total returns on the S&P 500 of just over 3% annually."
More from @hussmanjp on Twitter the other day:
Days and days of churning near an overvalued, overbought, overbullish multi-year peak is what some used to recognize as "distribution"
— John P. Hussman (@hussmanjp) March 27, 2013
The Federal Reserve's manipulation of asset prices and credit spreads via its zero percent interest rate policy and purchases of longer-term risk free government debt (Treasury bonds and government-backed mortgage-backed securities) with printed money have been responsible for the S&P's rally and economic growth since the bailouts in 2008/2009. But, going forward in this mature bull market, unless there's a hyperinflationary scare in this deleveraging cycle, or the U.S. dollar collapses for whatever reason, at some point this reflationary trend will become a victim to the normal business cycle. And all of this money printing (currency wars) and interest rate manipulation could have severe negative consequences for the financial markets and economy again as well. Former famed hedge fund manager Stan Druckenmiller recently told CNBC that he thinks "it's going to end very badly."
"I don't know when it's going to end, but my guess is it's going to end very badly. And it's going to end very badly because, again, when you get the biggest price in the world, interest rates, being manipulated, you get a misallocation of resources."