John Hussmans Latest

[HenryTo]

http://www.hussmanfunds.com/wmc/wmc050711.htm

Quote: "So while it's true that lower yields have been associated with higher P/E ratios in recent decades, the meaning of that for investors isn't positive or even neutral, it's decidedly negative. What we're really seeing is that stocks since 1970 have been heavily sensitive, and possibly overly sensitive, to interest rate swings. While it's true that lower interest rates have supported higher P/E ratios, those lower rates and higher P/E ratios, in turn, have been associated with poorer subsequent stock market performance.

"In short, if investors want to argue that low interest rates help to explain today's elevated P/E ratios, that's fine, as long as they also recognize that subsequent returns on stocks are likely to be dismal in the future as a result."

[nodoodahs]

Quote: That means that in the data since 1970, every 1% increase in the 10-year bond yield has been associated on average with a 2.63% increase in the S&P 500's total return over the following year (an additional effect is picked up by the coefficient on the earnings yield - the value would be even higher if one used the 10-year Treasury yield as the only variable). Similarly, every 1% decrease in the 10-year bond yield has been associated with S&P 500 total returns over the following year being 2.63% lower than they would otherwise have been.

Funny thing is, at any point in time, both the "current" 10YT yield and S&P500 return over the following year can be defined as functions of the previous 15 month's changes in M3. This is not the dog (yield) wagging the tail (stock return) as much as it is the master (fed) yanking the leash.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.