The scary thing about what Hussmanâs prediction for the futureâŚ
A note: If you had invested in Vanguard total bond with $10,000 in 2000âŚyouâd be underwater by a big margin in 2022âŚinflation would have more than eaten your gain to $20,000 by now. Youâd be at near zero gain. Your spending power would be equal to your investment in 2022.
IF his prediction for future growth comes trueâŚand you get 2% real gains over inflationâŚletâs see âŚwhat would happen
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Every corporate and state pension fund would go bust. They depend upon a 8% over inflation market gain to have the funds to pay future retirement benefits. Worse for company pensions - federal tax laws require them to âtop offâ their pension funds to be able to pay projected pensions ad infinitum. With 2% type market gains - all of them would quickly be insolvent after five years and bust after 10.
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The end of retirement? Most folks now donât have pension plansâŚthey went the way of the dinosaur mainly because of requirements in #1. Companies can have up and down years in profits and itâs hard to predict how much they need to top off the pension funds so they bailed out big time in the 1980s and 90s and converted to 401Ks. That works well in a rising market, but if gains are 2% over inflation - that means a LOT of people busy savingâŚand having only 2% gain for 10 or 20 years till they reach retirement ageâŚwonât have anywhere near sufficient portfolios to provide any cushion beyond SS.
Now Hussmanâs future is bleak - he is predicting NEGATIVE returnsâŚbut let us assume we have positive gains but only a few percent⌠and that future is not rosy either.
Weâve just had a âmarket bubbleââŚway off the peak. Some stocks down an incredible 70%!
And P/E ratios are still way out of whack.
So just what do folks think P/Es will go to? Historically they have been in the âteensââŚnowâŚ
Look at the graph here on actual returns of the SP500 over the past 50 years. It might be an eye opener - it was done in 2020âŚbutâŚwe are back to that point now with the collapse of the stock market! âŚ
https://www.hussmanfunds.com/comment/mc200130/
he notes:" As Iâve detailed before (and review below), the U.S. economy is presently running at a structural real GDP growth rate of only about 1.6%, reflecting the combination of demographic labor force growth and trend productivity. Thatâs the real economic growth that we would observe if the rate of unemployment was simply held constant at current lows indefinitely.
Add 2% inflation, and youâre up to 3.6% nominal growth (which is also the nominal growth rate of S&P 500 revenues over the past two decades). Add a 2% dividend yield, and we can estimate â assuming that market valuations remain at current extremes forever â the S&P 500 would achieve total returns averaging 5.6% annually."
But take out the 2% inflation (your bucks are worth less with inflation) and your real gain is 3.6% over inflationâŚand that assumes you are re-investing your dividends likely.
AgainâŚa lot of âretirementsâ are going to be put on hold or end in disasterâŚand a lot of state and corporate pension plans are going bust in the future.
Vanguardâs prediction
"Our 10-year, annualized, nominal return projections are shown below. The shaded asterisked figures(*) reflect a February 28, 2022, running of the Vanguard Capital Markets ModelÂŽ (VCMM) for broad equity and fixed income asset classes only. Outlooks for the remaining sub-asset classes reflect a December 31, 2021, running of the VCMM.
Equities Return projection
U.S. equities* 2.8%â4.8%"
âVanguard continues to foresee GDP growth around 3.5% in the United States in 2022, though oil prices and geopolitical risks from the Ukraine crisis bear watching.â
thatâs 3.5%âŚbut with 2% inflation (at best)âŚthatâs only 1.5% real growthâŚand if inflation worseâŚmight eat up all the real gain or make in negativeâŚ
https://advisors.vanguard.com/insights/article/marketperspecâŚ
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