We believe that capitalism should causethe return on capital to be in line with the cost of capital, and that assets that embody similar risks should offer similar long-term returns. These beliefs, in turn, guide our assumptions that equities should trade at replacement cost, that the long-term return to equities should be approximately the same as their normalized earnings yield, and that assets without long return histories should have similar valuations and equilibrium returns as related assets with longer histories.
These beliefs have allowed us to sleep reasonably easy even at times, such as the late 1990s or 2006-7, when valuations and returns were doing things we thought were irrational. And they have also allowed us to take the leap into assets such as emerging equity and debt, REITs, and TIPS even when we did not have a lot of historical data to confirm theapparent cheapness of those asset classes.
But our sleep is not always altogether easy. There are times when the markets do not seem to be following the script properly, and we are left wondering whether we are dealing with a temporary anomaly or a more permanent problem. Today we are faced with one of these problems: the persistently high profit margins of U.S. corporations. High profit margins should not persist in a mean-reverting world, and yet profitability in the U.S. has been higher than long-term averages for most of the last 20 years, oddly pretty close to the same length of time that the U.S. market has been trading above replacement cost.
The current situation is not supposed to happen, which makes it tricky for us to understand exactly when it will end.
nothing but dogma and self righteousness when they say the market should do this or that based on history and "the current situation is not supposed to happen". Who the f is anyone to tell the market what it should or should not do. History doesn't always repeat and indicators/tendencies that once worked in the past may not work in the future which Hussman has learned the hard way and yet he shows very little humility.