Two weeks ago in Thoughts From the Frontline, I mentioned a piece by one of my favorite contrarians and behavioral finance analysts, James Montier of Dresdner Kleinwort Wasserstein. It was going to be the Outside the Box last week, but a previous letter by Montier was sent instead.
I normally try not to use the same author two weeks in a row, but this was an exceptional letter and I wanted to bring it to my readers. James pulls together research and observations from many sources in order to prove his point and show that being a contrarian is not always the easy path to follow. I have always said that the time to own equities will be during the next recession when everyone else has given up on them, but that will also be the hardest time to buy. James helps explain why it is so hard to be contrarian and that is why it is this week's Outside the Box.
This week's letter is from John P. Hussman, Ph.D., President of Hussman Investment Trust. His firm is one of the few that has employed hedging techniques, similar to the hedge fund world, in a mutual fund structure. John is also one of the really, really, really smart guys in the running money business. John manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX.
Hussman's Weekly Market Commentary on August 22, 2005 takes a look at the relationship between stock market valuations, interest rates and inflation. He takes a look at what has happened to this relationship in the past and fills in the "omitted variables" other market cheerleaders seem to leave out.
This is a very short piece, but it is an important analysis of market valuations and why some people (including the Fed) might not be seeing statistical relationships the right way.