http://www.hussmanfunds.com/wmc/wmc130408.htmOn the earnings front, my concern continues to be that investors don’t seem to recognize that profit margins are more than 70% above their historical norms, nor the extent to which this surplus is the direct result of a historic (and unsustainable) deficit in the sum of government and household savings (see Two Myths and A Legend for an analysis, including more than a half-century of data on this). As a result, investors seem oblivious to the likelihood of earnings disappointments not only in coming quarters, but in the next several years. We continue to expect this disappointment to amount to a contraction in earnings over the next 4 years at a rate of roughly 12% annually.
As mentioned about a year ago, profit margins are unlikely to revert back to historic norms, they are likely to shoot under them in some kind of mean reversion fashion. The 70% target would assume that the same tailwind of deficit spending that has been applied over the course of previous cycles he has studied would also apply. For those reasons, I think Hussman's assumptions are optimistic. His calculation of 12% assumes a reversion back to the mean in 4 years (170 x 0.88 raised to the 4th power).
For as far as when investors/gamblers will realize this, yes, I would suggest looking at moon phases and eclipses, and to study the behavior of wolfpacks as they howl at the moon.