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Wealth: John Hussman Considers a Double-Dip


Hussman Funds, his portfolio management company, has a strategy for playing short-term deflation and long-term inflation

The most emphatic advice I've been giving lately is for investors to carefully consider their investment time horizon. One of the most difficult things I've observed over the last decade is investors very close to retirement—or in need of short-term funds for tuition expenses, down payments on homes, or medical needs—having their plans devastated by extremely deep market declines. If you have near-term financial obligations, you should not be in stocks now.

This is because the economy, in my view, is headed for a double-dip recession. The consensus view is that the economy may slow but won't slip. That's largely based on the fact that double dips are rare. The rarity of an event—or the inability to imagine an event—is not evidence. That should be clear from the last couple of years. The consensus of economists has never correctly anticipated a recession.

We are 100 percent hedged in our equity fund [Hussman Strategic Growth (HSGFX)]. We would never go net short, so this is as negative as our positioning can get. Since we are worried about deflation in the short-term, our primary concern is revenue and profit-margin stability. We also like dividend yields, which can help reduce the volatility of individual holdings—provided those dividends are well covered by stable earnings. There are companies in the pharmaceutical and consumer staples sectors that have a long history of such stability, even in the face of economic downturns. [As of Mar. 31, Hussman's equity fund owned Colgate-Palmolive (CL) and Walgreen (WAG), which yield 2.5 percent and 2.4 percent, respectively.]

In our Strategic Total Return (HSTRX) fund we've become increasingly wary of long-term Treasury bonds. Now we're mainly in cash, short- and intermediate-term Treasuries, and stable currencies such as the Swiss franc. During periods of credit crises and economic weakness, investors have an almost insatiable appetite for default-free securities. The government is able to issue an enormous quantity of debt without inflationary consequences because individuals are willing to hold it. Over the longer term, though, as the demand for default-free securities subsides, you invariably observe very high and rapid inflation. The government is now currently risking a second great inflation similar to what we observed in the 1970s.

We are holding Treasuries, however as yields fall, we'll shift into inflation-protected bonds. As deflation concerns grow, we are likely to see treasury yields drop [as more people buy Treasuries]. We are also apt to see a fairly strong liquidation of inflation-protected bonds as well as commodities. As the economy weakens, commodities tend to fall, with a lag. Although some investors think of gold as a currency substitute, its correlation with other commodities runs pretty strongly in a downturn. In our Total Return fund we have clipped our precious metals positions.

The Stats: John Hussman is founder of Hussman Funds, a portfolio management company focused on investing for the long term while managing downside risk. The firm manages $8.1 billion. Since its July 2000 inception, the Hussman Strategic Growth Fund has delivered an 8.3 percent annualized return vs. -1.4 percent for the S&P 500.


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