Buffett's argument could be setting stocks up for worst disaster

Billionaire investor Warren Buffett made a lot of people feel better about historically stretched stock prices earlier this month.
Speaking in an interview with CNBC on October 3, the chair man of Berkshire Hathaway said, "Valuations make sense with interest rates where they are."

The investment community breathed a sigh of relief. After all, Buffett is arguably the most successful stock investor in world history. An all-clear from him surely gives a green light for adding more equity exposure, right?

Wrong, says John Hussman, the president of the Hussman Investment Trust and a former economics professor.

In his mind, Buffett only gets half of the equation right. While Hussman acknowledges that low lending rates do, by nature, improve future cash flows, he argues that they must also be accompanied by strong growth -something that he notes the US is not currently enjoying.

To Hussman, the simple idea that "lower interest rates justify higher valuations" is one that gives people false confidence. "It's an incomplete sentence," Hussman wrote in a recent blog post.

"Unfortunately, the convenience of investing-by-slogan, rather than carefully thinking about finance and examining evidence, is currently leading investors into what is likely to be one of the worst disasters in the history of the US stock market."

Hussman calculates that stock valuations are stretched 175 per cent above their historic norms, and predicts the S&P 500 will see negative total returns over the next 10 to 12 years.