Douglass hypothesises a 50% correction scenario

It really could be different this time and the central banks are ill-placed to save us, according to the co-founder and chairman of Magellan Financial Group, Hamish Douglass.

Douglass told a Morningstar investment forum today that the investing situation could be is a very interesting point in history had been reached.

Asked about the challenges in investing at the moment, Douglass said: “… I think people need to understand that this environment is potentially different this time because an interesting point in history has been reached”.

“And you should never say ‘it’s different this time because those are famous last words in investing but why is it different? Because measured on any realistic basis the valuation of equities relative to economic output is the highest it’s been in 100 years and it has jumped very materially with this stimulus in the last 18 months,” he said.

Douglass said this analysis was not relative to current earnings because earnings are elevated at the moment.

“But compared to the total output of economies we are off the charts on equity market valuations and normally that would put a little question mark in your head,” he told the Morningstar forum.

“We’re also at the end of the stimulus cycle and we’re about to go into a stimulus tightening and now you’ve got that threat of inflation out there,” Douglass said.

He said that for the last 15 years if there had been a material market correction the central banks had come and rescued the story by printing more money.

“But if we have inflation this time and interest rates are zero then the game is up to some extent because there is little the central banks can do so,” Douglass said.

“We are in a market where equities are very, very expensive relative to economic output, we’ve got speculative settings starting to unwind themselves which is normally a bit of a warning sign and we’ve got the threat of inflation and tightening monetary policy and we’re ex stimulus now,” he said. “We’ve still got excess savings in the system but we’re ex-stimulus and for 15 years we’ve been rescued.”

“I do think it is different. The game book is different. If we do get into trouble it could be much uglier this time because there are fewer things the central banks can do to rescue the situation.”

“If the game is up I would put it at a 50% scenario,” Douglass said.