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    Thoughts from the Frontline

    Can It Get Any Better Than This?

    August 3, 2013

    What in the world is going on?! As I write this letter from the Maine woods, the S&P 500 has just cleared 1,700 for the first time. The German DAX continues to set all-time highs above 8,400. The United Kingdom’s FTSE 100 is quickly approaching its 1999 record high of 6,930, and its mid-cap cousin, the FTSE 250, just broke through to its all-time level above 15,000. And last but not least, Japan’s Nikkei 225 is extending its gains once more, toward 14,500. This weekend I am sitting around with some of the smartest economic and trading minds in the country. At Leen's Lodge, where we're fishing and eating where our phones don’t work, the question on our minds is, how long can this run go on? The debates can get intense in a room full of strong opinions.

    So, with a little help, I did some research on what our forward-looking prospects are for the markets. Let me take this opportunity to introduce a new name to readers, one that will become familiar over the next few years. I have gotten to know Worth Wray, a young economist (though I should say that, as I stare 64 in the face, a lot of people are looking young these days) who has really impressed me with the breadth of his knowledge and insights. He was the former portfolio strategist for my good friends at Salient down in Houston, and they were kind enough to let me entice him to come to Dallas to work with me. This is a big move for both of us, and I am finding that it's one I should have undertaken a long time ago. Worth is really going to help me expand my abilities to do research and present my thoughts to you. I asked him a few questions, and he helped me tee up this week’s letter. Plus, we'll look across the Pacific, and I'll share some thoughts I’ve had about an interesting black swan that could be developing in the Korean Peninsula. Let’s get started!

    Can It Get Any Better Than This?

    To many investors, developed markets appear healthier and stronger than they have in years. Major equity markets are rallying to record highs; corporate credit spreads are tight versus US Treasuries and getting tighter; and broad measures of volatility continue to fall to their lowest levels since 2007.

    This kind of news would normally point to prosperity across the real economy…

    Discuss This

    9 comments

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    Comments

    Dallas Kennedy

    Aug. 5, 2013, 6:24 a.m.

    John, thanks for stating the relevant facts so plainly. I can barely stand to listen to the incessant hype. We come to you for sanity.

    The objections to the Shiller P/E (CAPE) don’t hold up. The same problems of survivor bias apply to earlier periods, including the 1930s and 1970s. Pooling the earnings together makes the identity of individual S&P500; companies less relevant. It’s an aggregate of profits from large companies.

    Other measures—in particular, the dividend yield and the Dow-to-gold ratio—also point in the same direction: the secular bear market is far from over.

    richard@classifiedverticals.com

    Aug. 5, 2013, 4:13 a.m.

    Love your newsletters, and if you come to South Dakota, we will welcome you with open arms…..and even buy you dinner if you are up for it. Here is why it is a good time to come to SD.

    http://www.prnewswire.com/news-releases/americas-next-boom-town-sioux-falls-sd-216153641.html

    Jennifer Watson

    Aug. 4, 2013, 10:53 a.m.

    John,

    I am so touched by your thoughts regarding your son. I am glad you have the values to enjoy him!

    r.harneis@wanadoo.fr

    Aug. 3, 2013, 10:19 p.m.

    ‘I think the task would be more difficult and more expensive on a per-capita basis than the unification of Germany.’

    It is a bit more complicated than that. I think you have overlooked the likely Chinese negative reaction to any nuclear armed Korean reunification on its border particularly bearing in mind the present US involvement. Russia was too weak to interfere seriously with German reunification and there were no nuclear weapons to worry about. Your comparison with Cuba is a bit US-centric. The Cubans are not starving and they have good education and medical care. Whether the Cuban leaders wanted it or not, ‘democracy’ has been impossible up to now given the inevitability of US meddling. On the other hand in both Cuba and N.Korea a desire for real independance is a major factor.

    jack goldman

    Aug. 3, 2013, 4:18 p.m.

    Who are we kidding? The Dow was $800 in 1964. In the same exact silver coin money the Dow is $750 today in 2013. In real US Treasury silver money the Dow has not gone up in fifty years. I think this how we should really measure the Dow. In 2013 money the Dow was $16,000 in 1964 or $800 in silver coins. It’s $15,500 in 2013 in counterfeit currency or $750 in 1964 silver money. How stupid can the America people be? Very, very stupid. The US Central bank is simply a legal counterfeiting operation selling America children into debt slavery. The Dow today at $15,500 buys exactly what the Dow $800 bought in 1964. The difference is wages have not kept pace with counterfeiting. The counterfeiting benefits the bankers, brokers, owners, and governments, which is why they are all better off. The counterfeiting harms children, families, renters, and employees, which is why they are all worse off. It’s a counterfeit money bubble and nothing more.

    Craig Cheatum

    Aug. 3, 2013, 3:19 p.m.

    Great analysis.  It’s refreshing to read a contrary analysis to the mainstream media and just as likely as a bullish scenario going forward.

    Craig Cheatum

    Lon Purvis

    Aug. 3, 2013, 12:20 p.m.

    Good letter.  I use my Sunday School method.  When the folks at church started talking about flipping houses you knew the end was near.  When they were talking about gold; again it was a top.  I keep listening for them all to get back in the market.  Of course it is easier just to use some good trend following system to time the market.  I am sure everyone else knows about this but if you like timing of sectors and seasonal market trends I just discovered Thackray’s investor’s guide.  I think he does one each year giving you the exact dates to buy and sell different parts of the market.  It is making money for me so far.

    Christopher Belanger

    Aug. 3, 2013, 10:36 a.m.

    With regard to:

    “One of the interesting things that he shared is that an increasing number of cell phones are being smuggled into North Korea from China and that the North Koreans are beginning to get the real story about the world rather than just the propaganda fed to them by their government”

    Are they smuggling cell towers in, too?  A smart phone without a cell tower (and subscription to use that tower) is not going to function.  I don’t see how smuggled cell phones are going to illuminate the North Koreans.

    bmerkey@tampabay.rr.com

    Aug. 3, 2013, 10:09 a.m.

    “How capable is the North Korean military of actually mounting an offensive when their soldiers are simply not physically able to withstand the pressures of combat?”

    It would be quite dangerous and provocative to think along these lines. Logic and history indicate that North Koreans are capable of massively defending their country if threatened.

    Relative size and childhood level of nourishment would not be significant factors. After all, Koreans, even after two generations of almost slave-like conditions under Japanese Imperial rule, were quite capable of military action when the opportunity came.