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Thoughts from the Frontline

Signs of the Top

August 17, 2013

The investment media seems obsessed with the question of whether the Fed will taper. The real question should be not about "tapering" but about credibility. What happens when fundamentals become the narrative as opposed to what the central bank is doing? What happens if the Federal Reserve throws a liquidity party and nobody comes? Today we look at some of the fundamentals. The market is in fact overvalued, but that doesn't mean it can't become more overvalued. Is this August 1987 or August 1999?

Before we delve into that question, let me fix a problem. Last week I mentioned a great strategy paper authored by my good friend Jon Sundt, President and CEO of Altegris. I failed to include the link. Here is the link. I encourage anyone who is looking to diversify into alternative investments to read it.

Signs of the Top

We are told they don't ring a bell when bull or bear markets start. That may be true, but it does seem that there are similar signs as we approach turning points. This week in my reading I have been struck by a number of signs that suggest that, if we haven't reached a top in the latest bull market cycle, at least a pause may be in…

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Aug. 20, 2013, 4:03 a.m.

“What are they smoking” is definitely the right question. Recent increase in interest rates on the back of the belief that growth will come back sooner then expected by central banks and that such banks will be forced to taper sooner is the most recent proof of irrational markets to me.

Historical multiples are interesting only to the extent that they are comparable among each other in terms of economic environment. According to a recent note from Morgan Stanley, today’s Next-Twelve-Month-P/E multiples are at 15.3x (ie below below 17.8x average since 1995, 18.0x in 2007, and way below 1999 all time high pick of 28.0x). Even if we are not at a pick in terms of historical relative valuation, how can such levels of valuation be justified when:
i) The developed countries are facing the worst historical unemployment rate in a century (let’s not get fooled by the cosmetic improving employment rate in the US which is totally due to lower inscription to jobless registers and employment shift between full time jobs vs. poorly paid and temporary jobs as pointed out by one of your recent letters)

ii) Internet and technology growth boost is fading while tech index levels imply a new technology revolution (from where?!)

iii) Developed and emerging countries suffer from negative demographic impact

iv) China miracle is over and full of overcapacity

v) Energy cost are damaging the economy and/or the environment (the US “recovery” thanks to shale gas will come at a cost eventually I believe)

vi) Social unrests threaten Middle East and even Europe political stability

I have a question I would be much grateful if you could answer, when was the last time in history that the economic world was facing such challenges and that, at the same time, the financial markets were showing such optimistic signs of near term brilliant future??

Even so, the problem still remains that, “market can remain irrational a lot longer than you can stay solvent”, so what do you think a rational investor should do? 


The grateful Frenchman for your “This time is different” analysis.

John Bengfort

Aug. 19, 2013, 5:03 p.m.

“If we had done nothing in 2008, we would be in the worst financial crisis of the past 150 years, worse than the 1930s”

Mr. Sherry, it would seem to many we are in the worst economic crisis.  Perhaps the next volume of “The Lords of Finance” will describe this when written.  Stay tuned.

Peter J Taylor

Aug. 19, 2013, 11:58 a.m.

“Money for Nothing” is the title of a book published in 2004 by Roger Bootle, a senior economist in the company “Capital Economics”, and a writer for the Daily Telegraph.
It is said that imitation is the greatest form of flattery.

Lucas Fairborn 48391

Aug. 19, 2013, 10:55 a.m.

Mr. Mauldin,
You are a great writer and know a lot about the economy, but you’ve been warning people not to invest in equities throughout this entire 4-year market run.  In August 2011, you forecast a recession within 12 months, noting that the stock market typically falls 40% in recessions.  What is different about your current market call?

ron welch

Aug. 18, 2013, 12:30 a.m.

Indeed if we are so near the top would it not be prudent to sell out of our positions at this time?  Yield Shark and Bull’s Eye Investor seem to be in a buy mode which appears to be disingenuous with the tone of the current article.  After a correction or outright drop then investors could reinvest.  I imagine that all of your stock recommendations will take a big hit if your current prognosis is correct.

Dallas Kennedy

Aug. 17, 2013, 4:29 p.m.

The situation is absurd: absurd earnings expectations, always scaled back, so that companies can beat them, etc.

(Who’s that smoking weed in the upper right?)

Don Braswell

Aug. 17, 2013, 10:17 a.m.

How high can the market go?  Whether true or not, the US markets are considered the only place to go in the world. As an upcoming billionaire in China/India/-or fill-in-the-blank-country, I would park a lot of my assets in the US market.  In the land of the blind, the one-eyed man is king.  I think our market top may reach the PE values of the Nikkei of the 1990s before the crash?  After all, the FED has more credibility than the or real estate - because they’ve never been wrong.  Even when they were wrong.  I don’t know the maximum value of the Japanese PE, but remember numbers like 80 or 100?  So the market can stay stupid longer than we can stay solvent…