Outside the Box


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Camp Kotok, Here We Come!

August 2, 2017

Tomorrow I head for the backwoods of Maine and Camp Kotok – always one of the high points of my year. Most of my readers know by now that Camp Kotok is the annual fishing trip cum economics gab-fest hosted by David Kotok of Cumberland Advisors. It’s an invitation-only event that has been compared to Jackson Hole and even Davos – except that here you get to catch your own lunch.

David hatched the idea after surviving the attack on the World Trade Center, where he was attending a conference on the morning of 9/11. “We all had a conversation about how fragile life is and how good it is to go somewhere and talk about what’s on your mind in a quiet setting,” he says.

The fishing is (sometimes) great, but it’s the quality and intensity of the conversation and the camaraderie that draw me back to Grand Lake Stream each year – and this will be my 11th year. Most years, my son Trey has come along, too – and has generally outfished me – but he can’t make it this year because he can’t get off work. Which is responsible of him but disappointing.

This year we’re going to make it possible for you to share some of what makes Camp Kotok great. Next week, after the camp concludes, we’re going to launch our own “Camp Kotok Week.” I’ll be sending out cutting-edge articles from some of this year’s attendees to subscribers to my Over My Shoulder service. If you’d like to join us, you can do so right here

Seriously, Over My Shoulder is a heck of a bargain – you get to have me sort through everything I read and send you only the best. Often, I’ll get special permission to share some pretty exclusive writing. It’s nice to have friends…

To kick things off, I have a dynamite article by David Kotok himself as your Outside the Box today. Enjoy!

At the moment, I’m on a plane to Philadelphia to meet with friend and partner Steve Blumenthal and Tony Courtney (investment industry insiders may know of him). Steve will be taking over the operations of Mauldin Solutions, and I couldn’t have a better person running that world.  Then way too early tomorrow morning, Steve and I hop a flight to Bangor and then drive a few hours north to Grand Lake Stream. I’m not saying that’s as far north as you can get, but you do pick up Bell Canada’s signal on your phone when you’re out on the lake. (And you do not want to pay international roaming charges.)

Three days of talking all things economics and finance with some of the best minds in the country (and certainly the more fun ones!) definitely sharpens your thought process, believe me. And everyone is required to ship in wines or whatever adult beverage they prefer (which tends to deepen the thought processes even if it doesn’t exactly sharpen them). Like Jeremiah the Bullfrog, they always have some mighty fine wine at Camp Kotok. And because the event is under the Chatham House Rule, we get to try out a few outlandish ideas and get feedback (and occasional razzing) from all sides, without having to worry that we’re going to be called out on twitter or in the press for what might turn out not to be our most polished thinking.

There is however lots of press at Camp Kotok – and so far they’ve played by the rules. If they ask to quote you, though, or you do an interview (and I do lots of them there), you know you’re fair game.

Mornings at the camp can be chaotic, as the only place to get internet is in the main dining room, and everyone just has to check their email. Then it’s time to really disconnect from the world and go out in a boat with your guide and fishing partners. And just talk and fish. It’s great.

They are telling us we’re going to land soon, so I’ll hit the send button. Have a great week!

Your ready to relax and think analyst,

John Mauldin, Editor
Outside the Box

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Joseph & the US Stock Market

By David Kotok
Originally published by Cumberland Advisors, June 13, 2017

Joseph (as in Abraham, Isaac, and Jacob) was the first (maybe) successful economist mentioned in the Bible. Why do we say that? Answer: He was data-driven.

Think of it this way. He interpreted Pharaoh’s dreams. He developed a model (forecast). He presented it to the decision maker and persuaded him to agree. He raised the capital (easy to do in those days if one worked for the deified ruler). He developed and implemented an infrastructure capital expenditure program (warehouses and food storage). He planned ahead and had a rainy day fund. He balanced a 14-year budget that featured seven rich and seven lean years. He avoided deficit spending.

He was promoted for his efforts and given prestigious governmental power. He used it to rescue his family and friends.

Joseph didn’t have to deal with tweets. Let’s fast-forward a few thousand years.

Washington chaos is now reducing the odds of the Trump tax/economic agenda ever coming to fruition. We do not know what is going to happen with tax reform or tax cuts, with repatriation, with deficit spending, with the debt limit, with the budget, with infrastructure, with healthcare, with the climate-change agenda (if any), with foreign policy, with the Voice of America (Bannon is going to run it), or with Cuba.

(Smart foreign policy would favor Cuba so as to divide it from Venezuela and weaken Maduro, but dumb policy would apply sanctions or curtail outreach to Cuba and thereby remove incentives for Cuba to lessen support for Venezuela. Trump has a major opportunity here to improve Latin American policy if he plays it well and he invites a terrible outcome if he bungles it.)

Meanwhile, The Democrats are salivating as approval rating statistics support a forecast that the House could swing to a Democratic majority in 2018. That would mean a bill to impeach Trump is introduced in 2019 and it likely passes in the House.

What happens in the Senate is another matter. But, for sure, impeachment is a political process. An impeachable offense was defined by former president Gerald Ford as “whatever a majority of the House of Representatives considers it to be at a given moment in history.” An examination of all Republican presidencies of the last century shows that Trump’s approval rating and the voter outlook support the forecast of a Democratic House after next year’s midterm election. Will it occur? We do not know. But the risk is rising daily.

Markets like this political indecision; make no mistake about that. The US stock market prefers a divided government that cannot do damage to what is a slow-growth but steadily improving economy. That is our assessment. Let me quote Mike Drury, chief economist of McVean Trading and chairman of the Global Interdependence Center board:

The US, as a primarily service-oriented, mature, wealthy economy, enjoys much longer cycles – with the last four since the double dip of the early 1980s (the last factory recession in America) averaging 106 months. As we are currently in the 96th month of this expansion, no recession is expected for at least a year (more likely two), and even a short recession to end the cycle would be 8 months – it is likely that this will be the longest cycle in US history, topping the 128 months from March 1991 to November 2001. Bottom line, long, slow and stable cycles in the US are not what drives markets. It is the volatility of growth on the world’s cheapest factory floor that causes the most ripples.

I asked Mike to interpret the last sentence, since it can be read two ways. He replied,

I think the volatility in both commodities and interest rates is due more to China than US. Long and slow underpins long-run growth in financials. China causes the ripples that make for trading rather than investing.

We agree. Long-cycle. A rising stock market through the entire decade. Low interest rates and low inflation rates for the decade. Government will be a mess in Washington for the decade, which means gridlock for the decade. Financials benefit, and we are overweight.

Now let’s get to the political divide. Lyric Hale had a good summation of this on her Econvue website:

I’m beginning to think that political events, no matter how explosive, no longer have the power to affect the economy, financial markets, or even oil prices. Technology, while entertaining, seems to have lost its ability to create productivity gains. Structural reforms have become stuck in many economies, and needed infrastructure improvements just aren’t happening. Income inequality does not seem to be reversing anywhere, and so one wonders how global consumption can rebound. Automation has negatively impacted jobs, and nothing seems likely to stop that momentum. Global risks to the environment, and to health, seem likely to increase. Where can we find optimism, and new leadership? As has been the case throughout human history, the answer could be technology rather than political leadership. My hometown of Chicago is the only top-20 city in the US that is losing population, in a state whose bonds are rated close to junk. However, like other cities in ‘flyover country,’ the Midwest might be in a state of transition that the bicoastal media has not yet understood – just like they misunderstood Trump. (Readers, see www.econvue.com for details.)

At Cumberland, we think political division in the United States intensifies. The coastal elites have disengaged from the middle of the country. And an unseasoned political adventurer succeeded in capturing a weak Republican party and then its nomination and then the presidential election. We have a president with no government experience and no military experience.

We advise readers on the left not to take for granted the midterm election reversal. And readers on the right should not take for granted the status quo. What is apparent is the current stalemate, though it may or may not persist.

Presidential cycles are for eight years unless the first-term winner stumbles. Trump might. Or he might encounter events that rally his base and reelect him. He might lose the House in the midterm. Or House Republicans may rally and pass some key legislation such as tax reform and thereby hold onto their majority. We do not know.

We do not have Joseph’s power to interpret dreams (or tweets), and we cannot project the next seven years, let alone 14 years. We do believe that markets like stalemates. And we do believe that earnings growth is accelerating. That means a rising stock market as long as we do not have a recession and do not have an inflation flare that leads to much higher interest rates. None of those negatives are in our dominant forecast.

Our targets: That S&P 500 is at 3000 by the end of the decade. Interest rates are somewhat higher but not by much. Think of it as shorter-term rates at 2% a year from now and coincident with the midterm election. Longer-term rates a point or so higher. Tax reform would bring a moderate change in the tax rates, at best. We remain nearly fully invested in our US stock market ETF strategy. We advise that could change at any time.

As for interpreting tweets or dreams, we recall the famous movie line “Frankly, my dear, I don’t give a damn” (Clark Gable as Rhett Butler, in Gone with the Wind, 1939.)

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Robert Watkins

Aug. 2, 2017, 4:02 p.m.

Hmm.. another lost decade like that of Japan?? Corporate debt, personal debt and national debt higher than in 2008,  but no worries! The only short term winners in this scenario will be those foolish enough to buy stocks with PE’s in the nose bleed section! This article sounds eerily like those writing just prior to 2000 and 2008! I wonder exactly why the author ignores the impossible debt John is always speaking of? Oh, I forget, as long as the entire world is in worse shape, we have nothing to fear!