Outside the Box: What Is Really Bugging the Market by John Mauldin

My good friend David Rosenberg, Chief Economist at Gluskin Sheff, has long been one of the biggest draws at my annual Strategic Investment Conference. I had always taken him for a “permabear.” Then three years ago, Dave shocked us by announcing in no uncertain terms – in his usual fire-hose delivery of hard data and brilliant analysis – that he had turned decidedly bullish. His call was of course spot on.

Dave will once again kick things off at this year’s SIC, and you’ll want to be there to catch his every valuable, investable word. David is only one of our all-superstar cast. At SIC we have only headliners, people who would keynote any other investment conference. You get to see them all in one place.

I can say with some justification (and a measure of pride) that SIC is the best economic gathering on the planet, and SIC 2016 is going to be our best yet. The dates are May 24-27, 2016, and this year we’ve moved the conference to Dallas, my home turf, with easy access from anywhere in the world. Just as you’ve come to expect, we’re tackling a big theme: “Decade of Disruption: Investing in a Transformed World.”

In the decade ahead, you and I will not be able to successfully invest in the same way we did in past decades. Our world is transforming at an ever-accelerating rate, and we’re going to need a more comprehensive understanding and better tools if we’re going to invest in that world profitably.

To see how SIC16 will help you with those aims and to get all the particulars on registration, click here. And don’t tarry: if you register by January 31 you’ll save $500 off the walkup rate.

And now let’s get back to Dave. To give you a taste of where he’s going these days, I’ve asked him to let me excerpt a key section from this morning’s edition of Breakfast with Dave. He asks, “What is really bugging the market?” And then he tells us, with the clarity and conviction that only a very few people in our business can muster.

OK, time to sign off and hit the sack! I just landed in Hong Kong and I already feel the jet lag oozing through my pores. I’ll be back this weekend, though, with my annual forecast issue, and I promise it will make for lively reading. I had hoped to finish it on the flight over, but I just had to finish catching up on 2015 and clear the decks for the big year ahead of us.

Your thinking that disruption means opportunity analyst,

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Each week, John Mauldin highlights a thoughtful, provocativeessay from a fellow analyst or economic expert. Some will inspire you. Some will make you uncomfortable. All will challenge you to think outside the box.

What Is Really Bugging the Market

By David Rosenberg, Gluskin Sheff + Associates Inc.

Excerpted from Breakfast with Dave, January 6, 2016

The overriding problem for the equity market remains one of valuation – not that we are in bubble territory, but more that the stock market is still quite expensive.

The price action of 2015 failed to resolve one thing, which was to correct the excess valuations that held back the market last year as it likely will this year too.

The trailing price-to-diluted earnings multiple is 21.4x versus the historical norm of 17.5x, while the forward multiple on the S&P 500 is 16.8x, and again, the mean has been closer to 14.4x. The Shiller cyclically-adjusted price-to-earnings (CAPE) ratio is 26 and the long-run average is 23. Capish?

So here we have the stock market, according to many measures, trading close to three multiple points above historical norms.

Like the personal savings rate in the macro world, the price-earnings multiple in the financial world is a behavioral aggregate – a signpost of confidence, if you will. A lower savings rate is symbolic of higher confidence over income or wealth prospects, and similarly a higher multiple is a characteristic of rising investor confidence over the outlook for market returns.

The problem is that we do not have the clarity, certainty or visibility across the globe, whether it comes to policy, oil prices, regional conflicts or China, to warrant multiples being this far above the norm, if at all.

So, 2016 is likely going to be a year of transition and one where uncertainty is going to dominate the macro and investing landscape.

Oil prices

The fact that oil prices could not catch much of a bid given the conflict between Iran and Saudi Arabia should have the bulls shaking their heads.

The reality is that supply is an impediment at a time when there has still not been a dent in U.S. production and OPEC has been pumping out 32 million barrels per day (far above its quota) for seven months in a row.


The severing of diplomatic ties between Iraq and Saudi Arabia could be problematic for investors risk tolerance if the situation turns worse, as in some form of military response. At a minimum, it complicates efforts to resolve the internal crisis in Syria.

It also further exposes the failure of U.S. foreign policy under the current administration (underscored by the surge in Aerospace & Defense sector stocks last year).

The Fed

Several monetary policy makers, including San Francisco Fed President John Williams (who is reportedly close to Janet Yellen), struck a hawkish tone at the regional bank’s symposium.

Also, Cleveland’s Fed President Loretta Mester sounds very hawkish and has openly argued that the Fed should turn a blind eye to the stock market (the rotated voting membership this year has a slightly more hawkish tilt than it did in 2015).

Finally, there was nothing out of Fed vice chair Stanley Fischer to suggest that the Fed is going to stop at one or two hikes.

The Fed has never hiked rates with the ISM manufacturing moving below 50, let alone for two straight months now. This a transition, first away from quantitative easing, and now away from zero interest rate policy, but with a twist since the central bank has never tightened policy with manufacturing under so much duress.


The consensus is looking for around 8% S&P 500 earnings growth this year and yet the analysts have dragged the earnings revision ratio down to the lowest levels in eight months (to 0.55x for the three-month ratio in December from 0.58x in November and 0.74x in October; declining now for four months running).

Another transition will be what rising wage growth will do to profit margins – a case of what is good for Main Street may not be so good for Wall Street (call it mean reversion from the past six years of 18% equity returns and a mere 2% growth trend in the broad economy).

Local politics

Another transition this year is the U.S. election this November and if Byron Wien is prescient on his “surprise” pick for the

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