Why Stocks Can Still Soar Dramatically From Here

The Federal Reserve's biggest fool... Yellen said what?!... More on the 'Melt Up'... Why stocks can still soar dramatically from here... P.J. O'Rourke says goodbye...

Is Ben Bernanke's 'legacy' in trouble?

Today, former Federal Reserve Chairman Ben Bernanke may be best known as the man who "saved" the U.S. economy from the 2008 financial crisis.

Longtime Digest readers know we disagree...

We believe Bernanke's bailouts and easy-money policies merely delayed the inevitable... and ensured the next crisis will be far bigger. And in the end, we suspect history may remember Bernanke as the greatest fool to ever run the Fed.

For example, in 2005, near the top of the biggest housing bubble the world had ever seen, it was Bernanke who said...

We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit...

House prices have risen by nearly 25% over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

In 2007, after the housing market had clearly rolled over, it was Bernanke who assured the public time and again that the problems in subprime mortgages were "contained"...

Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low...

The effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

And in mid-2008, just days before subprime "contagion" caused the collapse of mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), you know who swore the following before Congress:

[Fannie and Freddie] are adequately capitalized. They are in no danger of failing.

We could go on, but you get the point...

Bernanke could have some competition...

We bring this up today because Bernanke's successor – current Fed Chair Janet Yellen – is suddenly in the running for the "title," too...

During a question and answer event in London on Tuesday, Yellen was asked about the likelihood of another financial crisis. And you may not believe her response. As financial-news network CNBC reported yesterday (emphasis added)...

Speaking during an exchange in London with British Academy President Lord Nicholas Stern, the central bank chief said the Fed has learned lessons from the financial crisis and has brought stability to the banking system...

She also made a bold prediction: that another financial crisis the likes of the one that exploded in 2008 was not likely "in our lifetime." The crisis, which erupted in September 2008 with the implosion of Lehman Brothers but had been stewing for years, would have been "worse than the Great Depression" without the Fed's intervention, Yellen said.

Yellen added that the Fed learned lessons from the financial crisis and is being more vigilant to find risks to the system. "I think the system is much safer and much sounder," she said.

We suspect she'll regret those words...

Central banks have created the largest speculative boom in history.

Unlike the last, this bubble isn't concentrated in a single area like U.S. housing. It has spread to nearly every corner of the developed world. Consumers... corporations... and even governments have loaded up on record amounts of debt.

Another crisis is inevitable.

'The final innings have arrived'...

In the meantime, our colleague Steve Sjuggerud believes stocks can go much higher...

As regular readers know, Steve has long predicted that a "Melt Up" will push stocks to explosive new highs before the bull market finally ends.

But Steve says it's no longer a "what if" scenario. He believes the Melt Up has already started... And he's hosting a free event tomorrow, June 29 at 8 p.m. Eastern time, to reveal the latest details on his Melt Up investing "script."

To be sure Digest readers are up to speed, Steve has agreed to share some background on this research ahead of this event.

Yesterday, Steve explained why he's convinced the explosive final innings of the bull market have begun. Today, he'll show you why the biggest gains are still ahead...

Why stocks can soar dramatically from here...

I (Steve) have said it for years... The biggest gains will come in the final innings of the bull market.

My friend, the final innings have arrived. The big moment is here.

Yesterday, I explained my Melt Up thesis, and why I believe these final innings could lead to massive gains.

It's already happening... Stocks are up big over the last 18 months. But I don't believe we're at the top yet.

The reason is simple... Things don't look anything like they did at the top of the last Melt Up.

During the last Melt Up, we saw the biggest gains in the tech-heavy Nasdaq Composite Index. It soared 200%-plus in 18 months as the Melt Up concluded. And prices hit truly ridiculous valuations along the way.

A lot of people point to today's valuations in the U.S. as a reason the recent gains can't continue. But here's the thing...

During the last Melt Up, valuations were already ridiculously high – before it all began.

The chart below shows the price-to-sales ("P/S") ratio for the Nasdaq during the 1990s. (This ratio is one of the best ways to measure real value in the stock market.) Take a look...

The Nasdaq's P/S ratio doubled from 1.5 to 3 in 1998-1999. It then roughly doubled again before finally hitting its peak.

This proves a powerful point... Valuations alone don't stop this kind of boom.

And that was just the broad index. The Nasdaq's top holdings hit even crazier levels...

The table below shows the Nasdaq's top 10 holdings at the end of 1999. Many of these are household names today. But back then, they were the most exciting and highest-growth businesses in America.

Importantly, as the table shows, these companies saw their P/S ratios explode during the last Melt Up. Take a look...

These numbers are hard to believe, but they're true...

Microsoft was priced at a ridiculous 17 times sales when the Melt Up began. Its valuation increased nearly 60% from there. Qualcomm went from being dirt-cheap at 1.3 times sales to a true bubble valuation of 27 times sales.

Only one stock on this list – WorldCom – saw its P/S ratio decline during the Melt Up.

Most of them saw their P/S ratios increase by multiple times – and they eventually reached crazy levels.

This is all the proof I need that the Melt Up in the U.S. isn't over yet.

Valuations are high... But they're nothing like the last Melt Up. And that tells me stocks can still soar dramatically from here.

Tomorrow, I'll explain which stocks are likely to be the biggest winners as the Melt Up continues. In the meantime, it's not too late to reserve your free spot to tomorrow night's event. Click here to sign up now.

New 52-week highs (as of 6/27/17): American Express (AXP), Allianz (AZSEY), Global X MSCI Greece Fund (GREK), and Tencent (TCEHY).

A slow day in the mailbag. Haven't we offended you lately? Let us know at feedback@stansberryresearch.com. And be sure to read on for a "farewell" piece from Digest contributing editor P.J. O'Rourke.

"Dear Porter and Crew, for the skeptics and naysayers out there, I began the China Opportunities portfolio within a day or two of it going live last summer. For fun, I downloaded it before the market opened this morning from my Fidelity account and since I use the notebook feature, I can filter by newsletter, etc. I have deployed $52,933.46 (using TradeStops to calculate my share quantity for each buy).

"To date, including the most recent portfolio change last week, I'm up $8,452.66 – 16% the way I calculated it. I suppose it does not include the realized gain on the position change last week, but I did deploy every penny of the sell into the buy recommendation. The average gain is 19.744% on each position but due to different position sizes, my overall gain is less... I'm happy. Keep it up! You guys Rock. BTW – Doc is no slacker either! Have a great day!" – Paid-up subscriber Michael G.

Regards,

Justin Brill
Baltimore, Maryland
June 28, 2017

What's Humor Good For?

By P.J. O'Rourke

If you want to understand humor, try explaining the Volga River to a Marxist...

I got my start as a journalist trying to be "seriously funny" back when the Cold War was still icy cold and Leonid Brezhnev was the dictator of the U.S.S.R.

Harper's Magazine assigned me to travel on a three-week riverboat luxury cruise through the Soviet Union with a group of aging American leftists. These were not your Elizabeth Warrens or your Nancy Pelosis, but real unreconstructed 1930s Stalinist types. They were to the left of – and even older than – Bernie Sanders, if you can imagine.

Watching this bunch of geriatric Reds trying to put a good face on Brezhnev's Russia was a remarkable experience.

The experience reached its peak while we were going through one of the enormous locks on the Don-Volga canal. A very old, very Marxist lady came up next to me at the boat's railing. She was staring at the gigantic blank wall of concrete on that side of the lock.

"Marvelous! Marvelous!" she said. "They're such marvelous engineers in the Soviet Union." I agreed with her that it certainly was one really big wall of concrete. "Marvelous engineers!" she said, peeking over the side of the boat, "And where do they get all the water?!"

I had an epiphany right then and there. I realized that, for the rest of my life, I would never lack things to write about. All I had to do was put myself in foolish situations (something I'm good at) and keep my eyes and ears open.

I'd go on to cover six wars, two revolutions, two Palestinian Intifadas, seven or eight local insurrections, a number of Third World elections (which combine the worst aspects of combat, civil disturbance, and U.S. presidential candidate debates), plus any number of other places exhibiting garden variety hatred and repression (U.S. presidential candidate debates, for instance). I have found them all humorous.

In general, there are three kinds of humor:

• Parody – where you make fun of people who are smarter than you are.
• Satire – where you make fun of people who are richer than you are.
• Burlesque – where you do both, while taking off your clothes.

I don't personally attempt any of these (especially, you'll be relieved to know, the last one).

Instead, I try to use humor as a journalistic technique for covering serious stories such as war, revolution... and health care reform.

The Democratic politicians who passed Obamacare and the Republicans who are trying to replace Obamacare are all telling us that we can increase the amount of medical treatment, increase the number of people who receive medical treatment, and decrease the total cost of medical treatment.

I only got as far as Practical Math in high school, but this doesn't add up. It's like saying I can smoke, drink, gain 200 pounds, and then, when I've reached age 95, win an Ironman triathlon.

Federal "health care reform" is a tragedy. But humor has nothing to do with the charming or the cheerful. Humor is how we cope with violated taboos and rising anxieties (and rising gorges, too). Humor is our response to the void of absurdity. Humor comes to the fore when events render us impotent. (And as men my age know, all events eventually do.)

We laugh when we don't know what the hell else to do. Humor is not about a kitten tangled in a ball of yarn, unless – to borrow a line from my late colleague at the National Lampoon, Michael O'Donoghue – the kitten strangles.

I had spent most of the 1970s, along with O'Donoghue, as an editor at the National Lampoon. Meanwhile, the real world seemed like a bigger joke than anything we could come up with.

Mark Twain said, "The secret source of humor itself is not joy but sorrow." I wanted to get at that awful secret source.

After going to Russia for Harper's, I got an idea to take the skills of humor-writing and apply them to reporting on actual news events. Convince editors to pay my way to Lebanon, El Salvador, South Africa, etc. I wanted to know where trouble came from.

I was curious about the kind of trouble humans cause for themselves – the kind of trouble that humans could, presumably, quit causing at the drop of a hat (or at the drop of a gun, anyway).

I wasn't curious about natural disasters – earthquakes, mudslides, hurricanes, and floods.

How do you laugh off a flood? I mean, unless you worked for FEMA under the George W. Bush administration during Hurricane Katrina?

And the one thing I really like about being a humorist is that I'm not expected to have any answers. It's the great benefit to humor as a trade. Ignorance has a positive value. I mean when I'm covering a story, I'm free to just come right out and say that I don't understand the big issues.

Like the 2008-2009 financial crisis... I didn't understand it one bit. The guy down the road from me with a lot of cars up on blocks in his yard fell behind on his mortgage payments and the world economy exploded.

I'm ignorant. I find this to be an advantage. It was an especially big advantage when I was a foreign correspondent. I was so ignorant that I was willing to admit curiosity about even the most basic aspects of international political troubles, social squabbles, and armed strife.

And this basic, primitive level of curiosity allowed me to avoid some of the pitfalls of more sophisticated journalism. I never interviewed any heads of state or highly placed sources (not that they'd let me, but that was fine). These people didn't get to where they were by being dumb enough to tell the truth to reporters. And although I'll admit to most faults, I do not have the network news anchor-sized self-conceit that makes me think that Vladimir Putin is suddenly going to confide in me. "Just between us, P.J., on Monday, Russia nukes Latvia."

A humorist necessarily writes from a worm's-eye point of view. The things I asked my fellow members of the blind, spineless worm phylum are things like, "What's for dinner?" and "Please don't kill me." In other words, I asked what ordinary people ask during periods of confusion and strife.

I stay away from earnest messages. Well, I don't really stay away from them. Half the world's suffering (and hence, per Twain, half the world's humor) is caused by earnest messages contained in grand theories bearing no relation to reality – radical Islamism and Federal Reserve monetary policy, to name two. But I try – sometimes unsuccessfully – to avoid promoting any earnest messages myself.

The opposite of humor is not seriousness. Humor, by its nature, has to have serious content. That kitten tangled in the ball of yarn, even if the poor thing doesn't strangle... The situation is, from the kitten's point of view, fraught with serious contradiction and frustration. This is why puns are oppressive and shaggy-dog stories are obnoxious – they are "humor" without the necessary serious content.

The opposite of humor is earnestness. Earnestness is not about how serious an issue is. Earnestness is about how seriously the person talking about the issue takes himself. A serious person says: "It's important to lower the federal deficit." An earnest person says "I'm important for saying it's important to lower the federal deficit."

No matter how serious things are, taking ourselves seriously about them does not improve the fate of the people involved. By being terribly, terribly earnest about AIDS, we could not save a single life. The condom machine in a gas station men's room was doing more good than we were.

Fifty years of being earnest about the Holocaust did nothing to prevent genocide in Cambodia, Rwanda, or Bosnia.

Earnestness is stupidity sent to college (specifically, I'd say, journalism school).

If you'll indulge an old liberal-arts major for a moment... The serious purpose of humor can be seen in Aristotle's distinction between comedy and tragedy. It's not that awful things don't happen in comedies. For example, in the ancient Greek comedy Lysistrata by Aristophanes, the women kick the men out of bed until the men stop fighting wars.

Lysistrata is about two awful things: war and not having sex. But comedy, said Aristotle, concerns ordinary people in every day circumstances, while tragedy concerns great men and important events. Well, as you may have noticed, the world is a bit short of great men.

As for important events, we all know what kind of everyday circumstances important events – like the London terror attacks – can cause for ordinary people.

Aristotle said that the other important distinction between comedy and tragedy is that tragedy captures the emotions – "freezes us between pity and terror."

Frozen between pity and terror – that's watching your kids become teenagers. Not much you can do to help it, and nothing you can do to stop it. Being frozen between pity and terror is not a great place to be.

Comedy shakes us out of this stupor. Anger will do it too. But comedy has the advantage of giving us some emotional distance on what we're dealing with. I mean, I'm a Republican, so lately I've been really angry – at the Republicans.

The Republicans have the Oval Office, the House, the Senate, and half of the Supreme Court, and they still can't get any place. They're just standing there like kids waiting for mom to help them cross the street.

Thank goodness I don't have to make sense of politics. I just have to make fun of it.

Real seriousness is involuntary. If you're an American soldier trying to stem the violence in Afghanistan, you'll be serious about it. If you're a decent person, you'll also have serious feelings witnessing that violence.

In fact, if you're a decent person, faced with all the world's catastrophes, horrors, and pleas for help, you'll make a serious attempt to perform the right acts – whether you're serious-acting or not.

St. Thomas More, the Lord High Chancellor of England martyred by Henry VIII for refusing to become Protestant, joked with his head on the block. "My neck is very short," he told the executioner. "Take heed, therefore, thou strike not awry – for saving thy honesty."

The Persian king Xerxes was amazed when his spies told him that the doomed Spartans holding the pass at Thermopylae were combing their hair and changing into clean clothes for battle. It seemed a far too serious moment for such gallantry.

But gallantry and good humor are the proper attitudes for people who are worth taking seriously. Or so the gallant humorist likes to think.

There is one exception, however – one situation in which taking yourself seriously and being self-important are completely appropriate. A haughty attitude and an earnest tone are always needed when calling the dog.

Goodbye for Now...

Dear Digest readers,

This is, I'm sad to say, my last Stansberry Digest column – at least, for the time being.

Although... I'm not really going away. I'm just traveling to another dimension. And you're invited to come along.

I'm now editing a new free digital magazine, American Consequences: Ideas That Matter.

Stansberry Research and I are doing something different in the field of financial news and newsletters.

For 18 years, Stansberry Research has been known for its investment tactics and strategies and for its examination of macro- and microeconomic trends that drive marketplace shifts.

But there's more to Stansberry Research than wise analysis and savvy stock, bond, and commodity tips. Behind the expertise are Stansberry's people. And behind the people are ideas.

Ideas matter. Ideas shape the market. But those ideas also have social, moral, intellectual, and political effects.

The ideas people have led to the ways people behave, and the ways people behave led to... American Consequences.

Please take a look. I hope you'll enjoy it.

Now, let me return to the subject of fond farewells...

I've been doing this column for the Digest since October 2015, and I haven't had so much fun writing things since I was passing study hall love notes to Kathy P. back in high school. (Hi, Kathy! Hope all's well with you!)

Until the Digest, I had spent most of my 47 years as a journalist covering things like Washington politics, foreign wars, and tragic events in far-away places. I've been much happier writing about the free market.

Unlike Washington, markets are rational (most of the time). And unlike politics, the free market is never zero-sum. We can make more goods and services. We wouldn't even want to make more senators and representatives.

The free market is an obvious improvement on war. In fact, it's the opposite of war. You go to markets and make voluntary exchanges for mutual benefit. You go to war and get killed.

And although tragic events do occur in markets, at least they occur right here at home, in my bank account, instead way off in the desert of Iraq, the boondocks of former Yugoslavia, or the chaos of Somalia. At least I can cry myself to sleep in my own bed.

I've loved writing for the Digest. And I love Digest readers. You give me exhilarating feedback – hitting me with new information, topics, points of view... smacking me on the behind of my prose when I get out of line, and sometimes even laughing at my jokes.

Plus, I've loved working with the Stansberry team. Many of you have met them. For those of you who haven't, they are quick, sharp, warm, thought-filled, thoughtful, interesting, and interested – just the way you'd expect them to be.

I'm looking forward to working on American Consequences with that Stansberry team and with a bunch of other people who are smarter than I am.

Not to get all sentimental and poetic about it... But a verse from Robert Frost's "The Pasture" comes to mind [with addenda by me in brackets]:

I'm going to clean the [muddy economic thinking out of the marketplace's] pasture spring; I'll only stop to rake the leaves [of regulatory obfuscation] away (And wait to watch the [free market] water clear, I may): I sha'n't be gone long. – You come too.

Regards,

P.J. Rourke