Comments on economics by John Mauldin and friends
Gloss on John Mauldin's newsletters: John Mauldin in my opinion is one of
the most astute observers and analysts of contemporary world economic trends
and investment opportunities. He publishes an excellent weekly newsletter -
"Thoughts from the Front Line". And also publishes most weeks
another letter - "Outside the Box" in which he features
excellent essays by many of his friends in the economics fraternity. His web
site is at http://www.frontlinethoughts.com/
- There you will find also the archives of past essays -
http://www.frontlinethoughts.com/archive/asp or also
http://www.2000wave.com/archives.asp
or http://www.investorsinsight.com/blogs/
Mauldin also is author of an excellent book on investing "Bull's Eye
Investing: Targeting Real Returns in a Smoke and Mirrors Market", John
Wilen & Sons, Inc. Hoboken, New Jersey, 2004. (see
recommendedreading.htm for comments.) The book's subtitle describes the
author's opinion on the future economic investment environment as of 2004. He
predicted the then coming market collapse. Actually, he had been predicting
market trends for years. One really needs to read as many of the weekly
newsletters as possible to understand the full story as Mauldin sees it because
it is developing as he writes and we read. Here we will try to comment on the
weekly articles starting with the most recent and going back as far as time
permits. I plan on adding each new letter at the top of this web site so
readers can find the latest issue first. But to begin I am adding as many of
the past letters as I can at the bottom of the pile so to speak to get them
into chronological order. But this will take a great amount of time and you can
go to Mauldin's own web sites to read all the articles in his archive. I am
trying to provide more depth in analysis at my web site on recommended reading. I
will present my comments in red font.
Jan. 17, 2011, "Outside the Box", Volume 7, Issue 3,
Hoisisngton Fourth Quarter Report, by Van Hoisington and Dr. Lacy Hunt
One of the most brilliant essays on the current economic situation in
recent memory - a must keeper.
Jan. 12, 20111, "Outside the Box", Volume 7, Issue 2, Global
Ageing and the Crisis of 2010, by Neil Howe and Richard Jackson
Jan 07, 2011, "Outside the Box", Volume 7, Issue 1, In Defense
of the "Old Ways", James Montier
Jan 06, 2011, "Outside the Box", Volume 7, Special, Where we
have been and Where we are Going, George Friedman
A Stratfor analysis
Dec. 20, 2010, "Outside the Box", Volume 6, Issue 51, Apple,
Google, Newscorp and the Future of Content, Michael Whalen
Dec. 06, 2010 "Outside theBox", Volume 6, Issue 50, The Three
Stages of Delusion, Dylan Grice
Dec. 02, 2010, "Outside the Box", Volume 6, Special,
Geopolicical Journey Part VI, Ukraine, by George Friedman
An excellent report on Mr Friedman's visit to Ukraine during which he met
with officials and ordinary citizens and observed typical activities in the
streets.
Nov. 29, 2010, "Outside the Box," Volume 6, Number 49, "The
Rational Optimist", Matt Ridlely
Nov. 16, 2010, "Outside the Box," Volume 6, Number 47, Age of
Deleveraging - review of Gary Schilling book
Nov. 11, "Outside the Box," Volume 6, Special, Geopolitical
Journey Part I The traveler by George Friedman
This is the first of a coming series describing Mr. Friedman's views during
and from his tour in Eastern Europe. This essay describes his thoughs on
geopolitics and the proper way to study it.
Nov. 08, 2010, "Outside the Box", Volume 6, Number 46, The
Effects of Obamacare by Lisa Cummings
Oct. 28, 2010, "Outside the Box",. Volume 6, Special, U. S.
Midterm Elections, Obama and Iran, by George Friedman
A Stratfor analysis
Oct. 25, 2010, "Outside the Box", Volume 6, Number 45, How a
Gang of Predatory Lenders and Wall Street Bankers Fleeced America and Spawned a
Global Crisis, by Michael Hudson.
This is an extract from Hudson's new book The Monster, which Mauldin says
makes him furious. I believe it will make you furious also. But from this
extract it appears that the author has not included the politicians whose
demands to increase home ownership, especially among those who could not afford
it enabled the private predators to thrive. Not to mention the FED creation of
very low interest rates that helped provide the financial fuel.
One of the most important of Mauldin's recent letters. He quotes
extensively from studies about the current condition of the housing and
mortgage market and then quotes a dire report about the potential disaster
steming from the break in the notarized change of ownership of the notes that
homebuyers sign showing who holds the ownership on the property. This is a huge
potential danger to banks, mortgage brokers, title insurance companies and
others.
Oct. 14, 2010, "Outside the Box", Volume 6, Special, China and
the Future of Rare Earth Elements, by Stratfor
A typical comprehensive report on the importance of the Rare Earth Elements
to a vast variety of modern technology including especially defense systems and
the significance of current Chinese near monopoly in mining and nanufacturing
of many of these. But the report also indicates that over time mines and
manufacturing in other countries may mitigate the situation.
Oct. 11, 2010, "Outside the Box", Volume 6, Number42, Time
Loves a Hero, by Greg Weldon
Oct. 06, 2010, "Outside the Box," Volume 6, Number 41,
Insoslvency too,, by Niels Jensen
Sept. 30, 2010, "Outside the Box," Volume 6, Special, Pakistan
and the U.S. Exit from Afghanistan, by George Friedman
Sept. 27, 2010, "Outside the Box," Volume 6, Number 40, All
QE2, All the Time by Ed Yardeni
Sept. 20, 2010, "Outside the Box", Volume 6, Number 39,
Soverign Subjects Ask not whether governments will default, but how, by
Arnuad Mares
Sept. 17, 2010, Letter, Thoughts from the Front Line, "The
Chances of a Double Dip - by Gary Shilling,
http://www.frontlinethoughts.com/pdf/mwo091710.pdf
Sept. 16, 2010, "Outside the Box", Volume 6, Special, Looking
to 2010, China's Next Generational Leaders, Stratfor essay.
Sept. 13, 2010, "Outside the Box", Volume 6, Number 38, Market
still deluding itself by Albert Edwards
Sept. 6, 2010, Thoughts from the Front Line, "The Problem with
Pensions",
Sept. 2, 2010, "Outside the Box", Volume 6, Special U.S. Draw
Down From Iraq Leaves Void, Stratfor video presentation
August 30, 2010, "Outside the Box", Volume 6, Number 36,
America's Greatest Wealth Creation Engine, by Alex Daley and Doug Hornig
August 23, 2010 "Ouitside the Box", Volume 6, Number 35, The
Importance of Stock Options, by Vivek Wadhwa and William Dunkelberg
August 19, 2010, "Outside the Box", Vol 6, Special, China's
GDP and Questions of Strength a Stratfor video
August 10,2010, "Outside the Box", Vol 6, Number 33, GaveKal
Five Corners by Francis-Xavier Chauchat and others
August 5, 2010, "Outside the Box", Vol 6 Special, Arizona,
Borderlands and US-Mexican Relations by George Friedman
August 2, 2010, "Outside the Box", Vol 6 Number 32,
Demographics, Destiny and Asset Values by George Magnus
August 2, 2010, Thoughts from the Front Line, "TheDismal
Science Really is",
July 30, 2010, Letter, Thoughts from the Front Line, "Are we
there yet?" http://www.mwo072010.pdf
July 27, 2010, "Outside the Box", Volume 6, Number 31, Running
through a minefield backwards - by Bedlam Asset management
July 25, 2010, Thoughts from the Front Line, "The Risk of
Recession",
July 24, 2010, Letter, Thoughts from the Front Line, "Some
thoughts on Deflation",
July 22, 2010, "Outside the Box", Volume 6, Special Despatch:
China Factors in US.-South Korean Relations, by George Friedman
July 19,2010, "Outside the Box", Volume 6, Number 30, Asia's
Paradigm Shift by Louis Vincent Gave
July 17, 2010, Letter, Thoughts from the Front Line, "The Debt
Supercycle" http://www.mwo071710.pdf
July 12, 2010, "Outside the Box", Volume 6, Number
29,Recession, Deflation, and Deficits, by Hoisington Investment
July 11, Thoughts from the Front Line, "The Frog in the Frying
Pan",
July 9, 2010, Letter, Thoughts from the Front Line, "It's more
than just Birth-Death" http://www.mwo070710.pdf
July 4 2010, Thoughts from the Front Line, "There's a Slow
Train coming",
June 24, 2010, "Outside the Box," Volume 6, Special, U.S.
TheAfghanistan Strategy after McCrystal ,by George Friedman
June 21, 2010, "Outside the Box", Volume 6 Number 27 What is
the point of Macro? by Dyeon Grice
June 18, 2010, Letter, Thoughts from the Front Line, "Be
careful what you wish for", http://www.mwo061810.pdf
June 14, 2010, "Outside the Box", Volume 6, Number 26Print,
Baby Print, by Dyeon Grice
June 2, 2010, "Outside the Box", Volume 6, Number 24 The
Ultimate Hedge in economic Activity by Patrick Cox
"The current health care bill is a relevant example of the policy
based on premises that are fundamentally obsolete and flawed". Patrick Cox
specializes in finding innovative technology and the companies that create it.
He is especially focused on coming bio-technology advances. He thinks new
bio-tech developments will change human life span and eliminate many current
killer aliments.
May, 28, 2010, Letter. Thoughts from the Front Line, Six impossible
things. (http://www.mwo052810.pdf
May 22, 2010, Thoughts from the Front Line, "The Case for a FED
Rate Hike",
May 15, 2010, Thoughts from the Front Line, "Europe Throws a
Hail Mary Pass",
May 7, 2010, Thoughts from the Front Line, "The Center Cannot
Hold",
May, 06, 2010, "Outside the Box", Special Global Crisis of
Legitimacy by George Friedman
May 05, 2010,"Outside the Box", Volume 6, Num ber 21,Was the
Demise of the USSR a Negative Event? by Charles Gave
May 03, 2010, "Outside the Box", Volume 6 Number 20, The Great
Reflation by Tony Boeckh
April 30, 2010, Letter, Thoughts from the Front Line,
April 28, 2010, "Outside the Box", Volume 6 Number 19 Macro
Europe: The Titanic is Sinking by Greg Weldon
April 26,, 2010, "Outside the Box", Special The Making of a
Greek Tragedy by George Friedman
April 22, 2010 "Outside the Box", Volume 6, Special Ecuador:
Correa's Play for Greater Influence on Oil Sector by George Friedman
April 19, 2010, "Outside the Box", Volume 6 Number 18UK
Economy Must Perform Rebalancing Act - and Growth to Fix by Martin Wolf
April 16, 2010, Letter, Thoughts from the Front Line 'First, Lets
Tell the Angels"
April 08, 2010, "Outside the Box", Volume 6 Special Mexico the
Failed State Revisited by George Friedman
April 09, 2010, Letter, Thoughts from the Front Line, "Reform
we can Believe in"
April 08, 2010, Letter. Thoughts from the Front Line
April 05, 2010, "Outside the Box", Volume 6 Number 17Where are
Rates Headed and Whyby Barry Habib and California Crisis Borat
Bonds, by Spencer Jakob
April 02, 2010, Thoughts from the Front Line, "Is This a
Recovery?",
March 29, 2010, "Outside the Box", Volume 6 Number U.S. Stock
Market Returns - What's in Store by Dr. Prieur du Plessis
March 06, 2010, Thoughts from the Front Line, Welcome to the Future,
March 04, 2010, "Outside the Box,"
Feb, 22, 2010 "Outside the Box", Volume 6 Number 11 A five
Step Gude to Contagion by Todd Harrison
Feb. 19, 2010, Letter, Thoughts from the Front Line, "The Pain
in Spain"
This letter can be found at
http://www.frontlinethoughts.com/pdf/mwo021910.pdf. Mauldin first comments on
the arguments between Greeks and Germans over the Greek sovereign debt and
possible 'bailout'. He notes his opinion of the strength of the Euro. He then
turns to Dennis Gartman and David Kotok for their opinions. Mr Kotok thinkis
the Euro will be even stronger and it is the U.S. dollar that is weak. But
Gartman thinks the Germans will NOT help Greece and the conflicts within the EU
will continue to weaken the Euro. Mauldin thinks both friends have good ideas.
Their differences stem from their different backgrounds, contacts and ways they
view markets. Mauldin thinks the Euro will survive because it must. But that
its value relative to the dollar will continue to fluctuate and is an
insignificant issue anyway. He comments. "But the valuation of the euro is
not in and of itself a reason for the euro to disappear. At one time it was
$.82. Then over $1.60. All currencies fluctuate, some more than others. What
destroys them is political malfeasance." Indeed,
political malfeasance - the lead up to sovereign defaults and bank
crises. He continues, "What would put the euro at risk of a bad
political decision? A Greek bailout without serious conditions would be the one
thing that could be a very bad start to a downward spiral. If Greece is bailed
out, then why not Portugal or Spain or Ireland? What about the emergency room
crisis that is Austrian banks?" The clear but not
stated point is that the 'bond vultures' will set the agenda eventually.
Mauldin then turns to Spain. The situation there is more serious, because Spain
is much larger than Greece economically and its default would be a much more
serious problem for Europe and the Euro. Once again, Mauldin quotes from two
expert groups he highly regards who have opposite views on the viability of
Spanish debt and its coming impact. Again, Mauldin notes that the very
different appraisals are based on different assessments of the
POLITICAL policies and preferences of the Spanish
government and people. Mauldin then provides a very interesting graph by David
Henninger published in the WSJ. It shows a rapidly escalating rise in Federal
expenditures versus a flat household median income. Mauldin notes that this is
"unsustainable". Again it is a political issue. He comments,
"This is the definition of an unsustainable path. Spending has grown 7
times as much in real (inflation-adjusted) terms as median household income
over the last 40 years. Like Greece and Spain and much of the rest of the
developed world, we will be forced to make hard choices."
And these choices are POLITICAL. The bond vultures
are circling the U.S. as well. The next 5 or so years will tell the tale.
Feb. 18, 2010, "Outside the Box', Volume 6, Special Edition, The
Meaning of Marjah by Kamran Bokhari, Peter Zeihan, and Nathan Hughes
Another of the special reports from Stratfor. A brief commentary on
American strategy and how the current offensive at Marjah fits in.
Feb. 15, 2010, "Outside the Box", Volume 6, Issue 10, Is the
Recession Over by William Hester
Lots of graphs and inconclusive conclusions.
Feb. 12, 2010, Letter, Thoughts from the Front Line, "Between
Dire and Disastrous"
This week Mauldin returns to the current financial situation in Greece and
Europe generally. The text is available at
http://www.frontlinethoughts.com/pdf/mwo0121210.pdf
He believes the extensive commentary in the media now misses the most
significant aspects and proceeds to provide his analysis. He believes the Greek
situation is but the 'precursor' to a general period of soverign debt crises.
"Path dependence" means that today's decisions are influenced and
limited by the series of past decisions. And future choices will be limited by
what we choose today. He notes that he has been commenting on 'bad choices' for
years. And the options are becoming more and more limited. Now, here he makes a major point I don't see often
enough. "Our economic future is more and more a product of the
political choices we make, and those are increasingly difficult."
So much of the analysis by economists these days is
narrow economics rather than real 'political/economy". This includes the
excellent book by Reinhart and Rogoff that is a must read "This time is
different'.. So Mauldin remarks that the choices for Greece are 'either
dire or disastrous'. He then provides a short historical discussion on the Euro
and how the Mediterranean countries continued to get into fiscal trouble
despite joining and promising to abide by the rules. They were alowed in
despite "exchange rate that overvalued their currencies relative to the
northern countries, but especially to Germany". Then Greece lied about its
own fiscal - budget situation. (The New York Times now
claims Goldman was involved in this deception.) But high currency value
resulted in high labor costs, and a trade deficit. He notes the current deficit
is "254 billion Euros" with anouther "64 billion Euros"
coming this year. They cannot continue to borrow without help. So far the
European leaders have given vague expressions about such assistance. They
indicate such help will only be provided with very significent Greek reforms -
that is budget cuts. Mauldin provides some perspective on what that would
require in U.S. budgets and notes it would cause a recession and higher
unemployment. He gives cogent facts about the nature of the Greek economy and
taxation system. "over 50% of GDP is government spending , and Greece has
one of the highest public employee levels as a percentage of the population in
Europe." He headlines this as a "National Suicide Pact". He
notes that such austerity measures would actually decrease revenue which would
then require more cuts. (This is a common problem facing
all the welfare states.) Then Greece would have to borrow even more with
added debt. If Greece was independent of the EU it might devalue its currency,
but its currency is the EURO. So Mauldin writes that the 'dire' situation is
budget cuts and recession and the 'disasterous' situation is an outright
default. The problem for Germany and the EU is that a bailout of Greece would
impact on the situation in Ireland and Portugal and Spain.
Again, I have been preaching ever since reading Philip
Bobbit's book, Shield of Achilles and David Hacket's book, The Great
Wave - that all this is a result of the coming collapse of the 'welfare
state' generally. Mauldin turns to information supplied by the BIS on
which banks hold the Greek debt. It turns out that France, Switzerland, Belgium
and Germany each have quite a bit. But the debts of Ireland, Portugal and Spain
on the books of German banks are much larger - up to 15 times the size of the
Greek debt. He continues,. "Greek debt is $350 billion with about $270
billion of that spread among just three European countries and their
banks." Thus a Greek default would be a much more serious crisis than the
media generally note. "That would bankrupt the bulk of the European
banking system, which is why it is unlikely to be allowed to happen."
Mauldin provides several ideas on what might happen. He next turns to Ambrose
Evans-Pritchard, an excellent analyst and author who
writes for the London Daily Telegraph. He writes that the European
politicians did NOT provide anything concrete. But the alternative ideas he
suggests might happen are all disasters. The politicians are hearing strong
warnings from their publics. The Euro itself and indeed the EU are at risk.
Mauldin concluds with a lengthy of four options the Greek government might
attempt. And he notes it is a political situation. Just
what I have been writing for years. Inflation, devaluation, deficits, defaluts,
all described in pure econometric terms by Reinhart and Rogoff are all
Political decisions, not simply economic results. 1 - The Greeks can
accept austerity and have a depression of some years. 2 - They can simply
default and go into a longer depression but with damage to other countries as
well. 3 - they can leave the EU and return to their own currency and
sovereignty. Already individual Greeks are quickly moving their funds out of
Greece. 4 - they can promise to make budget cuts and borrow from whomever is
willing to gamble. But the world financial market is NOT going to let Greece
get away with it for very much longer. Mauldin quotes David Kotok who thinks
the situation will be resolved eventually. Finally Mauldin extends his thoughts
to the impact on other countries. "It's More than Just Greece". He
remarks, "This is not just a Greek problem. Debt and out of control
deficits are a problem all over the developed world. The Greeks are just the
first". Exactly, bravo. He mentions that
Niall Ferguson, another currently popular commentator
since publication of his excellent book on the History of Money (another must
read) has written in the Financial Times that this epidemic is
coming to the U.S. "You cannot spend your way out of a fiscal
crisis." Again, bravo. Mauldin won't name
names but the economists he mentions, who sluff all this off, are well known.
(Well, they have Nobel Prizes, so you can guess or try
Krugman.) They continue to claim the U.S. is immune to all this.
Just want Reinhart and Rogoff meant. Mauldin
returns to his pitch "We are in the fullness of time approaching the End
Game." So in this weekly letter we have another
installment in the epic saga of our times. Read it and weep.
Feb. 8, 2010, "Outside the Box", Volume 6, Issue 9, February
Economic Report by Simon Hunt
Mauldin first comments on the situation in Greece, adding to his previous
notes. He believes it is very serious and could lead to financial problems
throughout Europe and the world. If the problem spreads to Spain, Portugal and
Italy there is a potential of 1 trillion Euros of debt that could be downgraded
in the bond markets. He believes this is just the beginning of a major crisis
in sovereign debt. The situation in Greece Europe
generally is right out of the Reinhart and Rogoff book. The report by
Simon Hunt is an analysis of the financial problems from a very long range
perspective. Hunt comments that 2010 will be a year of 'surprises'. Governments
will be even more active interventionists and markets will suffer for it.
Currently China is seeing inflation due to lax fiscal policy. There are growing
labor shortages and production problems. Export is being impacted. Expect
increasing prices for Chinese exports. But Hunt comments 'China's
industrialization has been nothing short of miraculous - stunning - yet there
remain many pitfalls ahead." The rise of China in the world economy is
generating political issues as well. He expects some improvement this year
followed by successive declines until 2018. Specific conclusions are - slow
growth in first half of 2010 - recovery in last half and in 2011. Another
credit crisis due to government debt in 2012 and 2013 - Another global
recession from 2013 to 2015 - growth starting in 2018. This long range forcast is based on Hunt's belief in 'long
wave' movements - one has to question the basis for such predictions.
Feb. 10, 2010, Letter, Thoughts from the Front Line, "A Bubble
in Search of a Pin"
This issue is available from
http://www.Thoughtsfromthefrontline.com/pdf/mwo020510.pdf
Mauldin again notes that he is personally beginning to invest in leading
biotechnology - especially 'regnerative genetic' companies. He follows Patrick
Cox, who is a leading student of new technologies. He then turns to the latest
unemployment data, some of which shows ups and some downs in numbers of
employed and unemployed. He quotes The Liscio Report that claimed
enployment numbers have increased. Lots of statistics here. Mauldin turns to
David Rosenberg, who notes that the tital employment number - 129.5 million is
the same today as it was in 1999. But the working age population has expanded
by 29 million. Plus, Mauldin adds a Rosenberg chart that depicts male
employment from 1996 to 2009. The graph depicts a gradual rise from 50 million
in 1996 to over 54 million in 2007 and a rapid decline back to 50 million in
2009. Moving on, Mauldin discusses NFIB data with another chart about credit
conditions for small businesses. Mauldin throws in the remark that if Congress
does not come off tax increases we will have another recession. The meat of
this letter comes with the "Bubble in Search of a Pin" title, which
is an extended commentary on the Reinhart and Rogoff book previously
recommended This Time Is Different. I review this
book on the web. Mauldin poses the question on the basis of the
extensive historical record in this book about what happens repeatedly when
credit=debt gets out of hand - Should not Greenspan and Bernanke have known
this and done something? Mauldin's direct quotes make the answer very clear.
Great quotes, but get the book and read it
yourselves. Unfortunately neither Reinhart &
Rogoff nor Mauldin discusses WHY the government officials, not only Greenspan
and Bernanke but Congress refused to admit (if they recognized) the causes of
the bubble and collapse - namely the government attempt to make 'afordable
housing' an entitlement in the face of a world - wide deflation. Mauldin
then recommends Andrew Smithers book - Wall street Revalued: Imperfect
markets and Inept Central Bankers. Hen notes that the book is a devastating
critique. It is also a critique of the Efficient Market Hypothesis (EMH) and
other theories. He presumes that the two bankers could not recognize the bubble
due to their belief in this theory - that is "the efficiency of
markets". Well, as I note that is not the main
reason. We might mention at this point Talib's 'Black Swan'. Well,
enough of that - Mauldin turns to the latest fiasco - The Greek debt=credit
bubble - about which he quotes Donald Morris. A really choice bit about the
history of Greek individualism. Mauldin sets the situation into context.
However I have to laugh when he comments. "It
is doubtful that German and French voters will be happy with any bailout using
their tax money that does not impose serious cuts in Greek Budgets...."
But the Germans and French are in a similar situation to
the Greeks, only less so at the present time.
Feb. 2 2010, "Outside the Box", Volume 6, Issue 8, If PIIGS
Could Fly, two articles by Mohamed El-Erian and Niels Jensen,
Mauldin first includes an article from Financial Times by Mohammed
El-Erian, chief executive of PIMCO with link to it The topic is the serious financial situation
of Greece - its sovereign debt - and thoughts about what Greece and the EU
might do about it. He comments that it is a big 'game of chicken' in that both
parties are hoping the other will somehow take proper measures. But, he notes,
'there is no solution to the country's debt issues without a deep and sustained
policy effort." Indeed, but at what political
cost. Mauldin then turns to Niels Jensen's Absolute Return Letter
of February 2010, a much longer and more detailed essay. The article begins
with discussion of deleveraging and provides a graph showing that bank loans
remain at an all time high. He comments that 'Years of excessive debt
accumulation cannot be reversed in 18 months, and it will take at least another
5-6 years to play out." Note the point that it is
leveraging and de-leveraging rather than 'velocity' which is cited. The
next chart supports Mr. Jensen's note that the U.S. government borrowing
campaign has barely replaced private debt with public (government) debt. So not
much deleveraging has really taken place. The great increase in sovereign debt
should be considered in the light of the Reinhart and Rogoff book.
And also note Moody's warning about the 'deluge of debt'
and its impact on credit ratings. The next topic is a return to the
'basket case named Greece' . A chart depicts the huge increase in basis points
of credit default swaps for this debt. Jensen notes that Felix Zulauf comments
that Greece has been "in default for 105 of the last 200 years."
See Barron's investor analyst round table in the last
three issues for Zulauf's views on investments in 2010. Jensen then
quotes from a research report of the Danske Bank in Copenhagen for ALL EU
members, with a table showing the dire debt-to-GDP ratios. Another table
depicts the annual tighgtening of primary deficit necessary to bring this ratio
down to the official EU target. The point is that Greece has a nearly
politically impossible task ahead. Next up Jensen asks "Is Spain
next?". This point is that of Greece falls then the speculators will turn
against Spain and perhaps Portugal. Jensen opines 'The outlook is very
grim". A chart asks "Are our governments solvent". A graph
reveals the stark difference between the official net debt to GDP ratio and the
actual one that includes government promises such as pensions and off book
liabilities. Jensen then turns to "The end game for Japan?" with
charts showing that Japan's previously favorable demographic situation is
rapidly deteriorating as the population ages and savings will be used to
support retirements. Jensen wonders then why in view of the dire situation
stock markets have gone up so far and so fast in 2009, "despite the grim
outlook". He gives some popular reasons that he does not quite believe.
His conclusion 'Summing it all up, the fate of global equity markets is very
much in the hands of bond investors..... the end game is approaching'
There is more that I hope everyone will study.
January 29, 2010, Letter Thoughts from the Front Line, "This
Time is Different"
The text is available at
http://www.frontlinethoughts.com/pdf/mwo012910.pdf. In this letter Mauldin
begins with his recommendation of the Reinhart and Rogoff book - This Time
is Different. which I include in the recommend reading list on web. The
authors have examined many financial crises over the past 200 years and take
their title from the all too common pitch by 'experts' that no one should worry
because 'this time is different' when of course it is not. By this the
'experts' mean that somehow the 'old rules' of value and investment advice no
longer apply. Somehow they think that 'modern' methods and insight and their
own skill have made investments bullet proof and the boom will continue. Of
course the historical record of such failures is used as a basis for commentary
on how and why Goldspan and Bernanke (and others) could continue to claim all
was well, when the crisis was right on them. Mauldin then comments on recent
GDP numbers that the media tout as proof the economy is now doing much better.
He has his doubts and gives reasons. This is why he calls it 'a statistical
recovery' meaning caution that it may not be so real. The main topic then is
the book cited above. I had to buy the book and read it
back and forth and make notes, so how Mauldin got enough out of it via a Kindle
I don't know. But he is right that it is an important book. In my commentary
about it I write that it is about the 'trees' of financial change (crises) but
David Hackett's book - The Great Wave - is about the forest. So read
them both. Mauldin provides extensive choice quotations. The focus is on
the build up of debt into a mountain that then collapses. Further, he points to
the authors' view that a crisis is generated by a 'crisis of confidence'. The
point is that all fractional banking and all extension of credit rests on the
confidence of those lending their hard-earned wealth ( creditors) about the
ability of the debtors to repay. There is no way to predict when the confidence
of enough creditors will break sufficiently to create a systematic failure.
Mauldin's expansion on the authors' theme is excellent. He believes that a
banking crisis is much different from a basic business-cycle recession. In this
letter Mauldin only begins his commentary on the book and lessons to be drawn
from it. His next topic is the Greek debt crisis - an all too typical example
of the book's subject matter. This crisis also is hitting suddenly. It was
triggered by an effort of the Greek government to peddle a large bond issue
when it is running an annual deficit of 12.5%. Mauldin provides a graph showing
that Greek debt is huge - 254 Euros - when Russian debt was only 51 Euros when
its government defaulted in 1998. The Greek situation illustrates the
fundamental problem brought on by such debt. In order to bring it down over a
reasonable number of years they would have to cut their annual deficits by 4%
of GDP, but that would throw the country into a recession which would in turn
reduce government income from taxes which would force even more budget cuts.
Apparently no one believes the Greek government's 'plan' to address this
problem. Meanwhile, since Greece, is a member of the European Union, its
problem impacts the whole of the Union. Will there be a run on Greek banks? But
what about the United States and its debt? Mauldin concludes with a graphic
depiction of 'spending' versus' revenue' Mauldin comments "Greece is an
object lesson for the world, as Japan soon will be. You cannot cure too much
debt with more debt'. AMEN
January 25, 2010, "Outside the Box", Volume 6, Issue 7, An
Insider's View of the Real Estate Train Wreck, by David Galland
David Galland is the editor of Casey's Report,
available for free subscription from Internet and a daily read I highly
recommend. This issue is an interview Galland had with Andy Miller, a major
investor and analyst of commercial real estate. It also appeared more recently
in Whiskey and Gunpowder daily email from AGORA. The theme is
that a very serious crisis is coming in commercial real estate. Galland notes
that Miller was among the first to predict the housing and credit crash back in
2007. Galland asks a series of questions and reports Miller's answers. 1 - what
is coming in the housing market, is it getting better - Answer - NO, the home
housing market has been 'nationalized' The government via the GSE's and FHA has
subsidized the great majority of recent mortgages. But this government
intervention MUST stop eventually because it is financied ultimately in the
bond market. When this happens the original problem remains. - 2 What about
default on FHA backed mortgages - Answer - The GSE's are losing billions. 3
What about commercial real estate? - Answer - There was as big a bubble in
commercial as in home real estate and it has not yet been fixed. 4 So what is
happening? Answer People are learing that prices will not go up forever but can
come down. But they lived in 'fantasy land for 10 years'. Now lenders are
sitting on non-performing loans. 5 What about banks? - Answer Defaults are
already rising but will become worse in 2nd quarter of 2010. The Treasury and
FED and FDIC will be involved. They are allowing banks to keep non-performing
loans on the books without taking paper losses. They hope to prevent 1 - 2
thousand small banks from going bankrupt. This is the Japanese method - to
prevent the banking system from outright collapse they left bad loans on the
books but this prolonged the problem. The overall economic effect is to keep
capital tied up in unproductive limbo. But the longer one delays taking the
loss the worse it becomes. Both the borrower (owner of the real estate) and the
bank have a vested interest in delay - preventing the loss from being realized
with the resulting hits. It looks like the federal government will find ways to
support the commercial real estate market just as it is supporting the home
real estate. It is a political scheme but the result is 'nationalization'
without Congress or the public becoming aware or responding. Eventually the
properties must be valued at their real level and there will be huge losses.
But somehow the American economy will survive.
January 22, 2010, Letter Thoughts from the Front Line,
"Thoughts on the End Game",
The text is at
http://www.frontlinethoughts.com/pdf/mwo012210.pdf Mauldin plans to focus
on 'the end game' in his letters this year. What is going to happen as the
current financial crisis reaches its conclusion? What about Japan? How safe is
the Euro? He mentions the coming fiscal-debt crisis in Greece. Mauldin then
discusses the concept of 'this time it is different and highly recommends a
book by Carmen Reinhart and Kenneth Rogoff, This Time it is Different -
of course that is such a common expression that various brokers and others use
to justify some idea they have, that usually turns out false.
But these authors this time have it precisely right. It
is different, we will have to read the book to find out if they understand
WHY. But according to the brief extract Mauldin supplies the authors
have studied over 250 financial crises during an 800 year period. He quotes
them, ''The lesson of history, then, is that even as institutions and policy
makers improve, there will always be a temptation to stretch the
limits." Bravo - indeed. They focus on the huge
leverage created over past 25 and more years with massive credit=debt by all
segments of the economy, private and public. Mauldin then switches to
provide an extensive report from Van Hoisington and Dr. Lacy Hunt, their
"Quarterly Review and Outlook - Fourth Quarter 2009" in which they
also cite the same book. They again focus on the disasterous result of the
massive credit=debt binge. Their subtitle "Hard Road Ahead" The U. S.
faces a very difficult future in attempting to "correct for
over-indebtedness". They report that there currently is $3.70 of debt for
every dollar of GDP. The deleveraging - unwinding of this hyper debt - will
take a long time and create significant pain. As usual they provide excellent
graphs. One shows that the total U.S. debt as a percent of GDP reached 299.8%
in 1933 and then collapsed. But now it is 369.7 % in third quarter of 2009.
They note the danger of excessive debt unwinding is deflation. (But it is deflation that forces the unwinding.) They
comment 'Debt overwhelms Monetary Policy'. And, "Over-indebtedness Creates
excess Supply" And, "Deficit spending only provides a transitory
boost to the economy." They provide a graph depicting their point that the
yield on Treasury bonds has been moving down since 1990. And that so far
inflation has not resulted from the massive expansion of U.S. debt (FED actions
and all) because the economy is continuing the deleveraging from contraction of
credit=debt. But nevertheless the government will raise taxes thus causing
further reduction in economic growth and recovery. Therefor, they note, they
are buying long Treasury bonds in expectation that there will be no significant
inflation in the near future.
January 18, 2010, "Outside the Box", Volume 6, Issue 6, 2010
Investment Strategy: Six areas to buy, Eleven to sell by Gary Schilling
Extracts from the January edition of Schilling' Insight Schilling
first recommends buying Treasury Bonds as he believes Treasuries will continue
to be favored by everyone fleeing more risk. He expects a decline in yields -
hence an increase in price. He cites previous periods in which Treasury bonds
outperformed equities. He believes the huge federal deficits coming will not
generate inflation as individual savers will continue to reduce their private
debts and buy Treasuries rather than stocks or consumer items. Second, he
recommends purchase of Income-producing securities such as high quality
corporate and municipal bonds and utility stocks and health care firms paying
good dividends. Third, he recommends consumer staple and food companies.
Fourth, he recommends small luxury makers, that is companies that make luxury
products that sell for lower prices. Fifth, he recommends buying the dollar. He
insists that the dollar will strengthen as everything else weakens. But sell
the British pound and the Euro. Even commodity currencies such as Canada and
Australia will fall along with the prices of commodities. Sixth, he recommends
buying Eurodollar futures. Shilling turns to sales and recommends first U.SD.
Stocks in general. He writes that the S%P 500 index is at a high P/E. Second,
sell homebuilders and related companies. Next, sell various big-ticket consumer
discretionary names as consumers will continue to save rather than buy plus
deflation will continue to push prices down. Next, sell banks and financial
stocks as these companies will continue to de-leverage and demand for loans
will remain weak. Next, sell consumer lenders' stocks as they are in the same
situation as banks. Consumers will continue to cut back on doing business with
these outfits.. Next, sell low and old technology capital equipment producers
as the supply of their products will continue in excess while new technology
will suplant them.. Next, if you want to sell your house, you should have done
so already, but do it now if you have not. He expects home prices will fall
another 10%. Next, sell junk bonds and commercial real estate for the same
reasons. Next, sell most commodities as deflation continues and demand is weak.
Finally, sell stocks and bonds of developing countries. He believes that China
and India do not have consumer buying power sufficient to sustain growth and
will suffer along with the rest of the world in deflation. He notes.
"China's economy looks like a house of cards." So, this set of predictions and recommendations was published
in early January and so far much of it appears to be coming true.
January 15, 2010, Letter Thoughts from the Front Line, "When
the Fed Stops the Music"
Mauldin notes that the FED has repeatedly stated that it will end its
quantitative easing program at the end of March 2010. But its buying of
mortgages has been critical in keeping the interest rates low. And it is
financing the federal government debt as well. This is because the banks and
institutions selling mortgages to the FED are then buying the Treasury bonds
which gives the money back to the FED. But foreign institutions also bought a
large amount of the new federal debt. So Mauldin asks ' who will buy the coming
debt issues?' He also wonders who will buy the trillions of new debt the
foreign countries also plan to sell. He quotes Bill Gross of PIMCO who wrote
that the public needs to be very vigilant. Assets now have been raised in
nominal value by the FED expansion of money supply. Private debt is being
transfered to government debt. "if exit strategies proceed as planned, all
U.S. and U. K. asset markets may suffer from the absence of the near $2
trillion of government checks written in 2009." In other words the 2009
market bubble has been due to the government pouring money out and absent this
continual expansion these assets may decline rapidly. Mauldin continues that we
have no historical reference as to what may happen if the FED suddenly stops
buying bonds. He asks "Why, therefore, would anyone want to be long the
dollar or treasuries?" Both the dollar and the pound are in trouble -
plus, Mauldin mentions Greece and Spain. He believes the volatility of the Euro
is 'huge'. He thinks the dollar may rise versus these other currencies in early
2010 since world traders will need dollars to conduct their business. But the
dollar remains weak for the future. He suggests one consider the Canadian and
Australian dollars. He thinks gold may be worth buying. Most importantly, in this issue he focuses on the
current 'recession' and so correctly notes that 'this recession is
different'... 'itis a deleveraging recession'. "We borrowed too much (all
over the developed world) andn ow are having to repair our balance
sheets...." However it is outside Mauldin's task to
ask why and answer the questions - Why did all the countries get such huge debt
burdens in the first place and why has deflation occured and why are the
governments doing what they are doing. That gets into politics. He
quotes at length a study by mcKinsey Global Institute on the outcomes of
periods of over leveraging followed by efforts to de-leverage and lengthy
periods of slow growth. He provides 6 of their findings.
Note, the discussion again is all about leverage and de-leveraging - not about
'velocity'. The report can be found at
http://www.mckinsey.com/mgi/publications/debt_and_deleveraging/index.asp
. Mauldin then turns to the Lex column from the Financial Times
which comments on this same report. The Times notes that the longer governments
delay in solving the debt -leverage problem the more painful it will be. But
governments are so reluctant. Mauldin here notes about Japan - "Japan, as
I have noted, is a bug in search of a windshield". Well, I think the same will soon be said about the U.S. as
well. Mauldin notes again that the "bond vigilanties" will be
coming soon. His final advice "I would be very cautious about being long
the stock market. It is now a trader's market. I would not be buying
long-duration bonds."
January 11, 2010, "Outside the Box", Volume 6, Issue 5, Coming
BioTech Bubble by Patrick Cox
Mauldin writes that he is so impressed with the views Patrick Cox has on
the coming revolution in health and longevity due to breakthroughs in
Biotechnology that he is going to start buying stocks of companies in this
industry. Patric Cox writes an expensive investment letter as part of the AGORA
family of letters. He appears to have a strong following. In this special essay
for Mauldin he focuses on one of the revolutionary technologies he follows.
This is the leading aspects of biotechnology. It is clear
that Cox does his research homework. In this essay he describes -
Vitamin D - nanotech sensing technologies applied to biologics - RNAi
(interference) - nanotech viricides,- stem cell technologies. The last is most
important - Cox terms it 'regenerative medicine' that is methods for
regenerating specific humans cells. RNAi is a field I have been following for
some years and I have bought into one company. Cox discusses 'nanotech/biotech
convergence' a field that will enable medicine to focus on individuals rather
than whole populations This is a very persuasive essay so
it is no wonder that having spent several years discussing all this with Cox
Mauldin is convinced enough to start buying into the industry.
January 8, 2010, Letter Thoughts from the Front Line, "2010
Forecast: The Year of Uncertainty"
Mauldin notes that this is his 10th annual prediction issue. He is
optimistic that the coming decade will be much better than the last.
Nevertheless there currently is a high level of uncertainty. He notes also that
the readership has grown from 2000 to over 1.5 million - quite an achievement.
And everyone is encouraged to subscribe at
http://www.investorsinsight.com
He mentions that there are a lot of forcasts published these days. He describes
the Birinyi Associates summation of this mass. Result is that there is a lot of
'uncertainty' with prognostications all over the map. So, first he wants to
consider where 'we are' now. He has recently read James Montier's book - The
Little Book of Behavioral Investing which he highly recommends. The author
states that people are 'prisoners of their preconceptions'. Mauldin reports
extensively on the psychological studies described in this book. Of course as
military professionals we are well aware of this phenomenon. In the investing
context people believe either in bullish or bearing futures depending on their
preconceptions. From this he comments on current popular views on the state of
the economy. Then he discusses the consumer confidence survey and actual
unemployment data including the number of people receiving unemployment income.
Despite very bad unemployment statistics the statistics on GDP appear too
positive. Mauldin coins the term 'Statistical Recovery' for this apparent
divergency. Conclusion is that the economy is not in a good a shape as some
reports seem to indicate. When he looks to the future, Mauldin sees great
problems - unemployment continuing - Congress raising taxes - stocks already at
high valuations - a very difficult medium term future. He believes, "This
is a trader's market. It is not time to buy and hold large indexes or high-beta
stocks and expect to be made whole over the next ten years." He continues
with discussion of the coming actions of the FED. The market is expecting
interest rate increases by fall. But Mauldin believes that political pressure
will force continuation of the current easy money policy. He notes that
Bernanke is much aware of the results when rates were raised prematurely in
1937. And the unilateral Treasury policy of authorizing the GSE's to continue
to buy mortgages will cost the tax payers billions.
January 7, 2010, "Outside the Box", Volume 6, Special Issue,
The Year Ahead for Russia, by George Friedman
I skip commentary on these Stratfor essays. They are available from
Stratfor.
December 18, 2009, Letter Thoughts from the Front Line, "The
Age of Deleveraging"
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo121809.pdfThis brief end of year
letter is focused on the deleveraging that has taken place since 2007 and is
continuing in the credit markets. The first section is "It's All about
Deleveraging". There is a link to a video of a discussion John Mauldin had
with Jeremy Sigel. Sigel is a relative bull for the economy come 2010 expecting
a GDP growth of 5-6%. While Mauldin remains bearish predicting growth of 1-2%.
Sigel is famous for his 'buy and hold' strategy. But the US market now is lower
than it was in 1999. Mauldin predicted the deflationary period and maintains
that it persists and will continue to persist with a secular bear market into
2010. The letter includes graphs and data. Then Mauldin discusses the 'nature
of recession' and "Commercial Woes" in which he describes the dangers
in commercial mortgages. He concludes with a personal note about the birth of
his first grand child.
December 14. 2009, "Outside the Box", Volume 6, Issue 3 Will
the Three Trends of 2009 Prevail in 2010? by GaveKal
The full report is at http://www.investorsinsight.com/blogs.
This is actually five essays by members of the GaveKal team of which the first
has the above title. The three trends given in the first essay are: 1.
Impressive weakness in the U.S. Dollar, 2. Significant rally in commodities, 3.
Pronounced out-performance of emerging markets, including Asia. The initial
thought is that these are 'running out of steam'. Theexamples of Saudia Arabia
and Dubai are cited. The second essay discusses three alternate views of
investments named for Ricardo, Schumpeter and Malthus. The GaveKal investors
seem to fall into one or another of these three camps. Disciples of Ricardo
focus on comparative advantage and seek to find investments where comparative
advantage has not yet been fully realized. Disciples of Schumpeter focus on the
creation of new industries and methods based on entrepreneural and
knowledge-based breakthroughs. The Disciples of Malthus focus on demographics -
increases in population that surely will drive demand for commodities and
rising incomes. The company believes in the future according to a combination
of Ricardo and Schumpeter and not Malthus. The third essay, by Arthur Krober,
is on "China's Two Turning Points" China has led the world in
economic development recently. But export values have declined for the first
time. Despite this overall growth will continue. The first 'turnning point' is
the shift from external - export - based expansion to internal - infrastructure
and consumption based expansion. The second 'turning point' is coming in a few
years when the present favorable demographic situation turns negative. For the
past decades China has been favored with a positive
"dependency-ratio" - that is relatively fewer dependents per working
person. This is the source of significant savings available for investment. But
after 2015 the ratio will begin to shift as the numbers of elderly people
increase while the numbers of working-age people decline relatively. Krober
concludes "These two turningpoints in the export sector and demographics
mean that China's traditional growth model - wich relied on favorable
demographics, rapidly expanding exports, and capital deepening - is nearing its
use-by date." The next essay by Louis-Vincent Gave is about "Why
Invest in China Now?" Interestingly the author points out that investment
in China and HongKong markets - listed companies - from 1994 to date actually
underperformed investment in Italian government bonds. Who would have guessed this either before the fact or now? But
the chart they provide does not lie. The author gives his idea on
reasons. The focus is on the "efficiency of capital" This efficiency
has been very low but now is improving as it must. The very inefficiency
remaining provides great opportunities for investors If 'efficiencyh of
investment' can be achieved there is great room for a sustained bull market.
The final essay, by Gavin Bowring, on "Categorizing Europe's Weakest
Sovereigns" is certainly timely considering the Greek problem. The author
discusses 1 - problems within the core of the European Union and 2 - problems
in the fringe countries. The latter include the East Europe and Baltic states
In these politics will play a big part in finances. He includes the PIIGS
within the European core. Ireland has a huge debt to GDP ratio but is working
hard on corrective measures. Spain and Greece are resisting the hard choices.
The European banks are at risk from these bad assets. The author believes the
Euro is "very overvalued". He recommends selling the Euro against the
dollar.
December 11, 2009 Letter Thoughts from the Front Line,
"Thoughts on a Statistical Recovery"
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo121109.pdf In this letter Mauldin
first discusses in a section "Lies, Damm Lies and Government
Statistics" the recent government statistics on unemployment and describes
the problems. In the next "Problem of Seasonal adjustments" he
continues. Then he discusses job creation engine and the posibility of a
'double dip recession'. There is much of value here but I
am behind schedule.
December 4, 2009, Letter Thoughts from the Front line,
"Conversation with John Mauldin"
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo120409.pdf
This is an interview Mauldin had with questions by Damien Hoffman -
transcript can be viewed at http://www.wallstcheatsheet.com. The
discussion ranged from Mauldin's personal background to his thoughts on future.
He sees huge demographic and technological changes transforming society
throughout the world. He again mentioned biotech and medical advances. Then
they discussed emerging markets which Mauldin favors especially India and
China. Another topic was 'life cycles of empires'. Mauldin predicts huge tax
increases and advises get used to it. He notes that the economic models that
economists all use whether bears or bulls are based on a different past - now
we are in a major deflationary period.
December 3, 2009, "Outside the Box", Volume 6, Special Edition
Obama's Plan and the Key Battleground by George Friedman - a Stratfor
report
The focus is on Afghanistan and some comparisons with the war in VietNam.
Friedman identifies three core elements to Obama's plan from his West Point
speech - 1 maintain pressure on al Qaeda on the border and around the world. 2
blunt the Taliban offensive by sending more troops 3 use the space created by
the counteroffensive and resulting security to train and build Afghan military
and civilians. Friedman notes that there is no expectation to actually 'defeat'
Taliban. US force is a 'stop gap ' effort. Since the capability of the Afghan
army will be the key, Friedman wants to evaluate that force. Friedman continues
by discussing comparisons with VietNam.
November 30, 2009, "Outside the Box". Volume 6, Issue 3,
Reckless Myopia by John Hussman
The November 28, 2009 Letter Thoughts from the Front Line, "Why
I am an Optimist"
November 24, 2009 "Outside the Box", Volume 6, Issue 2,
Government Debt Spirals by Ambrose Evans-Pritchard and Edmund Andrews
November 21, 2009, Letter Thoughts from the Front Line, "Where
the Wild Things Are"
November 16, 2009, "Outside the Box', Volume 6, Issue 1, Eclectica
November Fund Commentary by Hugh Hendry
November 14, 2009, Letter Thoughts from the Front Line, "If
this is Recovery..."
November 12, 2009, "Outside the Box", Volume 6, Special Edition
Video Dispatch: Israel and Intrigue at the White House by George
Friedman - a Stratfor report
No comment, folks can look at the video - Stratfor has interesting but not
always perfect analysis.
November 10, 2009, "Outside the Box", Volume 5, Issue 52, The
Uncomfortable Dance Between V'ers and U'ers by Paul McCulley
November 6, 2009, Thoughts from the Front Line, "The Glide Path
Option"
November 2, 2009, "Outside the Box", Volume 5, Issue 51, Just
Desserts and Markets Being Silly Again by Jeremy Grantham
The October 30, 2009 Letter Thoughts from the Front line,
"Catching Argentinian Disease".
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo103009.pdf
John Mauldin is giving a lengthy series of lectures in South America. In
this letter he presents his thoughts about hyperinflation generated by his
discussions with Argentinian economists and investors. First he comments on and
strongly recommends Niall Ferguson's recent book, The Ascent of Money.
I have been recommending it also. It is in my list of
recommended readings. I am so delighted that
Mauldin so strongly supports the view that one simply MUST study and understand
history (and by that I don't mean simply the 1970's) to see where we are and
where we likely will be going. But Ferguson's is not the only important
book on the history of money and banking that are so essential - see the
reading list. Mauldin then notes that the US faces very serious choices due to
so many bad choices already made. The first major section to this letter is
"Catching the Argentianian Disease". By this he means the recuring
bouts of hyperinflation that strike Argentinia. (And also Brazil and other
countries). He quotes Ferguson's book on this topic. ..."it is once again
necessary to see that inflation was a political as much as a monetary
phenomenon...' "Inflation is a monetary phenomenon, as Milton Friedman
said. But hyperinflation is always and everywhere a political
phenomenon....." Well, monetary policy itself is a
political policy. And David Fischer "The Great Wave' shows, inflation has
more underlying causations than being the result only of monetary phenomenon,
including political policies. See recommended reading and study Fischer's book.
But Fischer also shows that political responses to inflation have then turned
it into hyperinflation. Friedman was looking only at the instances of inflation
in the US and only since 1783. But there were three major inflationary waves in
Western history before that. Mauldin notes that the Argentinian answer
to inflation was to print the money. Fischer notes the
same response by governments throughout history. But Mauldin does not describe the causation - what government
policies turned the prosperous Argentina he notes, into the fiscal basket case.
The answer is the attempt to institute a 'welfare state' with all its
ultimately unpayable promises.
Mauldin repeats a showing of an important graph. This indicates that the
"US government fiscal deficit will approach $2 trillion in 2019".
Mauldin writes that the US consumers must undertake a massive saving regime and
moreover, must put that saving into US government debt. He repeats his previous
point that the Obama administration must have a valid plan to lower the
deficit. But they do not. He cites Ferguson again 'that hyperinflation is a
political decision. "Governments have to choose to print money."
Indeed, and in the past they clipped coins and substituted base metals and
indeed created various forms of paper money.
He lays great store in the 'independence' of the FED. "For the record, I
do not think the US will experience hyperinflation as long as the Fed maintains
its independence." But the FED is NOT independent -
it was created by the government to accomplish government purposes, chief of
which is the 'outsourcing' to the banking system of the fundamental
Constitutional function of creating the money supply. Mauldin
continues,. "I have been writing for a long time that the main force in
the economy right now is deflation. The Fed will fight deflation tooth and
nail. But they don't have to buy government debt to fight deflation. They can
buy mortgage securities, credit card securities, commercial paper,
etc...." Indeed they can and they are. But all of these and more are part
of the money supply. It is the de-leveraging collapse of these instruments that
are part of the deflation itself. There creation in the first place was part of
the expansion of credit necessary to keep the 'welfare state' afloat. So what
will the Fed do with these 'assets=liabilities' on its books? Already the
government is urging the banking system both to lend more to business and home
owners and also to increase its asset base. The banks are taking federal money
at near zero interest rate and investing it right back into the FED at a higher
rate.
The next section is "The Independence of the Fed Threatened" Mauldin
thinks that there are pending political demands that would create changes that
would compromise the Fed Independence. Indeed there are
and Mauldin spells some out. But these are of the nature of reducing an already
small amount of independence. The history of the creation of the FED shows it
was not designed to be really independent - only to appear so in order to cover
the politicians - while having as its purpose simultaneously to protect and
enhance the banking system while providing the gradually expanding money supply
essential for the fiscal needs of the welfare state. Among the many books that
stress this is Ferguson's which Mauldin needs to read again. But Mauldin
here describes some Obama administration initiatives that are generally not
well known in public but should be stressed. No mention
is made, for instance. of the Humphrey- Hawkins law that theoretically demands
that the FED also defeat unemployment.
Mauldin concludes with quotations from three experts, Mich Shedlock,
David Rosenberg, and John Williams about this weeks phoney government statistic
reporting that GDP rise 3.5% and the real nature of the results of the
so-called 'stimulus' package.
The October 26, 2009 Letter Outside the Box - Liquor before Beer - in
the Clear, is a speech by David Einhorn to the "Value Investing
Congress"
Mauldin is on a lecture tour in Argentina. David Einhorn is President of
Greenlight Capital - a hedge fund. His role in predicting
the financial crisis is well known. This is from his speech at this
congress. It is very long and full of important views, so
please take the time to read the full Mauldin letter.http://www.frontlinethoughts.com/
He begins by analyzing a mistake he claims to have made in 2005. That was to
under estimate the coming impact of the housing bubble and its underlying debt
bubble. The lesson he says he has learned is "it isn't reasonable to be
agnostic about the big picture." He says he was focused on 'bottom up'
analysis of individual investments and discounted the large scale -systemic -
risks. The result was he lost quite a bit in the subsequent housing crash. The
following is his assessment now of the large scale - systemic risk and he
immediately focuses on politics - economic risk coming from government -
political policy. He notes two fundamental problems steming from the government
- political system - 1. politicians favor short term policies in their urgent
desire to be re-elected. The political desire to evaluate every thing in the
short term permiates society and financial markets And, 2 - 'concentrated
benefit versus diffuse harm'. This is a well known circumstance. The
concentrated efforts of narrow, special, activist interest groups dominates
politics in their favor while the broad public is left to bear the
consequences.
Einhorn continues with a focus on the current crisis and the 'organized banking
lobby', which he claims has used its influence in its own behalf. He describes
the well-known recent government response in which billions of taxpayer dollars
were given to the banks - to 'rescue' them on the grounds they are 'too big to
fail'. He repeats the standard belief that it was the banks that played a part
in creating the crisis. He quotes President Obama about the danger of 'too big
to fail' and then notes that the government response has been 'exactly the
opposite'. In many paragraphs he denounces the government policy and program.
"The proposed reform takes us in the polar opposite direction."
"The bailouts have installed a greatdeal of moral hazard". "The
proposed reform does not deal with the serious risks that the recent crisis
exposed." All so true and he expands on this at
length. There is much more in his denunciations. The speech is an
excellent summary of the Obama administration policy and critique of its errors
and failings. Then he cites some history from the Great Depression of the
1930's and the failures of govenment policy responses. All well worth study. He continues with this devastating
analysis. "Over the next decade the welfare states will come to face
severe demographic problems.... It is no coincidence that we experienced an
economic boom between 1980 and 2000, as the Boomers reached their peak
productive years... Social security and Medicare commitments to them are
astronomical'. His analysis of the results of this should
be sent to every politician. "As we sit here today the Federal
Reserve is propping up the bond market, buying long-dated assets with printed
money. It canot turn around and sell what it has just bought'. There is much
more in his speech. He then cites the failure of Japan, even with their very
different cultural approach to saving. He forsees a collapse of the Japanese
government and economy ending in either a "government defalut of
hyperinflationary currency death spiral." He continues, "I believe
there is a real possibility that the collapse of any of the major currencies
could have a similar domino effect on re-assessing the credit risk of the other
fiat currencies run by countries with structural deficits and large, unfunded
commitments to aging populations." He says that the current crisis has
changed his view of investments and what is safe and what an investor needs to
do. He poses the key question, "how does one know what the dollar is worth
given that dollars can be created out of thin air or dropped from
helicopters?" He has changed his opinion about gold and now believes a
prudent investor should be placing a goodly bit of his assets in gold as all
the other fiat currencies are weak like the dollar. Finally he comments that
whereas the popular notion used to be that all of this government deficit
spending would be foisted on our grand children to pay of, now he sees the 'day
of reckoning' as Bonner terms it coming very soon. "The recent economic
crisis and our response has brought forward the eventual reconciliation into a
window that is near enough that it makes sense for investors to buy some
insurance to protect themselves from a possible systemic event."
Well, there you have it, a very powerful recommendation
by a hedge fund professional. But he does not discribe reasons behind the
political causation of the crisis.
The October 23, 2009 Letter -Thoughts from the Frontline is
"The Best of Times"
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo102309.pdf
This week John Mauldin discusses his views on deflation and current FED
efforts to recreate inflation. And then he reproduces a very interesting
exchange of views he had with Bill Bonner, the founder of AGORA investment
newsletter empire. But first Mauldin recommends that everyone read Tom Hayes'
book Jump Point: How Network Cuture is Revolutionizing Business. I have
not read this book yet, but I do subscribe to several publications that make
this same point. Mauldin notes that Hayes' thesis is that "we are
experiencing a cultural change every big as profound as the Industrial
Revolution and that this would create a major shift when 3 billion people get
on line in another two years or so." Well, back in
1973 I read a Soviet book on 'cybernetics' that pointed out that the Industrial
Revolution was essentially a leveraging of man's muscle power via chemical and
mechanical means. But that the 'cybernetic revolution' would be a leveraging of
man's brain power and that it would be impossible to predict the vastness of
the outcome.
The main section of the letter is devoted to 'The Elements of Deflation".
Mauldin lists and discusses several 'elements' of deflation. I may be wrong, but in reading this I get the implication that
Mauldin is implying these are 'causes' of deflation.
I disagree with this idea. These elements are not
'causes' but rather results of deflation. "The first element is
Risisng Unemployment." Mauldin writes that "there has never been a
sustained inflationary period without wage inflation." Maybe true enough in the20th century but there have been
periods of wage inflation that were NOT sustained inflationary periods.
Mauldin notes that today wages are flat and falling. And he notes that in
America unemployment is rising. But what is the cause of
this? I believe it is one of the results of deflation not a cause and it is a
result of the deflationary impact of the sudden, historically unprecedented
entrance into the world employment and wage pool of several billion of low wage
workers. Mauldin notes the Keynes recommended that government
"stimulate the economy in recessions in order to bring back consumer
spending." But Keynes was wrong - and at any rate was thinking of a
country as an autarchy not impacted by a world market. Mauldin mentions in
passing the Austrian School - a favorite subject of mine
for another time.
The next 'element of deflation is massive Wealth Destruction."
Again, I believe this is a result and not a cause of
deflation. Mauldin notes the impact of two bear markets and the housing
collapse on consumers. He does not mention the other examples of 'wealth
destruction' in the collapse of the commercial real estate market and the
evaporation of credit carried as an asset on the books of financial
institutions (not limited to banks).
The third 'element' Mauldin notes as "Then we have Reduced Borrowing and
Lending, as consumers are paying down debt and banks are reducing their
lending." Indeed an element of the current scene,
but a result of deflation and moreover directly an aspect of the 'wealth
destruction' already listed. Consumers must pay down debt due to their
overextension and the collapse of a major funding source - real estate value -
which is what 'wealth destruction' means.
The next element is 'Decreased Final Demand and its counter part Increased
Savings'. Well this is another way of saying the same
thing as the previous 'elements'.
Mauldin next points to 'the element of Low Capacity Utilization, which he notes
reduces business pricing power. His point is that this prevents inflation.
Now we are getting to a real cause of deflation, but in a
rather backwards formulation. I think a causal 'element' of deflation is
massive and rapid increase in productivity which results in excess supply
relative to demand that must be countered by both labor unemployment or wage
decline and reduced utilization of manufacturing and other productive assets.
So, yes indeed, it prevents inflation - it creates one of the bases for
deflation. The chart he provides tells the story graphically.
Next he turns to "Massive Deleveraging and $2 trillion in Bank Losses and
a Very Weak housing Market. Which brings us to a Slowing Velocity of
Money." Are not these very real aspects of the
current economic situation restatements of the previous points? "Bank
Losses are part of "Wealth Destruction" and the 'weak housing market'
is a result and also cause of the collapse of consumer credit structure that
forces the increased saving and decreases demand.
He continues with some elaboration of this term of art 'Velocity of
Money". It is a fundamental part of economic establishment theory and one
of the terms in their equations for GDP and all. What the term references is
the way in which the financial system (banks and non-banks) increases the
effective money supply by leveraging on the official 'money supply' created by
the Treasury and FED. But to me 'velocity' is a term for speed - not size or
amount. Mauldin continues,. "If the velocity of money is slowing, the
amount of money can rise without bringing about inflation. It is a delicate
balance, but nonetheless the hyperventilation in some circles about the coming
hyperinflation is, well, overinflated. "
Well, for one thing he here is considering the narrow definition of money when
he writes ' the amount of money can rise..." What he
is refering to is that the FED has massively expanded ITS portion of the money
supply but the banks are taking their share and investing it right back into
FED account and Treasuries. So, contrary to the government desire they are not
LEVERAGING their asset accounts by LENDING and thus creating expanded credit.
To me this process, which has been the basis for the US banking system since
1913 is a matter not so much of 'velocity=speed" and it is of
expansion=leveraging. But never mind the semantics, the point is right that so
far the huge increase in the basic 'money supply' that shows up in typical
graphs has not been leveraged into expanded private credit markets - and has
not even equaled the size of the deleveraging resulting from the collapse of
credit and increased savings and failure to expand new credit. So I think
Mauldin is right that inflation is not a near term threat. But at the same time
I note that the critics who do insist on coming inflation are thinking about
what will happen WHEN the banking system DOES do what the government demands
and does leverage credit=debt back up to 30 and more times. The credit in the
system IS money in the real world.
Finally in this section Mauldin states his confidence in Bernanke and the FED,
but in a strange way. He writes, "The FED IS going to do what it takes to
bring about inflation (in my opinion) (of course it
is) "But they will not monetize US government debt beyond what they
have already agreed to." He expands on this thought and remarks 'that the
Fed will maintain its independence'. But I believe the
Fed has NEVER been actually independent from its creation as the government
contractor to inflate the money supply, in a way that attempts to absolve the
Treasury itself from the action .. The FED can use the same leveraging
method it used to create the over expansion of credit, once the furor over
insolvency of the banking system is reduced.
Mauldin then comments, "There is a day of reckoning coming with the US
debt. And thank God for that." No doubt, but the
reckoning will show the mathmatical imposibility of the promises of the
'welfare state' so won't take place without a political revolution.
"It is the Best of Times" is the title for a very different
section of this letter. In this part Mauldin engages in a dialog with Bill
Bonner, his contemporary in many private and business activities. I find this
section to be particularly revealing and an interesting read. That is probably
since I have read Bonner's works for years prior to even finding Mauldin. Both
of these fine writers are here describing their thoughts about the future in
terms of what their children will face. Certainly a central concern of mine
also (grand children). Mauldin notes that Bonner 'is a tad pessimistic."
That is an understatement for sure. He recommends
Bonner's new edition of "Financial Reckoning Day".
I have the original edition and recommend it. The
essence of Mauldin's reply is that we should all be optomistic about the
wonderful future and that Bonner is really more optomistic than he appears to
be in his financial writing. But read Bonner 's Mobs,
Messiahs, and Markets: Surviving the Public Spectacle in Finance and
Politics. Bonner is an Hobbsian or Augustinian in that he is not merely
pessimistic about current financial conditions, but rather holds a classic
negative view on the whole of human nature. He believes, and provides a lot of
historical examples, that the public - the Mob - or 'lumpenpatsies' as he terms
it - is intrinsicly subject to delusions produced by demagogic leaders
-'Messiahs' - and that the resulting political/economic structures - 'Markets'
- are therefore inherently unstable and subject to bubbles, crashes, unexpected
(or even expected) disasters. Please do read this book
also. And do subscribe to Daily Reckoning - a free economic report -
http://www.dailyreckoning.com
Mauldin quotes interesting Bonner writing (that appears in his daily column)
including a bit about the creation of the Bonner 'family office' in Ireland.
Anyone who wants explaination of 'family office' please contact me. What is
interesting to me is that a couple months ago, I an no doubt the other
subscribers to Bonner's (AGORA) daily letters received in invitation to
participate - to join and become a member of this expanded form of 'family
office' with a rather minimal purchase of a share in the operation. Very
tempting but still too rich for my meager financial situation. The obvious
purpose of the invitation is to expand the total size of the capital under
control to acheive better leverages and reduce pro-rated overhead.
Mauldin presents an extended comparison of the present and future with the
1970's (the period in which he and Bonner began their careers) and which I well
remember from a very different perspective. He notes the role of Volker in
defeating inflation (but does not mention the essential
political role of Reagan that enabled Volker). And he gives a valid,
upbeat prediction about the promise of the future. The Futurist and
other writing I read predicts the same and I believe it. I have always focused
as he does here on preparation of the offspring to prosper in this future
environment. But all this will require and be the result of a coming revolution
that Mauldin does not discuss. For instance he points out that life expectancy
will greatly lengthen. Yes, but the current welfare state
Social Security cannot even finance current life expectancy, nor can the
Medicare system and the proposed changes being promoted by politicians include
measures to actually reduce the 'burden' of the old folks on the financial
system. I hope everyone will read and think about this letter from John
Mauldin.
The October 17 - 2009 Letter Thoughts from the Frontline is
"Muddle Through, R.I. P?
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo101609.pdf
Now Mauldin has been describing his perception of the future trend in the
investment world and the economy as a whole as a 'muddle through' situation
since he coined the term in 2002 - that is that conditions are bad and will get
worse, but in the not too distant future after we 'muddle through' the
situation will get much better. In this essay he is beginning to have second
thoughts about how serious the future economic situation will be and how soon
it might recover.
On page 1 he restates his definition of 'muddle through' - slow growth of 1-2 %
and "slack employment' as was the case in 2002. In 2007 he predicted there
would be a return to recession and another 'muddle through' period. Now in this
newsletter he expresses "surprise" that the Federal Reserve has
resorted the massive response that includes monetizing a significant amount of
federal debt and extremely low interest rates. He 'assumes' that the FED might
reverse these measures, and if so there will be a recovery. He provides a graph
of possible future trends in the annual budget deficit from Heritage Foundation
that is very frightening - going to $1,883 billion by 2019. Mauldin remarks
that he never dreamed of such a scenario.
My opinion is that the FED will NOT reverse its policies
any time soon and that in fact the annual deficit will likely grow even
larger.
Mauldin next provides the standard economic text formula for the Gross Domestic
Product - namely it is equal to the sum of Consumption (C) plus Investment (I)
plus Government Spending (G) plus the net of Exports (E) and Imports (I).
GDP=C + I + G + (E - I) |
In this equation national savings results from subtracting from GDP the number
for consumption and government spending. This indicates that investment then is
equal to savings plus net exports. So far so good. Although in my opinion this number for GDP is not a good one to
use as an indication of a country's economy, because the larger consumption is
the greater is the GDP, but consumption destroys wealth rather than creates
it. But that is not Mauldin's fault.
However, he continues by noting that if there is a government deficit then
"there must be savings by both consumers and businesses plus capital flow
in from outside the country to provide any funds left over for
investment." And "absent savings a government deficit crowds out
investment in the long run." But government can also
fund its deficit not only from taxation and borrowing but also by creating more
money - and it does this through the fractional reserve banking system.
Mauldin notes that some of his correspondents claim he is 'too worried' - that
is pessimistic. I think he is too optimistic.
He then discusses the case of Japan which experienced and still does a
prolonged deflation despite government efforts to generate growth via massive
government deficits. He provides excellent analysis on why the Japanese case is
much different from that of the United States. (He cites the article from
Hoisington Asset Management that he published the previous week and which we
will discuss as well.) Hoisington essay included the great comment "In
other words, more debt is supposed to solve the problem of over-indebtedness.
The truth is that this policy merely indentures its citizens further without
providing any income for repayment of debt."
The discussion on the Japanese case is very
important. Then Mauldin comments "I am sympathetic with the idea
that in the short run the government should step in and the Fed SHOULD print
(within limits) money to keep us from deflation."
With this I much disagree - for one thing deflation is
good for us and for another it is essential as the cure for the 20th century
inflation. Deflation is the necessary detoxification program the economy must
have to overcome the addiction to massive credit=debt. The 3 previous eras of
equilibrium in which deflation arrested a lengthy wave of inflation were the
three best social-cultural periods in western history - Renaissance,
Enlightenment and Victorian era.
Mauldin correctly notes "The way out of the current morass is to create
jobs and increase productivity." - Indeed - but this
can only be done on a sound basis after deflation has wrung the excesses out of
the 20th century inflation. And this means also repudiated the premises of the
'welfare state'.
Mauldin next discusses the question of who will buy the massive federal debt
amounting to at least 1.5 trillion each year. He notes that perhaps $400
billion will come back to the US from the trade deficit. He notes that much
debt will be bought by US banks and provides graphic description of the
process.
Well, yes, but there can continue to be a lot of dollars
floating around the world outside the US. A significant part of the actual
printed currency is outside the US. I remember when in Russia in early 1990's I
could pay a merchant with a 20 or even a 100 dollar bill and receive change in
dollars from his ready cash box. And of course there are still plenty of
Eurodollars around.
Still, Mauldin's point is excellent. He shows that bank lending is falling now.
Here is discusses the 'carry trade' that is now going on in the US (without
using that term). Namely banks are playing the FED and Treasury off against
each other by borrowing at .5% from one and lending (by buying bonds) at 2 %
from the other. The FED is printing money, the banks take it and leverage it up
to 10 to 1 and putting it back into the FED. Mauldin explains why this is
taking place. The government sees the private side of the bank's balance sheet
deteriorating as credit leverage is falling and it is replacing this with
government debt (as an asset) on the bank's balance sheet. Thus all this
'printing' of money by the government is not yet causing inflation because it
is not even matching the decline in the money supply represented by the private
credit markets. Mauldin notes that banks hold some 45% of commercial real
estate loans compared to only 21% of the single-family mortgages (These of
course are now held by the GSE's and FDIC). The banks are facing an immanent
decline in value of that commercial real estate - already down some 30%. So
over a trillion dollars in commercial real estate loans are coming due soon.
(I note that also insurance companies and pension funds
hold real estate paper.)
Mauldin then notes that the Congress wants to raise taxes. And taxes have a 3
fold impact on GDP - A tax increase will decrease GDP by 3 times the size of
the tax increase. So a tax increase will increase unemployment and reduce
output and ultimately also make the deficit worse. Finally Mauldin comes to his
new opinion on 'muddle through' . He believes the 'new normal' economic level
will be less than the market believes now. He now thinks the situation won't
get better until into 2011 and then only if government changes its policies. He
is still optimistic (as always) but now thinks the situation is "Just not
one as benign as I used to think" He expects a 'double dip recession
starting within 18 months at most with another drop of 40% in the stock market.
(I think we already had 2 dips and the coming one will be
the third.)
The newsletter for 15 October was a Stratfor analysis of China. I will not
comment on these issues.
The October 12, 2009 letter Outside the Box - Volume 5 Issue 48,
Quarterly Review and Outlook - Third Quarter 2009 from Van R. Hoisington and
Lacy H. Hunter
This is the Quarterly Review and Outlook - Third Quarter 2009 from Van R.
Hoisington and Lacy H. Hunter. Mauldin notes that they have been advocates of
the view that 'deflation is the problem'. And that they base their assessment
on history. Well, I believe that deflation has been the
situation since 2000 but that it is not a problem, but rather the solution and
one dictated by historical developments.
So lets see what they have written. The subtitle to the first section is
excellent 'Ponzi Finance", as indeed it is. They begin by noting that the
FED reports total U.S. debt at $52.8 trillion but that this does not include
'off the balance sheet' financing and liabilities for future welfare promises.
In other words Enron-style accounting.
They note that current GDP was $14.2 trillion which means the acknowledged debt
is $3.73 for every dollar of U.S. output. They provide a clear graphic chart to
illustrate this. What makes this situation worse is that the asset side of the
balance sheet bought by debt is falling in price and that the money borrowed to
finance the assets was "fraudulently expended". Terrific, I am glad a respected authority has the courage to
show this. They continue "Neither the borrower nor the lender
really expected the debt to be serviced." Exactly,
this is the premise of the 'welfare state' in a nutshell. And the current
administration does not expect its massive debts to be serviced either.
Hosington notes, "Each party expected the asset price to rise
extinguishing the debt". Precisely, but HOW will the
asset price rise? Answer, via inflation generated by depreciation of the
currency. The central activity of the FED since 1913. They quote the
great economist, Hyman Minsky, "Financial Instability Hypothesis", in
which he described three phases of debt financing. Please
read the full article several times. They continue by citing Irving
Fischer's book, "Econometrica" Again, please read the full
analysis. But Fischer's study was based on the normal
credit collapse cycles of the 19th century. And these were relatively isolated
events that occurred during a century of overall secular equilibrium, as David
Fischer shows. "The Great Wave'. This time we are at the beginning of one
of the rare historical deflationary eras generated by the collapse of the 20th
century great inflationary wave. So, while I am glad to agree with Hoisington's
analysis as far as it goes, I think it is missing the full picture.
However, they comment that Fischer (that is Irving) 'seems to be not so
historical as prescient'. Their conclusion from this analysis is that major
business cycle fluctuations are caused by over-indebtedness and the fall in
asset prices, and that the present situation mirrors these previous cycles. And
the conclusion then is that the current situation may get worse.
Well, again, I agree but they have not focused on what
causes the asset prices to fall. But David Fischer describes the causes for the
end of a major inflationary wave and the blow off in a deflationary period that
brings on eventually a new state of equilibrium.
The next section is titled "The Impossible Promise" -
how apt. But now they focus on the current Federal
government promise to extricate the economy from this recession by increased
spending 'increasing the public debt'. They cite Professor Robert Barro's
book Macroeconomics - a Modern Approach" The essence of this is
that there is a real short run boost in economic activity from such a stimulus,
but that eventually it will depress economic activity. The stimulus based on
increasing public debt will merely 'indenture' (another
great word) the citizens further. They cite research that indicates that
there is 3 to 1 relationship - thus a 1 percent increase in taxation used in an
effort to pay of this debt will create a 3 percent DECREASE in GDP. Final
conclusion from this is that the current fiscal policy will result in
lengthened stagnation. More graphs illustrate this conclusion. They also cite
comparison with the experience in Japan. They then write "The promise of
the government to revive growth through increased indebtedness is, indeed, an
impossible promise.
No doubt true. But the relatively brief excursion into
history results in an understatement. It is my contention that the IMPOSSIBLE
PROMISE is the continuation of the welfare state itself. The central difference
between the inflationary wave of the 20th century and the previous inflations
in history is the role of the modern state (and its government) in creating
this inflation and making it all the worse. And similarly, during the previous
deflationary blow offs that cured the excesses of those inflations there was no
government bent on preserving inflation as an essential basis for its 'welfare
state' policies. In fact there was NO welfare state prior to the 1880's. Thus
the current government policies (not only the US but all the major welfare
states) will prolong the process.
Hoisington continues with a section titled "The Hesitant Fed'. (they do have a way with words). They note, 'the
write-down of debt and distress selling tends to destroy money deposits and
lower the velocity of money". "Our Current FED authorities appear to
be oblivious to the lessons of the past. But now they applaud the FED effort to
increase the money supply and fault it for not continuing to do this enough to
offset the continuing decline that is caused by de-leveraging as credit (loan)
volume collapses. Again please read the section.
The final section is titled 'Dollar Weakness". Here they conclude that the
failure of the FED to fight credit volume collapse by expanding the money
supply even more is resulting in actual deflation continuing rather than
inflation returning. They write that dollar weakness also will not create
inflation. Even increased imports made possible by a cheaper dollar will not
offset this as imports are only 13% of GDP. They note that Roosevelt devalued
the dollar versus the price of gold and the dollar fell in value by 60% without
ending deflation. But they believe that any further dollar depreciation today
will not offset insufficient domestic demand. Thus in 2010 the dollar will
remain low, the GDP deflator will fall to zero or negative. Long term interest
rates will fall. And long term treasury rates will remain low . They cite
Japanese 10 year rates still at 1.3% and 30 year bond rate at 2.1%.
October 9, 2009, LetterThoughts from the Frontline- "Killing
the Goose".
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo109909.pdf
John Mauldin begins by referencing Peggy Noonan about a concern that US
government policies will not only take the golden eggs but kill the goose -
that is the strong American economic system. Which notes is 'the US free-market
economy'. He states that he does not think the situation will deteriorate to
that extent, although it is possible. The letter is a discussion of this
posibililty. Fine, but I maintain that there is no such thing as a 'free
market' now or in the past or future.
Mauldin asks, "what were we thinking?" when we (the US) made so many
bad choices that led to the current crisis. He provides an extended quote from
Hayman Advisors who in turn cite the research of Professor Peter Bernholz
(author of the important book, Monetary Regimes and Inflation: History,
Economic and Political Relationships,). The content of this research is
analysis of some 28 periods of hyperinflation in the 20th century. According to
Bernholz these were all caused by government financing of huge public budget
deficits by creating (printing) money - that is expanding the money supply. The
inflation became 'hyper' when the "government deficit exceeded 40% of its
expenditures." Hayman then gives the current US government expenditures
and notes already the government is financing about 40% via borrowing. Mauldin
then provides more statistics on expenditures, borrowing and interest payments.
He reprints a table from Woody Brock that shows the future trends of US federal
debt under various projected GDP growth rates. Mauldin notes that there may be
a gap of some $1.13 trillion dollars between expenditure and expected
investments in government debt. This, he notes, is about 8% of total GDP. He
comments, "There are only three surces for the needed funds: either an
increase in taxes or people increasing savings and putting them into government
bonds or the Fed monetizing the debt, or some combination of all three."
The Fed is already monetizing some of the debt. Mauldin describes the current
process in which deflationary de-leveraging of credit is being offset in part
by government monetizing. The banks are putting the government money they
borrow at zero right back into the Fed at higher interest. Mauldin expands on
this theme, noting the role of Paul Volker (but not that
of Ronald Reagan) in responding to the demands of the bond market. He
thinks that the bond market may again raise demands via higher interest rates.
He describes the situation that Japan has faced for over 20 years of deflation
and which how is bringing the Japanese ratio of debt to GDP to near 200%. The
US faces a similar struggle between the forces of deflation and the government
efforts to create controlled inflation. He sees dire consequences coming if
nothing effective is done. This is a very long and detailed discussion. He then
gives some suggestions about possible government policies that could make a
difference. "First, we must acknowledge the deficit is out of control, and
spending must be cut." And raising taxes is not the answer. Rather, tax
increases have a 3 times impact that would reduce GDP. Raising taxes would have
the same result they had in 1937 throwing the economy back into recession.
Mauldin suggests quite a few reductions in government expenditure, including
Federal civilian payroll, Social Security, Medicare and more. He recommends
major changes in immigration policy and housing. Most amazing of all he
recommends a new VAT tax, but also a reduction in corporate taxes and for sure
no 'insance' carbon tax. There is much more. He admits that all these will be
very unpopular.
Coming when I get a chance.
The October 5, 2009 letter Outside the Box - Volume 5 Issue 47,
"A Country of Old Men and a Bit of Samba" by Niels Jensen
John Mauldin - Thoughts from the Frontline weekly for October 3,
2009 - titled - "Another Finger of Instability".
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo100209.pdf
A short letter quoting Nietzsce and Mark Buchanan's book Ubiquity: Why
Catastrophes Happen on the complexity of markets. Mauldin uses the metaphor
of an avalanche to note that everything can seemingly be in repose and then
suddenly a huge avalanche happens. Mauldin also discusses Hyman Minsky's idea
that stability itself breeds instability. He mentions Nash's idea abaout
equilibrium in game theory. And then he notes Paul McCulley's idea 'stable
disequilibrium". He provides a graph from Chad Starliper showing the
debt-to-GDP ratio in the US already at 1,000% counting future promises. He
quotes a famous line I also use "Ifsomething can't happen, then it won't'
to note that the US government simply cannot run trillion dollar deficits every
year for the next 10.
The September, 2009 letter Outside the Box - Volume 5 Issue 46,
"Into the Fourth Turning", by Neel Howes and David Galland
John Mauldin - Thoughts from the Frontline weekly for September 26,
2009 - titled - "Welcome to the New Normal"
This letter may be found at
http://www.frontlinethoughts.com/pdf/mwo092509.pdf
The theme of this letter is current and future unemployment. At the
writing the official figure was 9.7% but when counting the marginally attached
workers it came to 11%, and adding part-time workers brought it to 16.8 %. Then
he notes that the US adds about 1.5 million new workers each year just from
population growth. He concludes that over the following 5 years the country
will heed to add 7.5 million jobs or at least 125,000 a month. But some authors
write it should be 9 million jobs. Then counting the unemployed the number
comes to 15 million jobs just to return to a 5% unemployment level or 250,000
jobs per month. The tables he provides show the data for job creation going
back to 1999. The average monthly job addition since 1989 is only 91,000 a
month. Mauldin then notes that the proposed Obama tax increases will be suicide
and create a second recession.
John Mauldin - Thoughts from the Frontline weekly for September 19,
2009 - titled - "The Hole in the FDIC"
This letter begins with part 3 of Mauldin's discussion of the 'elements of
deflation'. He faults the bureaucracy for providing phony statistics such as
hedonic measures of consumer price levels. The hole in the FDIC is the gap on
its balance sheet between assets and liabilities being incured from bank
failures.
The September 17, 2009 letter Outside the Box - Special Edition,
"A German Pre-election Win and Emerging U.S. Tensions", by George
Friedman
The September 14, 2009 letter Outside the Box - Volume 5 Issue 45,
"Penury, Self-imposed or Inflicted, The New Normal?" by Philippa
Dunne and Doug Heuwood
John Mauldin - Thoughts from the Frontline weekly for September 12,
2009 - titled "Elements of Deflation: Part 2 "
In this letter Mauldin describes the standard economic theory about
deflation. He focuses on the money supply - is it growing or not - and the
concept of 'velocity' with the standard equation Y=MV and provides a graph
showing the GDP divided by M2 and M3 and the CPI inflation moving average from
1900 to 2005. This letter deserves considerable
discussion.
John Mauldin - Thoughts from the Frontline weekly for September 5,
2009 - titled "Elements of Deflation"
The September 13, 2009 letter Outside the Box - Special edition,
"Reactions to a Proposed Energy Law", by George Friedman
The August 31, 2009 letter Outside the Box - Volume 5 Issue 44,
"Spain - The Hole in Europe's Balance Sheet", by Variant Perception
The August 28, 2009 Letter Thoughts from the Front Line, "An
Uncomfortable Choice"
The August letter 27Outside the Box - Volume 5, Issue 43
"Between Rock and Hard Place", by Bank Credit Analysts and London
Office of Morgan Stanley
The August 21, 2009 Letter Thoughts from the Front Line, "The
Statistical Recovery, Part Three"
The August 20 letter Outside the Box - Special edition, "Iraq
End Game", by George Friedman
The August 17 letter Outside the Box - Volume 5, Issue 42
"Growth in Potential GDP", by Dr John Hussman and GraveKal
The August 14, 2009 Letter Thoughts from the Front Line, "The
Statistical Recovery, Part 2"
The August 10 letter Outside the Box - Volume 5, Issue 41 "Slow
Long Term Growth and Government's Response", by Gary Shilling
The August 7, 2009 Letter Thoughts from the Front Line, "The
Six Impossible Things before Breakfast"
The August 6 letter Outside the Box - Special Edition, "The
Recession in Central Europe: Part 2, Country by Country, by George Friedman
The August 4 letter Outside the Box - Volume 5, Issue 40 "U.S.
GDP Review - Consuimers, where art Thou?", David Rosenberg
The July 31, 2009 Letter Thoughts from the Front Line, "The
Great Reflation Experiment"
The July 27 letter Outside the Box - Volume 5, Issue 39
"Breakfast with Dave", by Dave Rosenberg
The July 24, 2009 Letter Thoughts from the Front Line, "The
Statistical Recovery"
The July 23 letter Outside the Box - Special Edition, "Russia,
Ahmadinijad andIran Reconsidered", by George Friedman
The July 20 letter Outside the Box - Volume 5, Issue 38 "Should
the Fed be Responsibly Irresponsible"", by Ambrose Evans-Pritchard
and Paul McCully
The July 17, 2009 Letter Thoughts from the Front Line, "Europe
on Brink"
The July 13 letter Outside the Box - Volume 5, Issue 37 "Debt
and Deflation", by Van Hosington and Dr. Lacy Hunt
The July 9 letter Outside the Box - Special Edition "TheU.S.
Russian Summit", by George Friedman
The July 6 letter Outside the Box - Volume 5, Issue 36 "Make
Sure you get this one Right", by Niels Jensen
The June 29 letter Outside the Box - Volume 5, Issue 35 "A
20-Year Bear Market?", by David Galland
The June 26, 2009 Letter Thoughts from the Front Line, "The End
of Recession?"
The June 22 letter Outside the Box - Volume 5, Issue 34 "A Tale
of Two Depressions", by Barry Eichengreen and Kevin O'Rourke
The June 19, 2009 Letter Thoughts from the Front Line, "This
Time its Different"
The June 18 letter Outside the Box - Special Edition, "Iranian
Elections, Israel and The United States", by George Friedman
The June 15 letter Outside the Box - Volume 5, Issue 33 "Fear
of Lost Decade", by Paul Krugman
The June 8 letter Outside the Box - Volume 5, Issue 32 "History
of Economists in Thrall to Keynes", by
The June 4 letter Outside the Box - Special Edition "Geography
of Recession", by Peter Zeihan
John Mauldin - Thoughts from the Front Line weekly for May 29, 2009
- titled "This Way There Be Dragons"