I hope you had a wonderful weekend!
This weekend the Kung Fu Family got our international groove on by participating in an annual tradition in downtown Palo Alto, the May Fête Parade. This is a children’s parade where the kids can bicycle or scooter down the illustrious University Avenue in support of their school or organization, and it is a ton of fun for all involved.
We followed up the French festivities with a Cinco de Mayo celebration at our friend’s home (who is actually from Hong Kong, but hey, who’s counting?).
(We in the Kung Fu Family celebrate any and all holidays, of any and all ethnicity and religion…if there’s a party, we’re in!). 🙂
I bring this up because my report today is from John Mauldin, an international man (who I think also appreciates a good party) with high-level “friends” from all countries (he rubs elbows with Senators, the President, European prime ministers, economists, central bankers, and many other high-level officials from all over the globe). At the Casey Conference, John was rather bullish on the future and discussed the upcoming “party” and good times that lay ahead for us (once we have solved our current debt problem).
Without further ado, here is John Mauldin on the four biggest trends in our future!
John Mauldin — Four Big Trends For Our Future
John shared four big trends with us that he believes will dramatically affect our future in the next few years.
1. This is the end of the developed world’s “debt super-cycle”
…and the end of the ability of governments to be able to borrow money at reasonable prices.
John is enormously bullish because of this! He considers it one of the greatest events of his life, because we (as a society) have been misallocating capital to unproductive uses for 30 years.
Now, however, we will be forced to allocate capital back to productive uses, to new technologies and to new businesses, and he sees this as an exciting time to be alive.
He showed us a chart he borrowed from Dr. Lacy Hunt, and said that Lacy is one of the smartest economists he knows. His words were that Lacy “lives and breathes” history, and if you get the chance to listen to him for even a moment, take it!
The chart visually showed the ending of the great debt super-cycle and how we are witnessing it in the private sector now (huge deleveraging), and that it is going to happen in the public sector (it has already started).
John, ever the optimist (at least at Casey conferences!) believes that the U.S. will actually get our act together and that the government in 2013 will proactively say we need to bring the deficit down and put ourselves on a path to a balanced budget.
(Kung Fu Girl Note: I’m not quite sure what he was imbibing to give him this glorious optimism, but I sure would like some…) 🙂
He said that this will mean a long period of slow growth (at least 4 – 5 years), with higher unemployment than we are comfortable with, but that at the end of that period, we would be done…he hopes that we can use the opportunity to completely restructure our tax code and move to a lower overall tax rate at the higher end of the income spectrum, which would launch a new rush in jobs and create a “capitalist frenzy”.
He reiterated that if we don’t solve the problem, it’s not the “end of the world”…it’s just the end of the ability of the U.S. government to borrow money at rational prices (which is a good thing), but that it is not the “End of America”.
In fact he almost sees it as the “beginning” of America, because the government will be forced to cut spending and raise taxes, and we will have finality (rather than this endless kicking of the can) and we will know where we are…we will be done!
And once we have certainty and clarity on what’s going to happen with our government we can truly begin to plan for a bright future.
But in the meantime, it’s going to be a rough, bumpy road, and as investors we will need to hedge everything and try to get to “the other side” with as many assets as possible.
2. Europe is in much worse shape than we are
John pointed to a black swan that he believes not many people are paying enough attention to, which will come out of left field and may be the final nail in Europe’s coffin…France.
According to John, France is in deep trouble (not the word he used). 🙂
In fact, he joked that the only good thing that is going to happen out of this entire debt crisis is that “France is finally going to get theirs” (he was referring to the French government, not the people). He teased their socialist system mercilessly (imagine saying in your best French accent, “Our seestem eez sooo supeereeor! You capitalist pigs you do not understand zee social franchise…”).
John said, “Of course I understand it! You have 50% government taxes, you’ve got too much debt, you’ve got your banks at 4.5 times your GDP and you can’t afford to bail them out…” He went on to say that French banks have lent multiples of their bank capital to countries that will not pay them back in anything that looks like a viable currency, and then quoted Porter’s technical term (which I will kindly replace again…) “They’re fracked”.
He said that Holland is an accelerating factor and Greece is “hopeless”.
And Ireland is going to tell the ECB to “piss on it” (again no mincing of words at the Casey conference…you really must attend in person with me next time!).
By “it” he was referring to the €60 billion that they borrowed for their banks—Ireland is not going to pay it back.
John says they will renege / default on that debt prior to their next election, and in fact the government that is in power today was elected to do that very thing. If they do not do it before the next election, we will see the immediate absurdity of Sinn Féin becoming the majority ruling party of Ireland because that is the one party the people can actually count on to tell the ECB to “go piss off”.
John knows this for a fact, and has talked to members of the Irish parliament, prime ministers, business leaders, pub owners, and economists…and all of them agree they will not pay it back (they just disagree on the method of how they are not going to pay it back!).
Moving onto Asia and Japan…
Again not mincing words, John said that “Japan is a bug in search of a windshield”. Their ¥7 trillion injection is hitting zero.
(Kung Fu Girl Note: the Bank of Japan injected 7 trillion yen ($86 billion) of funds to the short-term money market in March—the largest ever for a single operation by the central bank).
When that reaches zero John says that Japan will issue a few emergency orders where corporations will be required to put their money into Japanese Government Bonds (JGB’s). But he said that at the end of the day, Japanese citizens are going to want to turn their savings that they have been saving for 50 or 60 or 70 years into yen so that they can buy sushi and sake and all of the things in life they want to buy, and they will not see it as part of the “solidarity” and “cultural imperative” to hold onto their Japanese bonds.
In fact, his friend Kyle Bass (John has many famous and high-level friends!) recently did a survey and found that only 13% of Japanese citizens would be willing to hold their bonds if the government asked them to.
He then showed us what he referred to as “the most important chart that you will see today”, and the reason why things are going to change and why he is so bullish for our eventual future.
That magic chart was a GDP chart….it showed the U.S. GDP of 2.2%, and then it showed the GDP without government borrowing (which was very negative), and then the GDP without government spending…which was the private sector and it has been flat for the last 15 years.
He used this to illustrate that the private sector has been sucked more and more into paying for the public sector, and that we are therefore putting money into unproductive uses. So, when we shrink the size of government relative to GDP (there was no “if”…John believes beyond a shadow of a doubt that this will happen), we will finally be at the “Endgame”. John says that we will either do it willingly (which is a problem) or we will be forced to (which is a crisis).
He talks to a lot of government leaders from both parties and says that they “get” the problem. They just cannot get up in public in advance of the November elections to say so. He doesn’t think anything will happen in the lame duck session, but he did say that if we get what we got last year, and Obama wins again, John then becomes “not so bullish” and even “pessimistic”.
He did say that no matter what we are going to have higher taxes, and the only place the government can get those taxes is from the middle class, because they can’t get it from the rich…he said they can take every single cent from the rich and it doesn’t get us far enough!
He hopes that they (Congress) really go for it and restructure the entire tax code and put us into something that encourages capitalism and capital formation.
(Kung Fu Girl Note: me, too, but I will be astonished if this actually happens!)
He mentioned Simpson-Bowles and said it was one of the worst things he’s ever seen…but also that he would vote for it tomorrow, because if it was enacted, we survive.
He likened it to chemotherapy and said that we have a cancer in this country and it’s our debt, and that sometimes when you have cancer, you put things in your body you normally would not be in the same county with! And you do it because you want to survive, not because you think it will make you better in the short-run, and not because it’s something that’s going to be pleasant…but because you want to survive.
And he said what we have to do to survive is not going to be economically “fun”, and that our goal as investors is to get to the other side of this problem with as many assets as we can, so that when the opportunity comes to productively deploy our capital, we can do so.
3. Massive demographic changes all over the world.
My apologies, because I missed a little bit of this (see, next time you’ll have to come with me!) but he said that Russia and Europe are 22% of the world’s (population?) today…not sure if that was a specific segment of the population or not, but in 40 years they will only be 7%.
And in 30 years Iran will have a bigger population than Russia.
He went on to say that the demographics in Russia are worse than you think….Russia’s young people are leaving as fast as they can get a visa to anywhere., because there is no opportunity there unless you are in the big cities. He also said this was happening in Greece now and in Spain and that you don’t export your young people if you want to be a growing country.
In the U.S., we need to recognize that the most important import that we have is young people, and he said that our immigration policies are stupid (“ignorant in the extreme”). He believes we should be giving green cards to everyone who gets a degree, and we could solve our housing problem by giving a green card to anyone who will buy a house for cash.
He used Ireland as an example and said that they could solve their housing problem in just that way, if they gave anyone in Ireland who bought a house for cash an Irish passport (he said he would buy one in a heartbeat!).
He went on to talk about “mature” countries like Japan, Europe, and China, and said that China has terrible demographics in the next 10 – 15 years. They have hit the end of their boomer generation (when the number of retirees outpaces the number of workers) faster than any other nation in the history of the world due to their “one child” policy.
They still have 200 million people who still want everything we have, but John is more interested in India, and in countries like India that have a more positive demographic cycle going for them.
John predicts that in the next 10 years we will see more change than in the whole last century. He predicted a bubble in biotech by the end of this decade, and said that cancer will be a manageable disease by the end of the decade, if not curable. If we get a virus, we will simply go to Walgreen’s and get a viral patch and slap it on our arms and be cured within 2 – 4 hours.
He also said that robotics and AI (artificial intelligence) are finally coming into their own, and discussed a 1 GB wi-fi router that will be coming onto the market late this year or early next year. Advances like this will cause us to revolutionize the way we interact with each other…we will be getting 100MB wireless downloads cheaply, and will be able to video-conference on an HD 80-inch screen that will seem like you are almost face-to-face with someone in person.
He says that manufacturing is coming back to the U.S. and stressed that we (the U.S.) are great at allocating capital into productive assets—this is one of our strengths—and the sooner we can get the debt/deficits out of the way, the better!
4. Coming to end of secular bear market
He mentioned that he goes into greater detail in his book, The Little Book of Bull’s Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets (Little Books. Big Profits), but in the meantime…
Spain is a problem.
They are quickly running out of their ability to access the credit markets at a reasonable rate. They are in a recession. They are imposing capital controls, and just passed a law that says that all citizens must report all foreign bank accounts and must report all cash transactions greater than €2500.
Spain is trying to convince Europe that it is doing all it can and is a fellow member of the euro zone, “We are not Greece! We are a European country working on our austerity program!”
But John says this won’t work, and they will be worse off. It is all posturing for the 21 other members of the ECB that are not Germany.
He said that the Bundesbank is a “toothless tiger”, because they only have 2 out of 23 votes!
So we can read all we want to about the Bundesbank saying that we shouldn’t print, we should have more austerity, etc., but the Bundesbank can only stomp their foot—they can’t actually do anything.
John believes that the only way Spain can make it is for the ECB to continue to print money. He said he had to applaud Draghi (Mario Draghi, President of the ECB), because as a central banker (e.g. money-printer) he gives Bernanke a run for his money!
John says they’re going to need another trillion euro for Spain, and then they’ve got to figure out Italy.
He’s not 100% convinced that the euro will break up, because they all want to stay together and they haven’t yet experienced enough pain to split apart. He said that the impetus to keep Europe together is far more powerful than we can imagine, and that we don’t understand it here in the U.S. (He also said that it doesn’t mean it won’t happen, though!)
John does think the euro will break up, but it’s not clear that it will happen. They are caught between a rock and a hard place, because the pain of staying together is disastrous, and the pain of breaking up is disastrous. Either way, it’s a disaster.
He also said Japan is a disaster, and that we (the U.S.) are a disaster-in-waiting if we don’t get our act together.
He closed by quoting R.E.M….”It’s the end of the world as we know it, and I feel fine”…
And he said that he actually felt better than fine, because the world as we know it right now sucks, but it will end soon and we will be better when we get to the other side!
(Kung Fu Girl Note: I’m not quite sure you can call this “bullish”, but he swears he is!) 🙂
And as investors, all we need to do is to figure out how we can get as much of our assets and buying power over to the other side with us as possible.
He left off with imagining the year 2022 or 2032 and looking back on today saying, “My God what barbarians we were! How terrible our medicine was! How backward our technology! How big was our government!”
He said, “We may even have a gold standard if Lacy’s right!”
So, to sum up, John believes some sort of crisis is inevitable (and imminent!), but he is hopeful for our future when the dust finally settles.
What do you think about Europe? Do you think they will be able to hold it together? Or will they break apart and kick the weaker countries out? Will the euro survive? Or is it a lost cause, doomed to the history books?
Please let me know in the comments!
Thank you so much for reading, and have a great day…
To your financial success,
—Your faithful reporter, Kung Fu Girl