Stumble-Through Jobs Market
Today we’ll look at the data, including some non-government sources. As you will see, millions of workers will stumble through this period, and they may be the lucky ones.
The Blacker Swan
I read The Black Swan shortly after it came out. The financial crisis and Great Recession were brewing, and I was already beginning to predict a recession. We sensed something big was coming but didn’t know the details. Rereading my September 2007 review of Taleb’s book is an eerie glimpse into the past. It’s also a good reminder that more big events lie ahead.
A Recession Like No Other
In short, a demand-driven recession can’t end until demand returns. It doesn’t necessarily need to be the same kind of demand. Indeed, it probably won’t be. But something must restore consumer spending. A lot of entrepreneurs are spending late nights (and days) trying to figure out how to restore consumer spending.
Where We Go from Here
Today I’ll defy the proverb, consider what we know and don’t know, and try to tell you where I think we’re going. In the long run (after The Great Reset in the late 2020s), I still foresee a wonderful new world. But we have to get there first.
The Stumble-Through Economy
In their effort to improve things/prevent pain, Fed officials past and present financialized the economy. That, along with more unintended consequences from government debt and regulatory interventions (all well-intentioned, you understand) brought us to where we are today. We can’t walk it back without a great deal of pain no one wants to take, including your humble analyst.
COVID-19: A Data-Driven Analysis
Today, we’re going to look at some actual data, both medical and economic. Spoiler alert: The unintended consequences of our response may be more threatening than the actual virus, unless we begin changing some things soon.
Economics in Orbit
Today I’ll share some more insights from the Virtual Strategic Investment Conference. Frankly, I could go on for weeks like this, but this is going to be my last letter on the SIC. We had so much expertise and wisdom beamed in from all over the world. I’ll give you a few more highlights and then offer my own personal takeaway.
Rewinding the Tape
We finished the Virtual Strategic Investment Conference yesterday. I shared some highlights in last week’s letter, will tell you more today.
I knew this letter’s topic months ago. It was going to be a review of the Strategic Investment Conference, which would have just concluded fabulously in sunny Scottsdale.
Five Viral Lessons
Last week I ran across a powerful essay by Morgan Housel, whom I knew when he wrote for The Motley Fool. He is now a partner at The Collaborative Fund and still writing. His article looks at five lessons from history that, on the surface, have nothing to do with coronavirus, Trump, China, the Fed, or any of our other usual topics.
The Figure-It-Out Economy
Some are greatly overestimating how fast the economy can recover. Entire industries, no longer viable in their current forms, must now figure out new ways to do business.
Today’s letter will be another hop-around review of the crisis landscape. I’ll touch on several topics instead of going deep into a single theme. So much is going on, it’s really hard to know where to start. There will be something to annoy everybody.
Repricing the World
We don’t know how this will develop, or how quickly, but I think it is far more likely to bring asset price deflation than inflation. We are going to reprice the world. Probably including your part of it.
Bending the Inflation Curve
The first and most important question that we will deal with is prediction of significant inflation/hyperinflation coming from many quarters because of the massive amount of Federal Reserve intervention. This is wrong-headed fearmongering.
Notes from Lockdown
The new coronavirus is touching us all, one way or another. The virus is infectious but so are the preventative measures. Today I’ll continue last week’s “postcard” format and at the end give you a lightening round of things I have come across, some good and some not. I hope some of what I tell you makes you as angry as it does me.
Postcards from the Frontline
With the economic and market situation changing by the day, I decided to approach this letter a little differently. Rather than go deep on one topic, I’ll share brief bullets on the many points swirling in my mind. Think of it as Postcards from the Frontline. These will be in no particular order and may generate even more questions.
The Beacons Are Lit
Today in the real world, we also face a dark, implacable, powerful foe. It is a microscopic virus that we now know is a threat, a very serious one. We in the United States have just seen the beacons. The warning travelled not just a few hundred miles but around the world: from China and Korea, to Italy and Spain, and now here.
Coronavirus Is Not an Emergency. It’s a War.
This is a short midweek note, something I haven’t done for years. But as we all know, these are very special and difficult times. I’ll give you two links. They describe the nature of the new coronavirus pandemic and its potential consequences. I have run this past the best medical professionals I know, and they agree.
Coronavirus Helicopter Money
The coronavirus could take us all someplace we really don’t want to go.
Chinese Coronavirus Changeup
There are things we can do to help. I’ll mention one big idea at the end of this letter. But first, we’ll take a closer look at what happened in China and how it affects the world economy.
COVID-19: A Crisis the Fed Can’t Fix
First, this is going to be a long slog. The virus will spread slowly but widely. The containment measures are simply buying time. There’s no need to panic, but we should all take common-sense protective measures. Second, as usual, I am the “Muddle Through guy.”
Why Americans Want Socialism
I don’t believe they really want socialism. Few even understand what it is. What they want is change. They see little hope for improvement in their situations, no matter how hard they work and sacrifice. They don’t see anyone in authority trying to help them. So, when someone offers what sound like easy answers, they jump aboard.
Depending on the Undependable
Today we’ll extend the GDP discussion, looking at where these numbers originate, what they miss, and what the Fed in particular does with them. As you’ll see, we need better data… but it’s not at all clear Fed officials would use such data correctly, even if they had it.
The Hits to GDP
Today I want to look at some aspects of GDP we rarely consider, thinking about how they affect our analysis and choices. But first, let’s talk about where GDP is now and where it may go in the near future.
Dismissing the Experts
As you will see today, sometimes I get it really, badly, completely wrong. Thankfully, not too often.
Nose Blind to Inflation
The Federal Reserve doesn’t see the inflation others notice. Their data says inflation isn’t a problem, so they ignore indications otherwise. We see this in their policy decisions. And it’s not just the Fed; other central banks, Wall Street analysts, economists, and politicians have the same affliction.
Looking on the Bright Side
Good things are happening, too, and will keep happening as we move through the 2020s. Occasionally I like to note them, and that’s what we will do today.
Decade of Living Dangerously, Part 2
In Part 1 of this forecast I described my relatively benign outlook for the next 12 months. The calm may last into 2021 and even beyond. But beneath the surface, pressure will still be increasing. It will grow slowly, almost imperceptibly, but eventually explode.
Decade of Living Dangerously, Part 1
Welcome to the 2020s. Some weren’t sure we would make it this far, but we did. Now we face a new decade and new challenges. How we handle them will determine what kind of conversation we have in 2030.
Prelude to Crisis
There is almost no willingness to face our top problems, specifically our rising debt. The economic challenges we face can’t continue, which is why I expect the Great Reset, a kind of worldwide do-over. It’s not the best choice but we are slowly ruling out all others.
Time to Do the Hard Thing
Much of the reaction to last week’s Inflationary Angst letter boiled down to, “Get government out of the way and the free market will work.” Others said the opposite: Government must help people even more than it already does. I wish it were that easy. Neither of those options are what we need, and today I will explain why.
We don’t have much time to get our house in order, either in the US or globally. Everything I’ve said today applies, to various degrees, throughout the developed world. Thinking that 2% inflation or zero interest rates coupled with massive deficits will somehow help is beyond wishful thinking.
Advice Worth Taking
I have some time-honored advice that may help. Both Dennis Gartman and Bob Farrell are legendary traders, and they kindly shared the rules they’ve found most helpful. I know they help me. So read these, and I’ll have a few more words below.
Muddling for Solutions
Should just being “employed” make people/workers happy? On one level, any job is better than no job. But we also derive much of our identities and self-esteem from our work. If you aren’t happy with it, you’re probably not happy generally. Unhappy people can still vote and are often easy marks for shameless politicians to manipulate. Their spending patterns change, too. So it ends up affecting everyone, even those who are happy.
The Road to Default
We will spend the latter part of the 2020s going through a kind of worldwide bankruptcy. We won’t call it that, and it will take a lot of argument because we won’t have a court to take charge. But we will collectively realize the situation can’t go on and find a way to end it. I’ve taken to calling this “the Great Reset.”
Slowing but Not Stopping (Yet)
Today I want to focus on that “entering a rough period” part. The signs are growing clearer and the bumps bigger.
Chinese Chess Game
When the US and ultimately the rest of the Western world began to engage China, resulting in China finally being allowed into the World Trade Organization in the early 2000s, no one really expected the outcomes we see today. There is no simple disengagement path, given the scope of economic and legal entanglements. This isn’t a “trade” we can simply walk away from. But it is also one that, if allowed to continue in its current form, could lead to a loss of personal freedom for Western civilization. It really is that much of an existential question.
China’s Disturbing Vision
But surely, we can work a trade deal? One that protects intellectual property and opens up the Chinese market to American companies? That seems to be the narrative that markets are looking for. But it may not be the narrative we get…
Decoding the Fed
In less than 12 months we have seen the Fed raise rates, cut rates, shrink its balance sheet, expand its balance sheet, inject liquidity, withdraw liquidity, and do who knows what else behind the scenes. Either Fed officials are confused or we are at some kind of economic turning point. Or possibly both—there is no playbook. At a minimum, I think we are at a turning point and the Fed is having to improvise policy as events dictate.
Our Nuts Are in Danger
Economic changes have made future planning increasingly difficult for government retirement systems, private pension plans, and individual investors. How do you generate a reliable income stream for an uncertain but potentially lengthy lifespan in a world where interest rates are barely above zero and possibly below it?
Social Security Is Dying Because Baby Boomers Aren’t
Unfortunately, my good news is also bad news for younger Americans, who won’t get nearly as much as my age cohort is collecting. Worse, they could actually see negative real returns despite having paid proportionally more into the system. In investment terms, they are getting screwed.
Last week’s That Time Keynes Had a Point letter brought many more comments than usual. Apparently Keynes is still provocative 73 years after his death, no matter what you say about him. But my real point was about the twisted economic thought that is having dangerous effects on us all. And we can’t blame it just on Keynes.
That Time Keynes Had a Point
The whole debt bubble, the income and wealth inequality angst, a growing deficit which will get worse after the next recession, and lack of economic understanding among voters is all coming home to roost. Better to think about that now, while we can still act and maybe even change things.
Black Hole Investing
At the economic event horizon, we all need to become black hole investors. Relying on past performance as the tectonic plates shift underneath us, as the central bank black holes begin to suck historical performance into their maws, we must look forward rather than backwards to design our portfolios.
Dalio’s Analogue and Mauldin’s Commentary
Ray says our current situation is essentially the reciprocal of the 1970s inflationary blow-off. The last historical parallel to what we now face was the 1930s. Both those analogues, while not perfect, carry valuable lessons we should consider.
Volatile Year Coming
I think the last few weeks marked a turning point in the economic narrative. It’s more than the trade war. A sense of vulnerability is replacing the previous confidence—and with good reason. We are vulnerable, and we’ll be lucky to get through the 2020s without major damage.
Digging a Hole to China
The saddest part is that the world trading system does, indeed, have serious problems, many of which emanate from China. We need to fix them. I fully support that goal. I am glad we have an administration that takes Chinese behavior seriously. But the tariff strategy is making the situation worse, not better, and the focus on trade deficits is entirely misplaced.
What I Learned at Camp Kotok
his year’s conversations focused on three key long-term themes which were discussed one by one. 1. A future where global interest rates remain permanently near zero. 2. Modern Monetary Theory (MMT) and US fiscal strategy. 3. A fundamental change in the US/China relationship
Larry Kotlikoff on The Big Con
Larry Kotlikoff will share some provocative ideas on what caused the Great Recession. As you’ll read, he demolishes the explanations Wall Street and Pennsylvania Avenue want us to believe. Instead, he argues that our financial system was built to fail, failed spectacularly, and was then rebuilt to die another day.
An Opportunity in the Chaos
One reason the economy is so fascinating is the way things just… happen. Growth blossoms if everyone just follows their own incentives and nothing gets in the way. The courage, vision and passion of entrepreneurs and those who risk their money backing them is one of the most inspiring aspects of modern civilization.
Money of the Future
There are good reasons to think we could once again see some fiat currencies disappear. If so, what “something else” will be money in the future?
The storm clouds are gathering. Someone is likely to get hit. It might be you.
Ray Dalio – John Mauldin Conversation, Part 6
Today in my final reply to Ray I sum up my previous letters and describe one possible path for dealing with the deficit and related problems. My idea will be controversial for most people. I am totally open to another, better solution if anybody knows one.
Ray Dalio - John Mauldin Discussion, Part 5
This is part of an ongoing series of a discussion between Ray Dalio and myself. Today’s installment, adapted from a letter I wrote several years ago, addresses the philosophical problem he is trying to address: income and wealth inequality.
Ray Dalio-John Mauldin Discussion, Part 4
I was quite pleasantly surprised to read a very generous and gentlemanly reply from Ray in Forbes last week, in which he clarified some of my understanding of what he wrote. I encourage you to read it after this letter for more context. I’ll continue responding to his original material but first a short piece responding to his letter in Forbes.
Ray Dalio Is Kinda, Sorta, Really Wrong, Part 3
Ray Dalio has done us all a service by pointing out some rarely mentioned elephants in the room (some tinged with pink). We discuss various parts but seldom the entire creature. By that, I mean the rapidly growing potential for “progressive” control of both Congress and the White House.
Ray Dalio Is Kinda, Sorta, Really Wrong, Part 2
Last week, I basically agreed with Ray’s analysis of US income and wealth disparity. It obviously exists. The question is what, if anything, can we do about it? I think this is an important conversation, not just between two people but throughout the entire nation. The answers will make a huge difference to both our society and our children’s futures. Not to mention our own futures.
Ray Dalio Is Kinda, Sorta, Really Wrong
Ray Dalio is really, really wrong. He basically endorses Modern Monetary Theory (MMT).
The Trump Trade War Recession?
John Mauldin is recovering from a minor illness. He’ll be back next week. Meanwhile, with trade disputes still roiling markets, below is a still-timely letter he wrote last year. You should definitely read it again.
Why Debt Won’t Spark Inflation
Like Japan, the US will see yet more quantitative easing and extraordinarily low interest rates, along with annual federal deficits of $2 trillion and higher. Alternatives like restructuring the tax code and balancing the budget will be nowhere in sight.
Takeaways from the SIC
Most investors and fellow citizens have no idea what water we are swimming in. They swim in a pool of agreed-upon, commonly understood narratives. And that’s all well and good until the water changes.
Your Pension May Be Monetized
Defined benefit plans, usually those sponsored by state and local governments, labor unions, and a dwindling number of private businesses. Many sponsors haven’t set aside the assets needed to pay the benefits they’ve promised to current and future retirees. They can delay the inevitable for a long time but not forever. And “forever” is just around the corner.
Time to Change Strategy
Friends don’t let friends buy and hold. At a minimum, you need some type of hedging program on your equity portfolios. Using a simple 200-day moving average to signal the time for going to cash, while not the best, will help protect you from the worst of a massive bear market.
How I Learned to Love the Debt
The Treasury Department will sell bonds and run up the debt. That’s a given. Then there will be a recession, as there always is, and then the Federal Reserve will take interest rates down to the zero boundary (otherwise known as financial repression and the devastation of savers), followed by unprecedented amounts of quantitative easing… just like Japan has done.
The Rules Will Change but That’s (Probably) OK
I think the next crisis will bring similarly radical, sudden changes. We will think the unthinkable because we will see no other choices. That means the range of possible scenarios may be wider than you think.
Japanified World Ahead
I think the rest of the world will enter a period something like Japan endured following 1990, and is still grappling with today. It won’t be the end of the world; Japan is still there, but the little growth it’s had was due mainly to exports. That won’t work when every major economy is in the same position.
Capitalism Gone Wild
Recession is coming. We can debate the timing, but the economy will turn decisively downward at some point. My own analysis, looking at the data available on April 4, says recession isn’t likely this year but unfortunately looks very probable in 2020.
Recession Signs Everywhere
Recession is approaching but not just yet. Yet like the Fed, I am data-dependent and the latest data are not encouraging. Today, we’ll examine this and consider what may have changed.
No Free Lunch, Part 2
Matching the stock market’s long-term average returns sounds like it should be easy, if you’re patient enough. But in fact it is remarkably difficult. In last week’s letter, Ed Easterling and I showed you why it is a longshot bet in almost every market environment. Returns over a decade or two are usually well above or well below average. Most of all, it’s fairly predictable which side of average will occur. Today Ed and I will expand on that discussion.
No Free Lunch: Valuation Determines Return
Last week, I described the enormous challenges retirees face. One reason for that, aside from insufficient savings, is that markets haven’t delivered the returns many experts said we could plan on.
Retirement Isn’t Happening
TV commercials suggest a financial advisor is key to a leisurely retirement. A good one certainly can help, but only to the extent you’ve saved enough cash to give them something to invest. And as we’ll see, many Americans haven’t.
The Fed Is Playing a Dangerous Game
I would prefer that the market set rates at the lower end as opposed to the Federal Reserve, again, except in times of crisis. I don’t believe 12 people sitting around a desk, no matter how brilliant and educated they are, can arrive at a proper market-clearing rate better than the market itself. Seriously, LIBOR was set for decades without government intervention.
Recession: Are We There Yet?
An old joke says economists predicted 15 of the last 10 recessions. In other words, they’re frequently wrong and often too pessimistic. I think it’s not so simple.
Modern Monetary Madness
Modern Monetary Theory is a revival of an early 1900s idea called chartalism.
Capitalism Without Competition
Today’s capitalism has a contradiction that is increasingly hard to ignore: lack of competition in key markets. That’s a problem because competition incentivizes producers to get more efficient and reduce prices for consumers. Without competition, you end up with bloated monopolies that may be highly profitable for the owners, but don’t serve the greater cause of economic growth.
What Should We Then Expect (From Investing)?
Today we’ll look at what we should expect from our investing. In case you haven’t noticed, financial markets are really a giant expectations game. A company can report great quarterly results and still get crushed if earnings are less than analysts expected.
How Should We Then Invest?
It makes little difference to our portfolios whether recession strikes in 2019 or 2020. The benchmarks will drop between 40 and 50%—some more, some less. To the extent that you are exposed to stocks and other financial markets, your portfolio is going to take a hit.
Bull in the China Shop
This week’s letter focuses on China’s economy. We’ll look at some numbers showing the challenges China faces, but they don’t explain something important. The way China will meet those challenges is going to be substantially different than we would see in the West.
Something Wicked This Way Comes
Americans like to think we are insulated from the world. We have big oceans on either side of us. Geopolitically, they serve as buffers. But economically they connect us to other important markets that are critical to many US businesses. Problems in those markets are ultimately problems for the US, too.
The Year of Living Dangerously
I expect to spend this year Living Dangerously. Yes, I’m thinking of the 1982 film starring a very youthful Mel Gibson and Sigourney Weaver, based on an earlier Christopher Koch novel. It has an Asian setting and features corrupt politics, neophyte journalists, international intrigue plus a gender-bending Chinese dwarf. If you aren’t sure how all those fit together, then welcome to 2019. We are all stuck in this craziness and can only make the best of it.
Bear Markets, Fed Mistakes, and Quick Shots from John
Today, we’ll address several things, so think of this as my year-end “Quick Shots from the Frontline.” It will be more like a personal, from the heart, fireside chat. (Trigger warning: I will be taking off my politically correct gloves. Naming names and pointing fingers. Just Uncle John telling it like it is.)
Powell, the Third Mandate, the New Fed and Crawdads
I am going to offer some different thoughts than the mainstream media spin on Jerome Powell, his press conference, and the Federal Reserve.
The Misunderstood Flattening Yield Curve
Everybody is suddenly talking about the inverted yield curve. They’re right to do so, too, but alarm bells may be premature. Inversion is a historically reliable but early recession indicator. The yield curve isn’t saying recession is imminent, even if it were fully inverted, which it is not.
In my never-ending quest to keep you ahead of the curve, I’ll review what’s happening in Europe. This may be a turnabout for European readers who rely on me to describe what’s happening over here. But as you’ll see, we are far more connected than separated by distance.
Pyramids of Crisis
We are simply not prepared for a world in which old people outnumber the young. But it may be coming, thanks to life extension at the upper end and falling fertility rates below. National pension systems—what we call Social Security in the US but similar elsewhere—are not designed for that combination. They presume a high ratio of working young to retired old citizens. That is no longer happening and is increasingly hard to ignore.
Double Debt Problem
It is entirely possible we will have another debt crisis before what I think of as The Great Reset. I firmly believe the latter is still coming, but there may be another “mere” credit crisis beforehand.
Seventh-Inning Debt Stretch
Today we’ll look at a new book by Ray Dalio called Principles for Navigating Big Debt Crises in which he examines those debt cycles and what we can do about them.
Economic Brake Lights
All good things come to an end, even economic growth cycles. The present one is getting long in the tooth. While it doesn’t have to end now, it will end eventually. Signs increasingly suggest we are approaching that point.
Debt Alarm Ringing
Debt is future spending pulled forward in time. It lets you buy something now for which you otherwise don’t have cash available yet. Whether it’s wise or not depends on what you buy. Debt to educate yourself so you can get a better job may be a good idea. Borrowing money to finance your vacation? Probably not.
The Real Cost of Low-Fee Funds
Today, rather than tackle some big macroeconomic issue, we’ll go back to this letter’s roots and look at market timing and portfolio construction issues. I expect this will get both enthusiastic support and at the same time, make a number of readers uncomfortable—if not annoyed.
Red Hot China Mailbag
As I read the responses to last week's article, I realized that it didn’t have all the nuance I intended. Further, I needed to refine some of my own thinking. In the interest of brevity, I will ignore the positive comments and focus on a few (out of many) that pushed back. I picked a few examples because a proper tour of tariffs would take a complete book.
The Trade Deficit Isn’t the Boogeyman
Trade deficits or surpluses aren’t bad. Nor are they good. They are a natural characteristic of post-barter economies that have achieved division of labor… a sign of success, in other words. For certain countries, there are times when trade deficits simply don’t make a difference. And then there are times when they can be devastating. It all depends on the current account surplus, a concept we will deal with below, and/or whether the country’s currency has reserve status.
The Trump Trade War Recession?
I do not think the tariffs on China are going to cause a recession. But if we have a recession, that is precisely what the Democrats will say. Democrats will not run against the Fed, investor sentiment, markets, Italy, or anything else that actually causes the next recession. They will be running against Trump and everything will be his fault. It will be the Trump Trade War Recession. Whether or not it is true is immaterial.
China for the Trade Win?
The US will have the upper hand initially, and could hold it for a year or two. This is because, for now, our economy is relatively strong and we can better withstand any Chinese retaliation. Beyond that point I think our current policies will begin to backfire, maybe spectacularly.
Chinese Growth Spurt
Economic reality isn’t black and white. At any given time, both good things and bad things are happening. Ignoring one side because it doesn’t fit your preferred outlook is an excellent way to go badly wrong.
China’s Command Innovation
Today and next week, we’ll look at the bright side: The good things happening in China, much of which will help the rest of the world, too. Just like the work going on in the US and Europe and other countries is helping the rest of the world. Entrepreneurs and scientists inventing new ways for us to better our lives is good for everyone everywhere. Then the third letter will consider some darker possibilities. It is not all sweetness and light in China, as long-time readers know.
The Growing Economic Sandpile
Change will be today’s topic. Below I’m reproducing part of a letter I originally wrote in December 2007 and have referred to several times. It is the single most-read letter I have written and the most commented-on, too. I consider it, in some ways, my most important letter. If you’ve read it before, you should read it again. I have updated it a little bit, but the principles are just as timeless as ever. And for the time conscious, we have shortened it a bit and at the end, I try to apply those principles to present economic times.
Revolutionary Future Ahead
Let’s consider two seemingly conflicting ideas.
- Major economic pain is coming.
- We have a bright, prosperous economic future.
Can both of those be right? I think so.
The Good News Economy
I see some major problems coming in the 2020s (and perhaps a bit sooner), but I also see a lot of good things happening right now. The economic recovery, while still weak by historic standards, is gaining some momentum that ought to carry it forward for another year or two, assuming (as I perhaps naïvely do) that we can put this trade war thing to rest. That’s good news because it buys us time to prepare for worse times, but it’s also just plain good news.
The Maine Surprise Was Time
This year at "Camp Kotok," I quickly sensed a more upbeat mood. Not that many that were wildly bullish, but most were positive or at least neutral. There weren’t nearly as many bears as I expected. “Cautious optimism” seemed to be the theme. That led me to refine my own views with a wide variety of participants. Today, I’ll do the same for you.
The Distribution of Pain, Redux
This week I have something special for you: an update of “The Distribution of Pain,” one of 2017’s most popular letters. I say “popular” just in terms of feedback and reprint requests. It was thought-provoking but also sobering. I started with the original version, re-edited to clarify a few points, and added some new comments. It is still a timely, important topic.
Last week I gave you some rules to follow with your investments. They were necessarily general because I’m writing to a broad audience. Today, I will get more specific by discussing some possible strategies for high-net-worth “accredited investors.”
How to Dodge the Debt Train
An active manager worth his or her salt will manage risk as part of the deal, and risk management is exactly what you need when you live on a railroad track. It doesn’t have to be perfect, just good enough to mitigate the major drawdowns. If everybody else loses 40% and you only lose 25%, you’ll be way ahead of the crowd. And the right manager should avoid even that scenario and keep you near break-even.
The Debt Train Will Crash
There’s going to be a train wreck here. Which train will go off which track is unclear, but something will. And we’re all going to feel it.
An American Story
This week, in the spirit of July 4 and Independence Day, I’m going to share the inspirational story of a friend who “Came to America.” But it’s also a teaching moment. I think the story is timely as we reflect on what this country means, to both its residents and the broader world. I hope you enjoy it.
Uncle Sam has made too many promises to too many people, with little regard for its future ability to fulfill them. These are debt. Worse, some of them are additional debt on top of the obligations we already see on the national balance sheet. Even worse, entire generations have planned their retirement lives around the government fulfilling those promises. If those promises aren’t met, their lifestyles will indeed become a potential train wreck.
Europe Has Train Wrecks, Too
Modern Europe’s (and Canada and Australia and…) vaunted social welfare programs have helped many people, but they haven’t eliminated poverty, nor let everyone retire in comfort. Could they simply have shifted spending forward, leaving future generations with the bill? Today, we’ll explore that question as part of my continuing Train Wreck series.
The Pension Train Has No Seat Belts
The pension crisis alone has catastrophic potential damage, let alone all the other debt problems we’re discussing in this series. You are sadly mistaken if you think it will end in anything other than a train wreck. The only questions are how serious the damage will be, and who will pick up the bill.
Debt Clock Ticking
The entire world went into debt for the equivalent of tropical vacations and, having now enjoyed them, realizes it must pay the bill. The resources to do so do not yet exist. So, in the time-honored tradition of lenders everywhere, we extend and pretend. But with our ability to pretend almost gone, we’re heading to the Great Reset.
The Italian Trigger
Over the next decade, we will endure increasingly damaging debt crises that culminate in a coordinated global default—“The Great Reset,” as I call it. There are limits in how much leverage the world can handle, and I think we are already beyond them. And that is before we have a global recession. The only question now is how we will manage the collapse.
High Yield Train Wreck
The first defaults will occur at the lowest end of the problematic market: high yield or “junk” bonds. They will play a role comparable to subprime mortgages in the last crisis. We’ll see mortgage problems as well, but I think overleveraged companies will be the core problem.
Train Crash Preview
Today we will summarize something I’ve been thinking about for a long time. Exactly how will we get from the credit crisis, which I think is coming in the next 12–18 months, to what I call the Great Reset, when the global debt will be “rationalized” via some form of nonpayment. Whatever you want to call it, I think a worldwide debt default is likely in the next 10–12 years.
Credit-Driven Train Crash, Part 1
I’ve been saying for some time that the next financial crisis will bring a major debt crisis. But as you’ll see today, it is a small part, maybe the opening event, of a rapidly-approaching train wreck. We’ll need several weeks to tease out all the causes and consequences, so this letter will be the first in a series.
Thoughts from the Mailbox
Today’s letter will be a little different. First, I want to relate some of the conversations I’ve had over the last week in my travels—a little glimpse into the life of John. Then I’m going to reproduce some recent letters from readers, with some mea culpas and comments from me. I literally get dozens and sometimes hundreds of interesting letters each week. They make me think and I read as many as I can. I think you’ll enjoy them.
Economy with a Fever
In short, there is not enough data to have me predict a recession and the consequent bear market. But there’s enough data bubbling up all around me that it makes me very nervous, and I am paying close attention. You should be, too.
China Plays It Cool
This year, China is in the headlines because President Trump wants better trade terms. That’s important, but it’s only one piece of a much larger Chinese story that has been unfolding slowly for decades. Periodically, I check in on the latest developments. Today, we’ll see where we are, with the help of my trusted sources.
How to Get Your Tax Weekend Back
Today we’re going to look at who wins and who loses under the new tax law. I think many of you will be surprised.
Assumptions Equal Problems
Today we will look back at what economists thought the federal budget and tax policy would be in 2001 and thereafter. Let’s just say the government projections were a tad optimistic.
Springtime Chart Fling
Just like the weather, the world economy and financial markets go through cycles. Most years, they don’t change suddenly. We get some transition time between the colder and warmer seasons. I fear we may be in an economic transition right now, and it may not be in the direction of the springtime or summer we would prefer. But let’s look at these charts and see what they tell us.
Squares, FAANGs, and Stock Valuations
We heard a lot about valuations at my Strategic Investment Conference, and particularly about the “FAANG” stocks that drove much of the recent bull run. Now, only two weeks later, the “F” in that acronym (Facebook) is tumbling, with the others maybe not far behind. That’s a problem for every stock investor, FAANG or otherwise. So today we’ll look at valuations more broadly and then zero in on the social networking issues that are turning more problematic.
It’s been a week and I’m starting to recover from my post-SIC high. It’s a weird feeling. I love SIC, yet processing it all takes time. Imagine one of those brain maps that shows the neurons opening new pathways. That’s what SIC does. It opens connections that I didn’t previously have.
The Great Jobs Collision
Today, I’m going to recap one of this year’s new speakers, Karen Harris from the Macro Trends Group at Bain & Company. She has done some ground-breaking research on job automation and the future of work. Much like geopolitics, these factors define the parameters in which other trends develop, so I made Karen one of our day 1 lead-off speakers. As you’ll see below, her presentation was even more enlightening than I expected.
Inflation and Honest Data
I’m going to wrap up our series on the problems of collecting and analyzing data in the first half of this letter, and then I’ll quickly comment on the Trump tariffs.
State of Inflationary Confusion
Today we’ll extend last week’s discussion by considering how twisted inflation data leads to less-than-ideal policies.
Data-Dependent ... on Imaginary Data
Federal Reserve officials like to say their policy course is “data-dependent.” That sounds very cautious and intelligent, but what does it actually mean? Which data and who’s interpreting it? Let’s ask a few questions.
Where Will We Get the Cash?
Last week’s turbulence shined a harsh spotlight on the stock market. Appropriately so, if that’s where your investments are. But in the hubbub many investors are missing the deeper and far more urgent bond market issues.
Enjoy It While You Can
Rarely do we move directly from boom to bust; but when the shift comes, it can develop quite quickly, even though the transition isn’t usually obvious in real time. As I look at the data and talk to my contacts, I’m beginning to conclude that we’re approaching one of those transitional phases. I think we’ll look back at 2018 as an in-between year… from good times to something eventually not so good.
Gross Domestic Problems
We must next decide what, specifically, a newly formulated GDP should measure and how – and that’s a thornier question than you might think. Today we’ll wrestle with that question and with some of the implications of changing how we measure growth.
A Fly in the Economic Ointment?
Imagine this: Rising interest rates and reduced foreign capital flows combine to push housing prices down in places like Vancouver. Leveraged players who own speculative homes start to liquidate their properties, pushing prices down further. Banks find themselves holding properties they neither need nor want. The dominoes begin to topple.
Year of the Octopus, Part 2
Only two weeks in and 2018 is already breaking records – mostly in a good way. But that leaves 50 potentially less enjoyable weeks to go. So rather than focus on promising current events, I think I’d better dip back into my annual forecast bag and share a few more highlights with you.
Year of the Octopus, Part 1
This week and next we’ll look at forecasts from some of my most trusted friends and colleagues.
Economy on a Roll
In addition to popping champagne corks and black-eyed peas (at least in the South) on New Year’s Day, year-end brings something else for economists and portfolio managers: annual forecasts. People want to know what the coming year will bring. I would like to know, too. But since I’m on the other side of your monitor, I must give you my own forecast. Caveat emptor applies.
Why 2017 Was a Year to Celebrate
The holidays always prompt us to look both forward and back. Soon you’ll start seeing 2018 forecasts. I’ll review some of them for you and give you my own in the coming weeks. But first, I want to take a look back at 2017 – and do it a little differently.
Automatic Job Storm Coming
Today I’ll give you some quick thoughts on the just-issued November jobs report, then take a deeper look at the automation problem/opportunity.
Renovating the Fed
In talking with some of my Fed-watching friends, it appears the world’s most important central bank is about to experience some potentially profound changes – not just in personnel but more importantly in the kind of people who lead it. Those changes could, in turn, have some serious economic impacts; so it’s worth taking a deeper look.
The Bonfire Burns On
The volume of daily economic lunacy that lights up my various devices is truly stunning, and it seems to be increasing. I shared a little of it with you in last week’s “Bonfire of the Absurdities.” Since it’s a holiday weekend and I was traveling all week, today I’ll just give you a few more absurdities to ponder. And this shorter letter will lighten your weekend reading load.
Bonfire of the Absurdities
This week’s letter will take a look at the growing number of ridiculous, inane, and otherwise nonsensical absurdities that fill the daily economic headlines. I have gone from the occasional smile to scratching my head now and then to “WTF” moments several times a week.
The Distribution of Pain
When you write about economics, you learn very quickly that the economy doesn’t care what you say about it. The forces that drive it are beyond any one person’s comprehension, much less control. But at the same time, the economy doesn’t work like a law of nature. Unlike gravity, for instance, the economy responds to human choices and preferences. We influence it, even if we don’t understand exactly how.
The Fragmentation of Society
Lately, my life has been completely packed with speeches, meetings, and in-depth, often lengthy, conversations. Plus ongoing research and writing, of course. It all culminated Thursday afternoon at the beginning of a business meeting with the leadership team from a firm that will become a significant new business partner.
I don’t want to be glib, but our educational system is largely a failure in producing children and young adults ready for the future. Why we would think that more of that would be useful? What we need to do is completely rethink the whole concept of what we call education.
The World Turned Upside Down
It is extremely difficult for an active manager to buy the best companies and/or short the worst companies and show much outperformance relative to the passive index funds. No matter how much research you do, no matter how well you know those companies, your research is not giving you an edge over the massive movement to passive investing.
Uncle Sam’s Unfunded Promises
This week we are going to take a hard look at the unfunded liabilities and debt of the US government. And even though the federal unfunded pension liabilities dwarf those of state and local pensions, I want to make it clear that I believe the state and local problems will be far more intractable.
Global Retirement Reality
Readers outside the US might have felt smug and safe reading those stories. There go those Americans again, spending wildly beyond their means. You are correct that, generally speaking, we are not exactly the thriftiest people on Earth. However, if you live outside the US, your country may be more like ours than you think. Today we’ll look at some data that will show you what I mean. This week the spotlight will be on Europe.
Build Your Economic Storm Shelter Now
Today I want to continue with the hard-hitting analysis of our public pension problems and say more about personal storm preparation. We all have some very important choices to make.
Pension Storm Warning
Elected officials at all levels have promised workers they will receive pension benefits without taking the hard steps necessary to deliver on those promises. This situation will end badly and hurt many people. Unfortunately, massive snafus like this rarely hurt the politicians who made those overly optimistic promises, often years ago.
The Future of the Global Economy
This letter will be the first of a series in which I outline my vision for the next 5–10–15–20 years of global economics. I understand that there is a substantial amount of hubris involved in such an undertaking, so I will approach the topic gingerly.
Instead of delving deep into one subject, I’ll give you my quick thoughts on several different items. They aren’t connected to each other, nor do they build up to any sort of conclusion. They’re just what is on my mind as we wrap up summer 2017.
All Things Bullish
Today we’ll look at reasons to be bullish on the equity markets, but I’ll also teach you a thing or two about trading.
All Things Bearish
With regard to the stock market, some people are true perma-bears while others merely adopt a bearish outlook when indicators suggest trouble ahead. There’s a big difference between the two.
What I Learned at (Economics) Summer Camp
Well, I went to camp this summer, too. I go every year, and I always learn more than I can manage to remember. Camp Kotok is an invitation-only gathering of economists, market analysts, fund managers, and a few journalists. It takes place at the historic Leen’s Lodge in Grand Lake Stream, Maine. We fish, talk, eat, drink, and talk some more. It’s a three-day economic thought-fest (and more rich food and wine than is good for me or anyone else at the camp). For me, that’s about as good as life gets.
Hot Summer Mailbag
Today I am at Camp Kotok in a remote area of Maine where connectivity (the electronic kind) is limited. Rather than try to write a regular letter, I decided to hand the keyboard over to you – or at least to a few readers like you. I went through the feedback to my last few letters and picked some comments to share and respond to. These are a small fraction of the feedback we received, so forgive me if I omitted your brilliant submission! And because I want to get to the Camp Kotok opening reception in a bit, this letter will be shorter than usual.
Happiness Is a Normal Yield Curve
Today I will show you a simple indicator that has an excellent recession-forecasting record, according to research by the Federal Reserve itself. Though the Fed’s own wacky policies may have weakened this early-warning system’s reliability, an interpretive adjustment can restore its usefulness.
Three Black Swans
I am concerned that another major crisis will ensue by the end of 2018 – though it is possible that a salutary combination of events, aided by complacency, could let us muddle through for another few years. But there is another recession in our future (there is always another recession), and it’s going to be at least as bad as the last one was, in terms of the global pain it causes.
Trade War Games
I have lived through recessions and bear markets; I know what they look like. I wish I could forget what they feel like. They don’t come out of nowhere; there are always warning signs. Many investors choose to ignore those signs; I choose not to. I hope you make the same choice.
Prepare for Turbulence
While there are bright spots, without major reforms the economy will drift lower, toward stall speed. Any outside shock – and several may be in the offing – could push us into recession.
The Wedge Goes Deeper
In last week’s letter, John Mauldin had some harsh words for the Federal Reserve leaders whose hubris pushed us into our current monetary corner. Now, with no good choices left, all we can do is pick the least-bad one.
Mad Hawk Disease Strikes Federal Reserve
When a person or an organization fails – and of course we all do – the best response is to show some humility, identify the problem, and modify the strategy. The Fed is doing the opposite.
The Next Minsky Moment
Ttoday we’ll have a little Minsky refresher and look at some recent danger signs. And I predict that we will soon see Minsky mentions popping up everywhere.
What, Me Worry?
With all the usual disclaimers, today I will review some recent analysis from my reliable sources and let you take a peek into my worry closet.
Can You Afford to Reach 100?
The good news is that you and your children will probably have much longer lives than you currently imagine. The bad news is that you’ll have to pay the bill for them.
The Great Reset, Part Two
Last week I discussed what I think will be the fallout from the Great Reset, when the massive amounts of global (and especially government) debt and the bubble in government promises will have to be dealt with. I think we’ll see a period of great volatility in the markets. I offered a solution for dealing with this complexity and uncertainty in the markets by diversifying trading strategies. But that diversification must reflect a rethinking of Modern Portfolio Theory, including a significant reshaping of valuations in asset classes. We’ll deal with those topics today.
The Great Reset: How Should We Then Invest?
This letter will cover the philosophical underpinnings of my thinking. I’ll also introduce some investment tools (which I will give you access to through a link later on in the letter) that express that philosophy, but you could also design a different answer that fits your own (or your client’s) portfolio construction.
How to Drink from a Firehose
Today I’m going to share a small sample of Peter Boockvar’s daily output. Below are three articles he published on one day – Thursday, May 11, 2017. And he does this every day, week and month and year in and out. He never fails to make cogent, interesting points about the day’s events. Think about the brainpower it takes to generate this sort of creative output every working day.
Angst in America, Part 7: The Angst of the Millennial Generation
I fully intended to end my series on “Angst in America” last week, moving on to portfolio construction and what I call the Great Reset. But as I did my regular reading and research this week and reflected on it, I realized there was one piece missing from this series. That is a discussion of the angst that the Millennial generation and generations that follow are facing. And this is not just a US problem; it’s global.
Angst in America, Part 6: Middle Class Blues
The middle class is a fairly new development in economics. Up until the last century or two, most societies had a tiny wealthy elite and great masses of common laborers. We now regard having this group in the middle, not wealthy but with their own assets and spending power, as a great achievement. We don’t want to lose it, but some people fear we will.
Angst in America, Part 5: The Crisis We Can’t Muddle Through
There is one problem that is very definitely coming our way that I really don’t think we can Muddle Through and where even the middle-of-the-road scenarios are terrible, and that’s the public pension crisis. I really see no way it can end well. It’s going to hurt just about everyone.
Angst in America, Part 4: Disappearing Pensions
Today, in what will be the first of at least two and possibly more letters focusing on pensions, we’ll begin to examine that angst in more detail. The mounting problems of US and European pension systems are massive on a scale that is nearly incomprehensible.
Stock Market Valuations and Hamburgers
Yes, active management has had its collective head beaten bloody for the past few years; and the proclivity for passive investing may persist a lot longer than any of us imagine, driving markets higher than many of us believe possible; but I think the stampede into passive investment is going to end up painfully, at the bottom of a cliff, for many investors.
Angst in America, Part 3: Retiring Broke
Today we continue looking at angst in America, the financial worries that so afflict us here in the world’s largest economy and by extension in much of the developed world. We may be the envy of the world in some ways, but we also have no shortage of stress. Today we’ll look at some data on retirement savings – or lack thereof.
Men Without Work
I have been promising a review of Nicholas Eberstadt’s very important book, Men Without Work: America’s Invisible Crisis. The book is relatively short at 216 pages, but it is packed with meaty facts and insights.
Angst in America, Part 1: Aimless Men
This week we begin a series of letters exploring the new economic and sociological anxiety. I want to look at what causes it and think about what we can do to ease it. I don’t know how many letters this dive will take. I may break away for other topics and then come back to the topic of angst.
Tax Reform: The Good, the Bad, and the Really Ugly—Part Five
Today, patient reader, we hopefully reach the end of our tax reform saga, which has grown much longer than I expected. I seriously thought at the beginning that I could fit all this into one letter. Then it became a two-parter, then a trilogy, and then … well, here we are.
Tax Reform: The Good, the Bad, and the Really Ugly — Part Four
This letter turns out to be the penultimate installment in my now five-part series on tax reform.
Tax Reform: The Good, the Bad, and the Really Ugly—Part Three
Today we come to part 3 of my tax reform series. So far, we’ve introduced the challenge and begun to describe the main proposed GOP solution. Today we’ll look at the new and widely misunderstood “border adjustment” idea and talk about both its good and bad points
Tax Reform: The Good, the Bad, and the Ugly, Part Two
We will look more closely at the rest of the tax proposals. Then next week we will go much deeper into the BAT and then into what I think the tax system should actually look like, which will be far different from anything I’ve suggested in the past. That discussion will make more sense if we have placed the ideas in full context.
Tax Reform: The Good, the Bad, and the Ugly—Part One
The usual thrust of this letter is economics, finance, and investing. Lately, however, the political process has been invading my normal domain – sometimes to the dismay of some of my readers.
More on Complexity Economics
In last weekend’s Thoughts from the Frontline, I talked about how the economics profession in general and central bankers in particular have consistently failed with their economic projections, and I pointed to the need to deepen our understanding of complex systems behavior.
This week’s letter is going to be an examination of academic economics today and why it fails to explain reality, and I’ll point readers in a direction that can offer a more fruitful explanation of how the economy really works. I readily accept that I will be drummed out of most economists’ Lamb’s Book of Life for espousing too many heresies of the first order. I should hasten to say that much economic research is quite useful and does help to explain how the world works. It is just certain specific branches of economics that have been problematic, but these are the branches that have most influenced government and Federal Reserve policy.
What I Learned in Washington DC
This is going to be a short letter summarizing my impressions from the last few days I spent in Washington, D.C.
Forecasting with Friends
I gave you my own thoughts last week (see “Skeptically Optimistic”). Today we’ll review several other forecasts from people who deserve your attention. Of necessity, I must leave out some good ones, but I think the ones I cover will give you plenty of useful information.
2017 Forecast: Skeptically Optimistic
As we’ll see, a great deal will happen in the first third of the year that could (and likely will) radically change the course of events in the last two-thirds. Furthermore, the possible outcomes are in the hands of inherently unpredictable individual humans otherwise known as politicians (and not just in the US, thank you very much!) instead of dispassionate market forces. Fancy quantitative models will be of little help.
What Could Go Wrong?
Instead of trying to answer questions about the future, I’ll try to list those we should be asking as 2017 opens. These are the things that I sit and meditate about when I consider the future of economics, markets, and investing. Today’s economy is something like an old-fashioned Swiss watch. It’s a thing of beauty when all those delicate little gears mesh just right. If you ever take the time to actually study the inner workings of the marvelous manifestations of human ingenuity that keep us all alive, it is difficult not to come away awestruck by the ability of the human mind to craft such complexity. But if any of the gears get just a little out of whack, the entire contraption can grind to a halt.
As the Fed Turns
I’m going to have a few things to say about the recent FOMC meeting, and we’ll use it as a springboard to chew the fat about the new season and upcoming episodes of our very own soap opera: As the Fed Turns. Just as devotees of As the World Turns used to speculate about what their favorite characters were up to, we can have a little fun opining about the Fed’s next moves. Now, a Trump presidency offers a lot of potentially juicy drama, too, and we’ll certainly want to chat about it. And of course, we won’t be forgetting that this is soap opera with real-world implications for the markets and our investment portfolios.
The Trump Rally Will Morph
Today we’ll look at stock valuation several different ways, see what history tells us about the future, and then think about how to react. There are good reasons to think that the Trump rally could morph into the stereotypical and expected Santa Claus rally. Toward the end of the letter, I will comment on why. It’s actually kind of a rational process. And then what?
A Big Swirling Italian Mess
Italians are headed to the polls this Sunday (and thus this letter is reaching you a little earlier than usual) – but no one is quite sure what is on the ballot. On the surface, the voters are considering whether to approve constitutional reforms that should make the government operate more effectively (or not, depending on your point of view). But many people think the real question is whether the current government should stay in power and whether Italy should remain yoked to the Eurozone.
What Should Trump Do?—Your Questions Answered
Last week’s letter with my thoughts on what Trump should do generated more responses than any other letter had in the last 17 years. As you might suspect, with a topic so controversial, not everyone agreed with me.
What Should Trump Do?
I’m going to depart from the normal format of my letters, where I talk about the economic realities we face and how we should invest, and instead offer my view of what I think the Trump administration and the GOP-led Congress should do.
This Could Be Our 1989
I think many of my readers are in the same boat I’m in: we are still sorting out the implications of last Tuesday’s election. My style is generally not to shoot from the hip but to think about things before I start to write. When I have adopted the “ready–fire–aim” style of writing, I have usually found myself going back and asking, “What was I thinking?” And the answer is that I wasn’t doing enough thinking.
The Election: Making Difficult Choices
It is quite conceivable that we could be approaching $30 trillion in national debt by the time the president is inaugurated in 2021. Make whatever assumption you want to about interest rates, the level of taxable revenues in current models suggests that interest could easily be consuming more than 15–16% of revenues by then. And growing… That is not a sustainable model.
Earnings ex-Losers Look Great
It turns out most companies are doing well, but a small group shows results so dismal that they weigh down the entire market. Worse, that group may not recover nearly as fast as some analysts think. We will see why in a little bit.
How to Rebuild Healthcare Right
Today we’ll look at the remarkable results the Cleveland Clinic has already achieved with its 100,000+ employees and dependents and with numerous corporations they work with. They are making people healthier and reducing medical costs. It is a model that I think could work on a much broader scale.
Taking a Wrench to Healthcare
This week we are going to look at the US healthcare system, not simply to critique Obamacare, but to explore the deeper problems. Warning: this letter will print much longer as the latter half of the letter has a lot of charts and graphs.
Federal Repression System
In today’s letter we are going to look at the FOMC’s decision-making process for monetary policy and survey the unpalatable future that our leaders are cooking up for us. But we won’t be living in the fantasy world they have created for themselves; we are going to have to live in the real world instead, where investment portfolios make a difference to our lifestyle and retirement, not only for ourselves but for our families and clients.