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.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
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.