John Mauldin proved to be one of the most popular
speakers at last spring's Casey Research investment conference, and we're
pleased that he'll be presenting for us again at the upcoming Casey Research/Sprott, Inc. Navigating the Politicized Economy
Summit. This timely event, to be held in beautiful Carlsbad, California
from September 7-9, features our own Doug Casey… natural resource
investing guru Rick Rule… former US Comptroller General David
Walker… best-selling author G. Edward Griffin… and many more
financial luminaries. Together, they will shine a spotlight on the pitfalls
of today's centralized economies and reveal actionable investment strategies
you can use to protect and grow your wealth. All the details are right here.
Interviewed by David Galland,
Casey Research, Managing Director
David Galland: Hi, this is David Galland.
I'm here with my old friend John Mauldin from Mauldin Economics. John is
participating in our Recovery Reality Check Conference, and we thought
we'd catch a few minutes and get his take on the recovery and whether it's
actually happening or whether it's a figment of somebody's imagination. So,
John, welcome. First off, I guess the big question in the macro picture here
is: are we in a sustainable recovery?
John Mauldin: No. It won't be sustainable until we figure out how to deal with the deficit,
so it's just halftime between the last recession and the next problem. But it
could be a 40-minute halftime – it could be a Super Bowl halftime
rather than a normal game time. It could go longer than we would think. It'll
be muddled through. Today we saw 2% GDP. It was goosed by the fact that
consumers saved 2% less; otherwise it would have been flat. These aren't
numbers that are being driven by increased production, not being driven by
exports or private investments.
David: But also a
large part of the GDP is government spending.
John: It is; and
it's becoming a larger part and that's part of the problem. As we take
government spending down – which we will be forced to do, either by the
markets or we do it willingly – when we reduce government spending it
will reduce GDP in the short run. It boosts GDP in the short run going up,
but it has the reverse effect going down. It's just like leverage can
increase spending. If I go out and borrow some money, then spend it, that's
good for the economy; but the reality is I have to pay it back, so I've spent
future monies with my borrowing. And that's what we've done with government
spending, increasing it up to its current percentage. We've borrowed from
future generations, and we're going to have to pay the piper at some point.
interesting, when you say that we are at a sort of halftime. There's no
halftime for the deficit spending. It's roaring ahead. Debts are continuing
to pile up. Actually, I heard in the news today that the House voted to not
increase student loan rates. Heavens forbid you do anything that's going to
gore anybody's ox, but at the end of the day you can't just keep this
spending up – and somebody's ox has to get gored. This is a true
John: It is, but
you're not going to see any ox get gored by either party prior to this
David: But there's
always an election. Won't you then see the same thing happen even after this
John: That's why I
think 2013 is such a critical year. If we don't do something about our
deficit and our debt in 2013 – and it has to be a really significant
game-changer; we can't nibble around the edges like we talk about –
it's got to be a massive restructuring of our society. If we don't do it in
2013, I don't see how we get it done in 2014, an election year. I don't think
we can make it to 2015 before the bond market starts to jerk our chain, which
says that 2013 is the year to see something get done. If we're sitting at
this conference in 2014 and we haven't dealt with it, rather than me being
the most bullish person at this conference – even though I think we've
got a great deal of pain in front of us – I’d be just as bearish
as poor Doug, which would be very, very sad for the country. One of the things
that I'm most fervent about is that I want Doug and Porter to be wrong.
David: Yes. Well,
here's the question. Every time over the last few years that the Republicans
and Democrats have agreed to sit down and really get this problem fixed,
they've come away with absolutely nothing. I forget what the most expansive
program they have proposed so far, but it's something on the order of, what,
cutting $100 billion over 10 years? It's just complete nonsense. To think
that between now and a year, year and a half from now they're actually going
to have that sort of "come to Jesus" moment and say "All
right, now we're really going to cut a half a trillion out of the
John: We're going
to have to cut something close to $800 or $900 billion. It's a huge number. It
can't be done all in one year. It has to be done over five or six years. We
have to have some growth as well. Say you start talking $150 billion a year.
You're talking 1% of GDP that we're going to reduce. It'll have an effect for
about a year – and then we're going to do it again. So what we've done
is we've locked in slow growth. We've locked in a muddled-through economy,
and that's without a recession. If we have a recession, it makes the
situation worse. We will have a recession during that period. You
don't go for 10 years without a recession.
It is problematical. If we don't do it, we get to the
place where Greece was or Spain is or Italy is; the markets will begin to
force us to do it. Spain would be in a catastrophic situation if it was not
for the fact that the ECB put one-point-something trillion euros together.
Without Europe, the ECB or somebody putting another trillion euros together,
Spain will in fact have their own moment where they can no longer borrow
money at rational numbers. The interest rates go hyperbolic on them, and they
start having to talk default.
David: It was
interesting that Lacy Hunt, who was the former chief economist at the Dallas
Fed, I believe, was saying that the Fed doesn't control interest rates. On
the long side as we know, this is true. However, when they make a promise
that they are going to maintain current low rates through 2014, there's
really only one way they can do that, which is to go into the Treasury
markets. If there is an insufficient demand to buy the Treasuries, they've
got to step up to the plate and create the money. So, in fact, they do still
have some way to exercise control over long rates.
moved out the yield curve. Five, seven, in some cases ten, to bring those
rates down. That shouldn't surprise us, because that was precisely what
Bernanke said he would do in 2002, when he gave his famous helicopter speech.
I'm sure he regrets that now, using the helicopter analogy. That was supposed
to be an economist joke. It was told to an association of economists, and I'm
sure the economists laughed, because it was kind of an inside chuckle, but
the rest of the world didn't get the joke.
But the more important thing than the
helicopter-dropping-cash part was that he said: "We'll move out the
yield curve if we have to." Because he's a Keynesian, and at their
hearts they believe it's consumer spending that
drives the economy. Now, a good Austrian like yourself or a quasi-Austrian
like me would say: "No, it's productivity and
supply." It's the creation of lower-priced goods that will create the
demand. You have to have that first. It's an opposite perspective. Right now
the Keynesians have the reigning paradigm in the entire developed world and
most of the emerging markets – until that thought process is destroyed. They're in the process of doing that in
Europe – that experiment is beginning to show
itself as not working.
David: Except for
the French. It looks like they're going to elect a socialist.
John: Yes. That
makes France my candidate – which I've been talking about for some time
– for the next really big black swan. Right now nobody is talking about
France being a problem on the scale of Spain or Italy. I would suggest that
they won't be a problem on a scale of Spain or Italy; it'll be Spain and Italy
together and doubled. France will be the final negative outcome, the final
nail in the coffin, however you want to call it, to
Europe. Hollande only makes it more likely that it
will happen. You would like to think that the French could wake up when they
walk into the polls and say, "Oh my God, we really can't put this crazy
man in." When you look at what he's saying, it's totally absurd, and
they're already careening dangerously close to the edge of the cliff. But if
they do, then they just get further down the road. France has got some real
David: One of the
things that is so interesting in all of this, is
that there are a lot of people who view this through the lens of history:
"Here's how these things ought to work and where they should go."
But it seems to me that there's years and years of a
sort of dead wood of building up, laying on the ground of socialism, if you
will. People have been educated to expect the government to fix everything.
Whenever there's a problem, the first thing they do is they hold
congressional committees. My God, they're still chasing after Roger Clemens
over whether he used steroids or not. Baseball players have to have a level
field, so let's get the government, they can fix that too!
And again Europe – France is a very good example.
You have a scenario where the French people are tired of this crisis, tired
of the problems, tired of the unemployment, tired of everything that's going
on, and they want the government to fix it, damn it! So their solution is, "Okay,
the right-wing guy didn't fix it, let's bring in the socialists now. They're
going to fix it." But the way they're going to fix it is by putting
chickens in every pot. But in reality, they don't have any money. They're
broke. All of these big Western economies are broke. So looking from what I
would call a less traditional perspective, it seems to me that your phrase
"end game" is a very good phrase because it seems like this has got
to come to an end. It can't be a soft, fuzzy end, because people want immediate
satisfaction and that's understandable.
If you don't have any savings in the bank, you're
living hand-to-mouth, you could lose your house, you lost your job, and you
can't find a new one – which applies to an awful lot of people –
you want a solution and you want it now. You're not going to wait five years
down the road for that chicken in the pot. So there's a good chance, it seems
to me, that the public are going to lose patience with this. But the
solutions that they're going to want to see are not the solutions that would
actually fix the problem. That is to say: going back to freer markets to
lowering taxes, even on the wealthy, reducing regulations, and reducing the
amount of services the government provides. It seems like that's the complete
opposite of what people would actually politically accept. What's your
general view on that?
John: Greece is a
good example, and they're the easy example. Greece has a choice between the
disaster of staying in the euro or the equally bad but different disaster of
leaving the euro. They only have a choice of which disaster they want to
choose. One is a long, slow disaster – staying in the euro because
their wages have to equalize. That's a depression for another 5-10 years.
Leaving the euro, going to the drachma, would be a deep and quick recession.
If they went into the drachma and tried to recover with the same set of rules
they have now, it will halt and make their recovery much more difficult.
You've really got to hit the reset button on not just the currency but on a
whole host of things.
David: This is not
John: It's now
becoming Spain. Without the European Central Bank being willing to put in
another trillion dollars and hold those interest rates down, Spain has the
same problems. Spain becomes Greece. Europe has got to spend trillions of
euros to give their governments the time – Spain, Italy, Ireland,
Portugal – to be able to reduce their deficits and get their balances
into a primary surplus. Without concerted monetary printing that can't happen.
David: But don't
stop in Europe. We also have Japan.
John: Well, Japan
– I'm well known for my bearish views on Japan.
basically, it really is a global phenomenon.
John: It is a
global phenomenon of the developed world. The good news, if you were Brazil,
was that nobody would lend you money at reasonable rates, so you didn't get
in debt. There are a lot of countries that aren't in debt, and they're going
to be able to just chug right along, thank you very much.
And it's not like the United States or Europe is going
to go away. What I was trying to say, semi-tongue in cheek today, was how
bullish I am because we're coming to the end of the ability of governments to
borrow money. We're going to stop misallocating capital via government spending,
and we're going to start allocating it properly to productive resources. Well
now, that transition is very difficult. It's either very bumpy and it's a
slow muddled-through grind or it's a crisis here in the US. But either way
you get to the other side of it. I don't think it's going to take more than
about five years. One way or another, we're going through this by the latter
half of this decade. Then it becomes quite bullish because we then can have
some certainty we've restructured. We've rationalized the debt in one form or
another, and we can start moving forward. But the ride between here and there
– the difficulty for investors is that we have to make sure we get as
much of our capital that we have today, as much as our earning power that we
have today, to the end of this process.
David: And the best
way to do that?
John: We don't
know and probably won't know for another 15-18 months. The best thing to do
now is to hedge your bets, diversify. I want income. I want to be able to
make as much money on my assets as I can, but I don't want to have to commit
to a 5- or a 10-year process.
If I could buy distressed real estate that will produce
income – that I can be reasonably sure there will be people who will
lease it for industry, either business or individuals – that's a
productive asset. If we have an inflationary episode – which I think is
the more probable scenario, not the hyperinflation that Porter's talking
about, but inflationary – real estate will be a good asset to own, if
you bought it at distressed prices today. Even if Lacy's
right and we see a true deflation (which is hard for me to see where we get
long-term that way – I could certainty see that in a short three- to
five-year term span) you've still got a productive asset.
I want to own companies that are producing things that
people want to buy. The advance of technology is not going to slow down.
There are places to put money to work. There are opportunities that we have
to get our money from A to B to C. But the traditional index funds, the
traditional things that people have most of their pensions and their savings
in, is not where you want to be.
David: There's a
huge amount of money that of course has gone into bond funds in recent years,
and that trade is probably getting a bit long.
All right, well I think that's a good place to leave
it; and thank you. We could probably just sit here and do this all day.
John: Well, let's
do it again.
David: We shall do
it again, and thank you for coming to the
John: Thank you.