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Thoughts from the Frontline

An Infinite Amount of Money

March 6, 2013

The three major blocs of the developed world are careening toward a debt-fueled denouement that will play out over years rather than in a single moment. And contrary to some opinion, there is no certain ending. There are multiple paths still available to Europe and especially the US, though admittedly none of them are bright and carefree. There are very few paths available to Japan, as they have skipped too far down the yellow brick road of debt. None of Japan’s remaining paths have good endings. In the US, even as numerous voices declaim on the crisis that awaits if we don’t act, there is seemingly no collective will to actually do anything as yet. Perhaps it will take… a crisis. In Europe, the peripheral countries can already be said to be in crisis.

This week we will look at the mindset that ignores warning signs, and reflect on a hard-to-believe comment from Mayor Bloomberg of New York. It is a teaching moment that does not bode well for my hopeful outcome in the US. Meanwhile in Europe, the risks have been heightened with the recent vote in Italy. We must remember that Italy is the world’s third-largest issuer of bonds – its problems matter on the world stage. While it may all be molto divertente for those of us sitting on the sidelines, the potential consequences are anything but amusing.

But before we get going, if you are a qualified purchaser or an investment advisor in the US, I would like to invite you to listen in as I interview Jacob Gottlieb, CIO of Visium Asset Management, on Tuesday, March 26 at 12:00 p.m. EDT, 9:00 a.m. PDT. Visium is one of the premiere long/short multistrategy managers in the investment industry and of great interest to me. I will ask where they are finding alpha opportunities today, as well as share my own thoughts on the global economy and outlook. This discussion will be hosted by my partners at Altegris Investments. Please register for this exclusive webinar through The Mauldin Circle. If you are already a member of the Mauldin Circle and a qualified purchaser, you will receive an email invitation to the webinar. A replay will be available to registrants unable to attend. I apologize for limiting this discussion to qualified purchasers and investment advisors, but we must follow the rules and regulations. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

An Infinite Amount of Money

I am often asked, “How can anyone not see the problems of growing debt in the US? Why can’t we get a consensus to change?”

Part of the problem is that too many in power just don’t see the impending crisis that you and I see, or at least they don’t see the need to act now. That is changing – or so I thought until…

Discuss This


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Don Braswell

March 12, 2013, 7:20 a.m.

John,—Not exactly on this topic, but an interesting question I haven’t seen discussed in any media.  How much of our recent jump in employment is due to the NEW 29-hour work week?  I put NEW in bold, because it is a simple law of supply & demand. 
—A 30-hour worker is defined as “full time” by Obamacare, so wouldn’t firms hire 29-hour employees?  A 29-hour employee would cost a business $7.25 per hour (depending on location), and a company pays their salary of $14,500 plus Social Security and Medicare.  Meanwhile a 30-hour worker would cost $17,000 (salary of $15,000 + $2,000 Obamacare penalty) per year plus social security and medicare. 
—When I do this math, the extra 50 hours from the 30-hour worker costs me $2,500 per year or an effective rate of $50 per hour for the extra hour per week.  This assumes that I pick the $2000 penalty and don’t attempt to provide health care at a much steeper cost. 
—Doesn’t Economics 101 dictate that an employer will seek this large efficiency especially in an economy with a surplus of 29-hour labor?  So, the increase of workers last month may have been due to companies hiring more workers to cover 29-hours per week, while the “underemployed number” sticks at about 16%? 
Just a question from the cheap seats.  I’d like to see that math and compare the number (percentage) of 29-hour work weeks today versus the number of 29-hour workers from the pre-ObamaCare days?  All the best…

March 6, 2013, 8:19 a.m.

In Charlie Roses’ interview this week with Krugman and Scarborough, they spent one hour debating whether or not debt should be maximized to an “acceptable” debt vs GDP ratio, or should be lessened by cutting spending a little.  Not one time was it brought up that we borrow 46% of our spending dollar, that amount presumably with not even a scenario for repayment, but obviously to be passed on to the next generation(s).  I do not see this as being on the radar in this discussion either (certainly not by Bloomberg).  With each child being born with a starting (startling?) debt of $53M not including UNFUNDED [unfundable?] pledged liabilities of several times that amount, does this not rise to blatantly STEALING from our children and grandchildren for our own selfish benefit, and should that not be an issue of the first order in discussions such as these?

March 6, 2013, 5:38 a.m.

I am mystified at the intense focus you and many other members of the financial elite (not meant in an unflattering sense) place on the threat of the debt to the exclusion of all other issues that affect the lives of your countrymen and the state of your country. Your government is dysfunctional, half of your population yearns for a golden past that was only golden for some, your infrastructure is decayed and collapsing, your educational system serves fewer and fewer people and your income distribution has become so skewed that it threatens your ability both to generate growth and to support a functioning democracy. There is a debt problem and measures should be put in place to deal with those measures but they ought not to be instituted now. The primary focus should be on reviving economic growth so that net government income can rise at a reasonable rate and consumer expenditure can return to normal yet neither you nor your associates are talking about this. Don’t you think that a plan, supported by those who have benefited most from the recent growth (and may have contributed to the recent financial debacle) that urges immediate modest expenditure increases allied with clear longer term actions to rein in debt would be a more useful contribution to your country’s policies than what looks increasingly as recommending actions that seem to fall on those least able to bear them while avoiding any serious consequences for those at the top?

Richard Davis

March 6, 2013, 4:53 a.m.

2 disjointed thoughts on your article…

1. I agree with the “muddle along” scenario for the euro, but for different reasons than yours.  You have articulated the high-road case very well.  I subscribe to a low-road motive by country leaders that goes something like this: “If we remain in the euro, and things go horribly, my fellow citizens will blame OTHERS (Merkel et al).  If we exit the euro and things go horribly, they will blame ME!”  No one wants to be viewed by history as a failure, so not one will bolt the euro until forced.

2. Your thoughts about moving touched a nerve; my wife and I are in our 8th home, and will probably move a couple more times in the future.  Like you we always seem to add more stuff with each move, and we always resolve that “this time is different.”  But if we cannot demonstrate austerity by ourselves, how can we expect it of others? 

Your story about moving has given me a brilliantly simple way to explain the austerity problem to my children.  Thank you.

Jerome Barry

March 6, 2013, 4:32 a.m.

Hello John,

I know you expect a lot from your Chinese translators, but “hell-bent for leather” is just merciless.

Vincent Roach

March 6, 2013, 2:55 a.m.

Almost an infinite number of words have been written and spoken about this issue, in general, and specifically about the state of current sovereign debt. But a most elegant quote from an iconic exmaple of political leadership with respect to this issue, sums it all up - apres moi, le deluge.

Diane Card

March 6, 2013, 1:14 a.m.

John - not a comment on this article, but a long overdue thank you for sharing your thoughts with us.  I’m sure it takes a lot of time out of your busy schedule to do this, and I appreciate it.