Thoughts from the Frontline

The Beginning of the Endgame

By John Mauldin

July 14, 2012

Choose your language

Your Not So Bearish but Definitely Concerned Analyst
A Quick Trip Around the World
The Beginning of the Endgame
The Attack of the Zombie Banks
The Unmentionable Problem of Europe
The New Religion of Europe
Will All Europeans Become Germans?
Cincinnati, New York, and Singapore

"Come, Watson, come! The game is afoot. Not a word! Into your clothes and come!"

– Sherlock Holmes

About this time two years ago I began to seriously work with Jonathan Tepper on our book Endgame: The End of the Debt Supercycle and How It Changed Everything. It came out the following March. I remember vividly that in November of that year, as crisis after crisis hit Europe, and the first of about 20 summit meetings which were supposed to solve the crisis was convened, that Jonathan and I worried that the book would not be out in time to actually catch the Endgame before it happened (at least in Europe).

Ah, such naiveté from your humble analysts. While we predicted (in general) pretty much everything that has happened so far, from Greece to Spain to Italy, the problems with "austerity" in times of crisis, the even larger eventual problems of postponing the day of reckoning, etc., we now must stand back and shake our heads in awe and wonder at the ability of European leaders to kick the can down the road. Given the serious nature of the problems, it is amazing (to us at least) that they have been able to keep the wheels from coming off. In the face of the powerful centrifugal forces that should have torn Europe apart, we must pause and give serious thought to why they have not done so already.

(In the book, we also discussed at length the problems in Japan and the US and looked at several other problematical countries, but we were not worried that those events would preempt our publishing deadline. Those problems are still in our future, but coming at us ever faster as times gallops on.)

For the last year I have been writing that it is not clear that Europe (with the probable exception of Greece) will in fact break up. The forces that would see a strong fiscal union are quite powerful. In today's letter, I will try to bring you up to date on some insights I have had in the 18 months since we did the final book edits.

Your Not So Bearish but Definitely Concerned Analyst

I want to start with a simple observation. I am described by most of my readers and certainly most of the press as "bearish." I am not. I am actually quite the optimist. I have a very positive outlook on the rise of the human condition and the accelerating pace of technology, and believe we are at the brink of an unimaginable era of abundance. My…

Discuss This

12 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Page 1 of 2  1 2 > 

Tom Grey

July 16, 2012, 11:17 a.m.

Fine post.  When CA was out of cash a couple years ago, they temporarily issued “IOUs”.  I advocate CA again paying its bills with 1 year, 0%, bearer bonds—which it will accept as tax payments at full value immediately.

I also advocate for Greece to do so.  And for Germany (and Finland, and Slovakia), and Spain and Italy. 

You note that Japan has not (yet) failed because its 250% of GNP debt is held ... by the Japanese.  If Euro governments use Bearer Bonds to pay bills, those receiving payment will be “loaning” the gov’t the money the gov’t needs to avoid bankruptcy—because bankruptcy is caused by lenders who cease to lend in combination with a monetary authority who doesn’t print money.

The ECB should already be printing more money; perhaps too the Fed and even the BOJ.  The inflation “tax”, if kept to about 5-10% per year, may indeed be difficult to put back down if it goes up, but is likely to be a much less bad Disaster C.

David Dukes

July 15, 2012, 3:30 p.m.

You said, “What I am bearish on, however, is governments gone wild with ever-increasing taxes and spending,”.  What do you say about the business world in general, in the light of JP Morgan Chase and Barclay’s recent illegal shenanigans?  You put the fault on government, when just as much belongs to big business.  (Don’t get me started on big religion).
It seems to me big business started digging this hole and big government has jumped in with another shovel.  Either way taxpayers/consumers are left holding the snipe bag.  On a smaller scale that highlights the evils of big business take a look toward North Carolina and the Progress Energy / Duke Energy merger.  Plenty of shenanigans going on there.  The new CEO resigns 20 minutes after being in charge and leaves with 45 million severance.  I really wish you would write an article on how much dishonesty in business has contributed to our financial problem.  Should more CEO’s and big shots have served some jail time?  Very few have, but they have received some golden parachutes and wonderful bonuses even when their business was average a best.  Let’s hear a bearish article on business please.

Bearish on Big Business.

Greg Webbink

July 15, 2012, 9:16 a.m.

First, could Mike Shedlock or someone explain the missing 54,970,463 persons on government pensions that would confirm his “finding” that “The US now has more people on government pensions than workers in the private workforce”?

Second, the anxiety of the City and Wall Street to be bailed out (again) needs to turn to “dealing without it”.  The Europeans will solve their problems and make these guys pay for their own incompetence.  The taxpayer will get hit either way, and realizes that at least wiping out these idiots and starting over may mean this is the last time, even if it is more painful, such wealth transfers will occur.

Clifford Baum

July 14, 2012, 11:06 p.m.

Mr. Mauldin:

I always find you letter informative, however, there is one paraqraph in your 7-14 2012 letter that I do not understand.  Would you clarify the following?

——————————
Sidebar: my friend Mike Shedlock chronicled this week a rather sobering set of statistics. The US now has more people on government pensions than workers in the private workforce.

· As of 2012-06 there were 111,145,000 in the private workforce.

· As of 2012-06 there were 56,174,538 collecting some form of Social Security or disability benefit.

· The ratio of SS beneficiaries to private employees just passed the 50% mark (50.54%).
——————

How can 50.54% be more than 1.

maurice newman

July 14, 2012, 9:36 p.m.

John,
I find it faintly amusing that highly regarded veteran analysts like you find it necessary to dispel any perception that you are a perma-bear or pessimist. Evidence is evidence, although, as you correctly suggest, it is an ill wind that blows no good. However, there is a risk in searching for silver linings that we can lose perspective and create moral hazards for others less well positioned. This is especially dangerous in ageing populations.
The human condition can manifest itself in many ways but given the fragile state of the global economy, and the economic misery now being inflicted on millions of people including in the US, this is unpredictable.
The world now faces a situation created by post modern economists, conceited politicians and reckless central bankers who have rightly lost credibility. The people are smarter than their leaders and are feeling betrayed. They watch taxpayers being subordinated to bank investors. In Europe they live with a failed experiment which vanity perpetuates. Voters reject the past, are uncomfortable with the present and are fearful of the future. They too can kick the can down the road.
Unless and until bank and national balance sheets are restructured, trade imbalances addressed and debts and deficits arrested, the path to recovery is becoming increasingly painful and difficult.
World leaders have fed us false hopes for too long.  It buys time which is our most limited resource.
What time there is should be spent on thinking the unthinkable and preparing accordingly. That is where the evidence takes us until the facts change.
Warm regards,
Maurice Newman

Ned Bright

July 14, 2012, 6:39 p.m.

You have sovereign debt crises, not primarily because governments spend money they don’t have, but because governments have unwisely taken on the debts (bought the toxic assets) of their wayward banks.  Governments have done this of course because when elective office is periodically put out to tender, the banks are the high bidders.  Deleveraging from 50:1 (a slide which could be precipitated by a very small fall in the value of bank capital) means the banks are on the hook for much of the 600 trillion or so of credit which they created (on the back of low interest rates).  Banks appear solvent because they have been let off marking their assets to market. In fact they are ALL zombie banks.  No matter how much money governments inject into these walking dead, they are not going to have the wherewithal to create jobs on any scale. That fact spells the End Game in my view.

Michael Gorback

July 14, 2012, 6:15 p.m.

Let’s see. You can let deflation take its course and hurt the debtors, or you can inflate and screw the lenders. I wonder what those indebted governments will do? Wow this is so hard to figure out.

Bruce Rae

July 14, 2012, 6:12 p.m.

I agree with one of the comments made already that the problem is currency union, though could the real issue be one fixed exchange rate for all euro members. I have probably missed your earlier references to it, but could the euro still be used with different fixed rates for members. I think you wrote awhile ago that the Swiss franc is fixed to the euro. Of course, there is no silver bullet for the euro crisis, but this measure would at the very least inform citizens and workers in different member countries of their relative productivity and make them pay for it with more euros than their more productive members. As far as being a gigantic “bear” goes, I think most investors or traders confuse the relationship of economies and markets. In my view, the banks control both, but they’re dealing with different stake-holders: politicians and the general populace, and traders and investors. The banks will keep lobbying for more government money and fewer regulations, while trading and creating problems for the rest of us. It seems to me they make and lose most of their money in the markets, so why would they stop doing that, regardless of the state of the nations around the world.

Patrick Lynch

July 14, 2012, 4:55 p.m.

This is a really good analysis of where we are. Well done John

Rodger Malcolm Mitchell

July 14, 2012, 2:17 p.m.

The only correct way to look at transfer receipts is on the basis of percentage, per capita change from the previous year.  Looked at correctly, transfer receipts are quite low.  See: http://research.stlouisfed.org/fredgraph.png?g=8KR

This is a shame. The U.S. federal government (unlike the euro nations) is Monetarily Sovereign, so has the unlimited ability to create its sovereign currency, the dollar.

Social Security and Medicare benefits are economically stimulative.

Page 1 of 2  1 2 > 

© 2013 Mauldin Economics. All Rights Reserved.

Thoughts from the Frontline is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.

Please write to subscribers@mauldineconomics.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.MauldinEconomics.com.

To subscribe to John Mauldin's e-letter, please click here: http://www.mauldineconomics.com/subscribe

To change your email address, please click here: http://www.mauldineconomics.com/change-address

Thoughts From the Frontline and MauldinEconomics.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin's other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA, SIPC. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee.

Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at www.MauldinCircle.com (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs may or may not have investments in any funds cited above as well as economic interest. John Mauldin can be reached at 800-829-7273.