There is a level of (let's call it) discomfort among investors and business people everywhere I go in the world now. It is becoming increasingly palpable with each passing month. The overriding sentiment seems to be, "That which cannot be sustained will not be."
We live in a world that is premised on economic structures that are now unsustainable, and that is a word we are going to hear used more and more this year. Unsustainable. It will be a theme in my writing, not only in my annual forecast issue, which will be out in a few days, but throughout the year. But just because things are unsustainable does not mean the end of the world for you and me. It is just that our world will change. Our job is to make sure that we manage the transition.
Transition. That is another word we are going to see a lot this year and next. I am going to invest a great deal of my intellectual capital (meager as it is) in thinking about how we transition our lives (not just our investments!) through the Endgame of the biggest bubble in the history of the world, that of government debt and promises. That bubble is going to collapse, in one way or another. Our job is to make sure we are not in the vicinity of ground zero. Meanwhile, there are a lot of positive things happening that we do not want to miss while our governments are busy rearranging deck chairs and kicking cans.
In today's Outside the Box, the first of 2013, we’ll look at the opening pages of an important paper written by Daniel Stelter of the Boston Consulting Group. I have his permission to send it on to you. At the end of the letter is a link to my site, where you can read the rest of the piece (his suggestions for government action) if you are interested. If you are not registered on Mauldin Economics, just put in your email address and then you’ll have immediate access.
Warning: there are sections of Daniel’s article that are not politically correct! I can guarantee you that you will not agree with all of his ten suggestions. Some will raise your blood pressure. But I suggest you read from the point of view of understanding just how difficult it will be to resolve the problems our governments have created.
Let me quote from Daniel’s piece (emphasis mine):
No one knows how long the developed world’s Ponzi scheme can go on without causing major social and economic breakdowns. As long as it does, however, economic uncertainty will remain high. One indicator of growing uncertainty is an index developed by economists Scott Baker and Nicholas Bloom, of Stanford University, and Steven Davis, of the University of Chicago. Their “economic policy uncertainty index” shows not only that overall levels of uncertainty have risen since the financial crisis, but also that this uncertainty is increasingly driven by political disputes over economic issues rather than by events such as 9/11, for example, or military conflicts such as the First Gulf War. To the degree that politicians and other leaders fail to address the structural challenges described in this paper, the odds of economic paralysis go up. The underlying issues cannot be ignored any longer. The developed world faces a day of reckoning. It is time to act.
I will be with Dan in London in 10 days, along with my Endgame co-author, Jonathan Tepper, as well as Simon Hunt, Dylan Grice, and Anatole Kaletsky, among other notables. It will be an interesting discussion.
I am sitting in a rather idyllic setting as I think about unsustainability and transition. I am at Jon Sundt's Hollister Ranch home in the mountains overlooking the Channel Islands and the Pacific. It is remarkably beautiful and serene. I am glad he pays California taxes so I can come and enjoy this piece of heaven a few times a year. Jon is a world-class surfer (even at 50), and the surf the last few days has been huge. The best surf in California is arguably right down at the foot of the mountain here. But as with our global transition, to get from the top of the mountain, where all is calm and serene, down to the exciting edge between order and chaos where the surf rolls in, involves trekking over some narrow, twisty roads and rough terrain. If you have the right vehicle and know what you’re doing, it’s no problem. But you have to be careful on the hairpin turns, to make sure not only that you stay on the road but also that there is not someone coming the other way. Local knowledge is critical for a safe transition from the mountain to the beach. A rather fitting analogy for what we face in our lives.
I have been having serious hardware issues with my nearly new Hewlett-Packard laptop for the last few days, and it has again broken on me. I have a less-than-optimal workaround, but that might mean that this weekend's letter will be a day late, as I may have to finish it in Copenhagen, since I won't get new hardware till Sunday. We'll see.
Let me wish you a very Happy New Year. I will do what I can to help us all think through the issues we face, and I will even try to suggest a few solutions. Now, let's see what Dan has for us and mull over the Ponzi scheme that is government.
Your thinking about the road ahead analyst,
John Mauldin, Editor
Outside the Box
Ending the Era of Ponzi Finance
Ten Steps Developed Economies Must Take
Daniel Stelter, with contributions from Ralf Berger, Jendrik Odewald, and Dirk Schilder
“Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is a large weight to units engaged in speculative and Ponzi finance. . . . The greater the weight of…