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    Outside the Box

    I’m Worried

    April 10, 2012

    I debated with myself about what to send as this week's Outside the Box. I have decided on a recent short but important post from my friend David Kotok, Chairman and Chief Investment Officer of Cumberland Advisors. He calls it "I'm Worried." There are some very thought-provoking ideas here, but what makes it particularly interesting is that I'm running into this sentiment more and more as I travel around the US; and when I'm abroad I also hear from people who are worried about the US. These are folks who rightly realize the world needs a strong US, both as an economic engine and as a leader – a chairman of the board, if you will – of a growing world. (Can the world grow and prosper without us? Of course, but not as easily, and the transition will not be pretty.)

    So this "worried" theme is one I hear, read, and see firsthand more and more each passing week. It's that gnawing feeling that things are just not going right and that our leaders are simply not up to the task of setting the ship on a steady course, even as they almost universally acknowledge we are on the wrong course and assert that the deficit must be dealt with. As with David, this concern is most vivid for me at the close of the day as I review my own thoughts and think on the future of my family and friends.

    This deficit of ours is the single most important political and economic question of our time. How we address it, or fail to address it, will set an economic course that can once again turn vibrant and hopeful, or one in which we find ourselves sideways to some monster waves, and capsize. We watch Greece and Spain and worry as we look askance at our own fiscal situation and wonder whether we will be able to kick the can around the deck for "just one more year," before our ship is on the rocks. There is a growing sense that the last one more year may be fast approaching, through the fog. Europe is already there. Can our own denouement lie very far ahead?

    I have known Kotok for the better part of a decade now. Mostly, he is a quite bullish and optimistic fellow; and, as he notes, he is fully invested in his client accounts and has caught the latest ride. He organizes the annual Maine fishing trip that has become quite the gathering of economists and writers. There, he has often chided me in the wonderful Maine evenings for what he perceives as my bearish views, although last year with Nouriel Roubini there I was at least not the most bearish of the group.

    My main view, say a 60% probability, is that we do in fact deal with the deficit here in the US in 2013. I will enjoy becoming bullish once again and telling my kids to look to the future with hope. But like David I am worried. What should be just a bump in the road for the US and the free-market world can become mountainous if we do not face the real problems before us, if we do not recognize that "We have met the enemy, and he is us."

    I choose to remember that David, in his brighter moments, is not quite so brooding. A good night's sleep may help. And yet, he voices a concern that is moving from the backs of our minds to the forefront with increasing urgency, across the full political and social spectrum. The drumbeat is becoming insistent that something must be done, and soon.

    (You can read more of David's commentaries at www.cumber.com.)

    I was in New York last Wednesday, and Tom Keene of Bloomberg TV was kind enough to invite me on his show for an extended interview and thoughtful exchange, not the usual two-minute drill. You can see that interview on johnmauldin.com. The link is on the left side of the page.

    Have a great week. I think I will write to my friend Louis Gave and tell him to send me something bullish for next week's Outside the Box. I can usually count on him to find the silver lining. And now if someone can just arrange for some sun in San Francisco this weekend, I am sure I will get more positive about the world. David, maybe we should invite Louis to Maine to perk us up?!

    Your really believing we Muddle Through analyst,

    John Mauldin, Editor
    Outside the Box

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    I'm Worried

    A note to readers. This 2000-word commentary is a longer-term view; think in terms of years, not months or days. The essay is not in conflict with the fully invested position currently held at Cumberland. The words reflect my personal thinking only. Some of my colleagues disagree. In my personal view, the future is uncertain (of course) and may be unattractive for the longer-term outlook. In my…

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    Comments

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    Alexander Gloy

    April 10, 2012, 8:19 p.m.

    Ah, the Maine fishing trip, “where, it is rumored, most of the nation’s important economic and financial decisions are actually made” (source: Cumber.com). “Of the 26 participants in the Friday night survey, four expected at least one European country to default or to reschedule in the next year” (source: Kotok’s comments on Maine fishing trip, August 9, 2010). So let me get this straight: 84% of those geniuses didn’t expect Greece to default? And you claim to make most of the nation’s “important economic and financial decisions” while holding a rope into the water?

    Russ Abbott

    April 10, 2012, 6:53 p.m.

    David, You seem to be worried about debt and taxes.  I suggest that you look at the history of the US from the end of WWII to the election or Reagan. It started with extremely high debt. It included extremely high tax rates. Yet it was the most prosperous period in our history. Perhaps we should repeat the policies that succeeded so well then.

    Charles Yaker

    April 10, 2012, 5:46 p.m.

    For what it’s worth and I suspect only derision on this site but the answer according to MMT is reduced taxes and increased spending. Balancing the budget or reducing the deficit will lead to a recession or Depression. We are not Europe the Nations of Europe are like our States we control our destiny they do not. On the other hand gridlock and winner take all doesn’t work for anybody. The US has always thrived on compromise except in the Civil War,we know what that caused and now. Despite what you say about Obama (don’t think I like him) he did try and compromise and tried to move toward the Republican position and each time they dug in and made further demands. That isn’t the American way.

    Mark Fisher 22970

    April 10, 2012, 3:19 p.m.

    The problem with spreading the word is that few also offer tangible prescriptions for correction. We cannot rely on merely knowing and spreading the truth but we must offer discrete steps that can be undertaken by those of us who comprise the great unwashed and thus amongst the first relegated to serfdom.

    I note that there is a law pending in the Congress to make foreign travel illegal for those who owe taxes. Rome rises!

    Lawrence Glickman

    April 10, 2012, 2:44 p.m.

    This is not the fundamental issue at all. The decision to enter the global economy set in stone what is happening right now, namely the shift of older demographic high wage and social safety net countries to younger demographic cheap labor with few social safety features, type countries. The real issue is how to engineer a soft landing. There is no way that any policy shift can compensate for the addition of 3 billion new competitors armed with commodity abundance and intellectual property gleaned by force through poorly thought out trade agreements or stolen over the internet.  The real issue is honesty. The time has come to tell the citizens of the developed world that we are broke and the standard of living in all developed areas will be declining to some world standard. If the special interests and lobbyists were somehow removed then perhaps real free markets might take care of some but not all of the pain. Health care is the best example. An aging population needs affordable healthcare and drugs.  The world standard in “developed” countries costs 30-40% less per person than in the USA because of money spent by lobbyists for the drug companies, AMA, insurance companies and lawyers. Take that example across the board and we might be on our way to a realistic “soft landing”.

    Gerald Eddy

    April 10, 2012, 1:26 p.m.

    With the possible exception of Switzerland (where health insurance is mandatory for all residents), the US is the least socialized major country in the world.  Why can’t we agree on a Bowles-Simpson solution?  It appears to be the best thought out strategy thus far, but neither the left nor the right seems to give it credence.

    Mike Breslin

    April 10, 2012, 1:05 p.m.

    There’s an error in David Kotok’s writings, in the quote from Vincenzo.  Diocletian did not live in AD 3, but rather from 244 - 311 A.D.  Under his reign came the last and greatest persecution of Christians, just before he resigned, split the empire into two, and Constantine took it over.

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