Outside the Box

Sorting Out the Decade

December 15, 2012

In today's Outside the Box I bring you two pieces that, at first glance, may not seem to have much to do with each other. First, Bill Gross, PIMCO managing director, runs down the fierce structural headwinds that our hard-pedaling global economy faces over the next decade. I am going to deal at length with not only his GDP projections for the rest of the decade but those of Grantham and others in the last two Thoughts from the Frontline of this year. This is a challenging environment for traditional portfolio construction, but it’s par for the course as we slog through the secular bear market I was first writing about in 1999.

Then Charles Gave instructs us on the distortions in the measurement of risk that have been introduced as the "plain, boring and well-meaning economists working in the entrails of the world central banks" have supplanted the Marxist avant garde in the world's shift away from “scientific socialism” to "scientific capitalism."

However, when you think about it, these pieces dovetail in a very convincing – and somewhat frightening – manner. Because what they add up to – if the econocrats are yanking the rug out from under a capitalist system that is already reeling, as Gross says, from debt and deleveraging, a slowing of the locomotive of globalization, and dislocations in technology and demographics – is a profound, ongoing challenge to you and me as investors. Gross and Gave have their own ideas about how we get through this. I don’t agree with all their conclusions – this letter is not called Outside the Box for nothing – but I offer these essays because they’ll make us think through our own presuppositions. However you view their analysis, they do reinforce the idea that we're all going to have to be not only careful but very nimble. 

I post this note from 35,000, feet flying back from Cleveland to Dallas. American Airlines has now put internet on nearly all of their domestic flights, and I find the time I spend read and respond without interruption up here some of the more productive time I get. Which is good, since the record shows that I have been on some 110-plus different planes this year, most of which were AA. (Lately, when I am asked where I live, I just say my closet is in Dallas.)

It is not just me but other “road warriors” who have noticed that the staff of AA have markedly stepped up their personal service levels (as opposed to United, when they were in similar financial difficulties). More than a few of their employees have gone far out of their way to make my difficult travel schedule a little bit easier and smoother, from frontline staff to their back-office phone mavens, who often perform a little bit of magic rearranging my schedule. And as they add newer planes to their fleet, seat 5B has almost become my home office. So here’s a tip of the hat to them and all the service people who make life on the road better. And may your own road be a little smoother these holidays.

I spent last night at Dr. Mike Roizen’s home before seeing a few doctors at the Cleveland Clinic. I rode in a limo with him to a speech in Youngstown, Ohio, and we had time to visit at length. Mike has become one of my dearest friends, and our times together are easy ones, deeply treasured. Without this peripatetic life I would not have so many good friends, far and wide. It is the best perk of traveling.

Mike is on the board of the Cleveland Clinic, and he is deeply worried about the fiscal cliff. Even assuming the “doc fix” is passed, as it always is, without an alteration or repeal of the current law, the Cleveland Clinic will be faced with an almost 9% budget cut on January 1. They will lose money on every Medicare and Medicaid patient they see. There are no good solutions other than deep budgets cuts. And since the largest portion of their budget is salaries?...

The CC is held up (rightly so) as one of the most efficient medical organizations in the world. They have no fat to cut. I met the lady, in my walking around at the clinic, who cut $24 million in energy costs and another $2 million in trash-removal costs, at some considerable effort and investment. They leave no dollar stone unturned in the pursuit of efficiency.

Mike and I talked deep into the night and much of the next day, when we could, about our healthcare system. It fills me with deep concern. I have asked Mike to give us an outline of his speech today for an Outside the Box. His five-step “solution” has lowered healthcare costs for the 43,000 CC staff and all firms that have adopted their plan. When you look at his numbers, you understand why the US spends more money on healthcare than Europe. We are indeed that much less healthy. The CC has found out that paying each staff member $2,000 to adopt a healthier lifestyle lowers overall costs by even more than that.

Smoking cigarettes may be your personal choice and God-given right, but it costs the American healthcare system and taxpayers multiple tens of billions. And the same goes for four other lifestyle habits. Want to live long and prosper? And be smarter and have better sex? Just eat right, exercise and avoid a few items. I hope Mike gets me that essay soon, as I want all my closest friends (that would be you!) to stay around with me for a long, long time.

Have a good week. I am looking forward to the holidays and home and family. And while I try to get exercise on the road, my home gym is still the best.

Your ready for a few good nights’ sleep in my own bed analyst,

John Mauldin, Editor
Outside the Box

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Strawberry Fields – Forever?

Bill Gross, Managing Director, PIMCO

Living is easy with eyes closed
Misunderstanding all you see
I think I know I mean a yes
But it’s all wrong
That is I think I disagree

Strawberry Fields Forever

The Beatles

You didn’t build that............... 332

I built that ................................... 206

Well, I guess that settles it: you didn’t…

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Discuss This


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Jan. 3, 2013, 4:02 a.m.

Avid reader of all your publications, John
In summary (including this one): capitalism is probably the worst thing that hapened to mankind. Communism has probably killed more people in a shorter time period, but icing om the cake is not an economic phenomenon but the aftermath of the Fukushima nuclear disaster, cleverly kept out of the main stream media. It’s a Capitalist moloch that killed us all in the end, GE.
Regarding capital markets I strongly believe in Max Keiser’s view and the analyse depicted in the ‘Inside Spry’. Wall Street is run by crooks and the US is not a democracy but is ruled by an ‘elite’ govrnement.
One brief youtube shot tells it all: www.youtube.com/watch?v=NR3RqMMIwD4
Former Merrill Lynch CEO Don Regan tells Ronald Reagan to speed it up.
Everybody seems to have his price in the Anglo-Saxon world, best characterised by ‘homo homini lupus’ (man is a wolf to his fellow man).
What is yours?



ted creedon

Dec. 16, 2012, 6:58 p.m.

If we pay off $116T in obligations and want to have enough gold left to back the currency in circulation at 50%, the price of gold would be $108,000/troy oz.

Two equations in 2 unknowns, solve using the quadratic formula.



Dallas Kennedy

Dec. 15, 2012, 11:41 p.m.

Yes, forest fires now are rare but catastrophic, rather than limited and frequent. This is typical of chaotic, open systems in all areas of life. And trying to squash risk in one place just makes it reappear, more frightfully, elsewhere. Remember, eliminating risk in quite risky activities (like subprime mortgages or lending to Greece) was the false promise of all that fancy quantitative finance.

An excellent article! I would be cautious on buying stocks, bonds, and commodities right now, though. Low volatility is associated with rising prices, in this case, artificially inflated.

David Remington

Dec. 15, 2012, 8:54 p.m.

I smile when I read ...“then the sum of all these suppressed risks will reappear one day through a massive increase in the systemic risk and this will happen because the future is unknowable.”  If it is unknowable, how can you be so sure?  Instead, suggest we are condemned “to ask the question, again and again, we must ... knowing all the while that there is no answer.”


Dec. 15, 2012, 6:16 p.m.



Dec. 15, 2012, 4:52 p.m.

Overconfident and overeducated foresters similarly have managed the risk out of our forests.  Have you noticed how much bigger and more destructive our forest fires are now?