In today's Outside the Box, the ever-philosophical Grant Williams introduces us to the ancient and profound art and science of alchemy – "the original 12-step program," as he calls it, the avid pursuit of übernerds from Hermes Trismegistus to Isaac Newton to (believe it or not) John Maynard Keynes, who referred to certain early works of econometrics as statistical alchemy (and some still are!). And we should not forget Carl Jung, who wrote the seminal work Psychology and Alchemy (for those who do not sleep or are looking for something to put you to sleep: http://en.wikipedia.org/wiki/Psychology_and_Alchemy).
Grant notes that, in contrast to the mechanically and spiritually laborious (not to mention ultimately futile) process of transmuting lead into gold, the steps to convert paper into money are only two: (1) Plugging and (2) Pushing. Nevertheless, he says, the fervid attempts by latter-day magi to concoct a successful outcome to our present economic crisis are proving no more successful than the Alchemical Work. Where alchemists got hung up, says Grant, was in the final, climactic step of the process, Projection.
Projection "was the moment when, despite all the work that went into getting to that last point in the program, hope and faith took over as the alchemist found himself having to rely on just a little bit of magic in order to get the outcome he so desperately wished for."
And Projection has much in common with Pushing. Whether it is Ben Bernanke pushing the outlandish assertion that "subprime is contained" or Spanish Prime Minister Mariano Rajoy hopefully projecting that Spain would "... stop being a problem and instead form part of the solution [to the debt crisis]," the economic alchemists have struggled. (I have a mental image of Ben Bernanke as the Sorcerer's Apprentice, with about the same results – forced to try and clean up the mess he made and ultimately being swept away in it!)
Grant wishes to speed the economic magicians in their arduous task by offering a new, slimmed-down transformational schema – it only has seven steps: Greecification, Backtrackification, Transmission, Restatigence, Bullyfication, Renegotiation, Realization. The outcome might not be any more satisfactory than it was for the conjurers of old, but at least they may learn something as they kick the Holy Economic Vessel down the road.
(See, I don't call this letter Outside the Box for nothing.)
Grant, by the way, is the best "new" wordsmith/storyteller I have seen in a dozen years. I am a huge fan. (If you want to be a Hmmm…’er too, you can subscribe for free at http://ethreemail.com/subscribe?g=bdc736be.) And I get to see him tomorrow in Singapore, where he works at Vulpes with master hedge fund manager Steven Diggle, who was with us in Tuscany for a few nights. (I am not supposed to mention how much he lost on Italian soccer, betting against Newt Gingrich, so I won't. But then, Newt has to fund his campaigns somehow. Might as well take it from a hedge fund guy who thinks he understands soccer.)
I have been in New York today (I'm writing this note from the Virgin Lounge at JFK) and did media hits all morning. Two hours of air time and never had to repeat myself. A great deal of fun. We started off at 7 a.m. with two segments with the super-serious and wicked-smart Tom Keene and crew at Bloomberg, then three segments with Matt Nesto at Yahoo Breakout (where I surprised him by agreeing with President Obama, kind of), and then finished off the trifecta with old fishing buddy and always-fun (where does he get all those obscure facts?) Mike McKee for an hour on Bloomberg Radio. You can listen on or watch at:
(Bloomberg Radio has not posted yet, but I assume it will be there when you get this. Look for the Bloomberg Radio 10 a.m. show with Mike McKee.)
They will call the first leg of my 24 hours to Singapore in a minute, so time to sign off. The next letter will come from Singapore. Have a great week.
Your still seeing Mickey Mouse and Ben Bernanke in my head analyst,
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,
I have been reading and talking with Simon Hunt for a long time. He is a very thoughtful Brit who spends a lot of time in China and thinks about copper and commodities and cycles. He has enough seasoning to have seen a few cycles himself. This piece summarizes rather well the view that he has expressed for some time. And while I am generally skeptical of relying too much on cycles for specifics (they work until they don't), I think Simon has some very powerful conclusions. From his summary:
"The world is in a balance sheet depression which will make a second and perhaps more dangerous credit crisis almost inevitable. That should break out next year or in 2013.
"The three global pillars of the world economy, the USA, Europe and China, each have their own problems, but their impact is global because of the feedback loops from the financial sector to the economy.
"The USA has a debt and deficit profile which is unsustainable; the Euro Zone has to decide whether it can forge a fully fiscal union or whether the costs are too great, in which event membership will be restructured; and China is trying to put its economy on a more sustainable growth path at a time of leadership change.
"Debt and demographics will be the determining forces to global growth. Markets will no longer countenance indecision and pushing debt problems under the table by lending more funds to indebted governments. Politicians want to postpone what they know is inevitable: debts must be repaid."
This is a very interesting Outside the Box and one I suggest you put some thought into, as to how its conclusions may affect you.
I write this from Dr. Mike Roizen's office in Cleveland, where I will be at the Wellness Clinic tomorrow to do a general physical and to find out specifically what is wrong with my right arm. Nothing life-threatening here, as I told my daughters last night. Just life-annoying.
I get back to Dallas in time to go shopping for Thanksgiving dinner and start the cooking. Some things just have to be done overnight. I love this week! 40-plus people coming to dinner. And I hope you have a great holiday as well. And if you are not in the US and don't celebrate Thanksgiving, then make up an excuse and get your family and friends together and have a great meal, emphasis on together. We should do things like this more often!
Your enjoying life more and more (even with the damn arm) analyst,
Long-time readers are familiar with the wisdom of Lacy Hunt. He is a regular feature of Outside the Box. He writes a quarterly piece for Hoisington Asset Management in Austin, and this is one of his better ones. Read it twice.
“While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern …”
As I write, Europe is starting to unravel. This is going to be much worse than 2008, at least as far as Europe is concerned, and odds are high that it will be very bad for the US. And the markets are still acting as if the problems in Europe can be resolved. The recent bank stress tests were a joke, as they assumed no Greek or Irish defaults. This simply can’t be. There is a banking crisis of massive proportions in our future.
As Lacy notes, we are testing the economic theories of three (I think von Mises should be added) dead white guys. The dominant theories are being shown to be wrong. The sooner we acknowledge that the better. But don’t hold your breath waiting for the major economic schools to come to grips with their failure.
This is a real problem, and there is just no way to avoid it. I wish I had more positive things to say.
Your trying to figure this out analyst,
Today's Outside the Box is from an old friend, but one who is new to my readers. Jason Hsu is a partner at Research Affiliates and helped create the Fundamental Indexes with Rob Arnott. Starting at Cal Tech, he went on to a PhD in economics, and is now a professor at UCLA and teaches in China and Taiwan. Wins all sorts of awards and has won the Rising Star of Hedge Funds award. In short, he is really smart.
He sent me this piece last week, and I asked if I could use it. He graciously acceded. It is on what Jason and Rob call "the 3-D Hurricane of Debt, Deficits and Demographics."
"Whether deficit spending truly has any significant impact on subsequent growth is rather irrelevant to the discussion; voters and politicians alike would simply misinterpret the economic literature and assume more consumption today will drive more growth tomorrow. In other words, and as scientific as one can put it ñ the Boomers have screwed Generation X."
As the hurricane season approaches, this is not a forecast for fair weather, but it's one we need to prepare for. This is a thoughtful piece with a lot of red meat, so let's jump in.
And if you like this, be aware that I read scores (if not hundreds) of pieces each week for Outside the Box. And now I'll bring you the 5-10 best of the best each week through my new subscription service, Over My Shoulder. If you like Outside the Box, then you're going to love Over My Shoulder. It's like having your own personal filter, with decades of analyst experience and access to exclusive resources. If your time is as valuable to you as your investments, click here to find out more about how I help you home in on the essentials.
Your looking for his all-weather gear analyst,
One of the great privileges of traveling and speaking as I do is getting to meet a wide variety of very interesting people. Of late, I have become friends with David Walker, former Comptroller General of the US, who is now crisscrossing the country warning of the deficit crisis. It is a message that my book Endgame resonates with. If we do not bring the deficit down below the growth rate of nominal GDP, we become Greece. We hit an economic wall and everything collapses. It will be a real and true Depression 2.0. Fixing this is the single most important topic and task of our generation. If we do not, worrying about P/E ratios, moving averages, long-term investments – anything else, in fact – is secondary. Solve this and we can go back to the usual issues.
This week’s Outside the Box is a presentation that David made recently. Powerful stuff. I urge you to forward this on. The message must be heard so that we can as a nation get this right. The world does not need a crippled USA.
David released a short statement about the Navy Seals getting Osama (finally!). It echoes my own thoughts.
“All Americans should come together in appreciation for the work of America's intelligence agencies and special forces who planned and executed yesterday's Osama Bin Laden operation. While his death is a key milestone in the fight against terrorism, the battle is far from over. More importantly, as I said in a CBS 60 Minutes segment in 2007, 'The greatest threat to America is not a person hiding in a cave in Afghanistan or Pakistan, it is our own fiscal irresponsibility.' That statement was true then and it is even more true now. It's now time for the President and the Congress to work together and address the fiscal debt bomb that represents a much greater threat to our country's and families futures.”
My flight was cancelled, so I am in Toronto for one more night. The folks at Horizon Funds have graciously offered to take me to an early dinner and a private wine cellar, as I have a 4:30 AM (ugh) wake-up call and will turn in early. I hate 4:30 AM. That is not a civilized time of day. If I wanted to live like Dennis Gartman I could learn to deal with it, but I guess occasionally one does what one must.
One final thought. While getting OBL is a wonderful thing, it does little to change the reality of the Middle East, and may even finally create a true martyr (albeit one who was living well, and not in a cave). The world remains unsettled. Every speaker at my recent conference was asked what keeps them up at night. Every speaker mentioned the Middle East, some rather pointedly. It is a true wild card. But let us enjoy for the moment some token of pleasure for the just end of the planner of the 9/11 tragedy.
I will report more about the conference in future letters.
Your having a lot to think about analyst,