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  • US Private-Sector Deleveraging: Where Are We?

    I was just in Greece with Christian Menegatti, and we had a good conversation about the piece he has sent along as today’s OTB. The case Christian and his coauthor David Nowakowski lay out regarding an incipient turnaround in US deleveraging (and therefore in economic growth prospects) is in some ways truly outside the box – I certainly wouldn’t call it the consensus view at this point. But they make the argument about as strongly as it can be made; so, if nothing else, they give us a solid piece of work off of which we can bounce counterarguments.

    For new readers: I often feature pieces in Outside the Box that make us think and that don’t reflect my personal bias or opinion. The point is that, if you only read what you agree with, you will miss the important changes and associated opportunities when they happen. And note that this piece is from Christian, who is head of research at Roubini Global Economics – not exactly a hotbed of bullishness. (By the way, Nouriel will be at my conference this year, more on which in a few weeks.)

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  • Working Out of Debt

    This week we look at a report called “Working Out of Debt,” about debt and deleveraging, from the McKinsey Global Institute. This is a well-done summary of their longer paper, which has been updated, called “Debt and deleveraging: Uneven progress on the path to growth.” I discussed the original paper both in my regular letter and in Endgame. It is one of the best, most definitive pieces on the topic I have read. For those trying to understand how the deleveraging process will affect their particular world, I think it is a must-read. I have been spending more and more time thinking about the whole process of deleveraging, and am coming to think deleveraging is the critical and fundamental factor shaping the economic environment and impacting every decision countries and businesses are faced with. This paper was done by Karen Croxson, Susan Lund, and Charles Roxburgh; and they are to be especially commended for their insight and work.

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  • 2012 Investment Themes

    As my good friend Gary Shilling says, in leading off his piece on 2012 investment themes, which is this week’s OTB, “This year is just the first step in the long-run journey that will continue to be dominated by The Age of Deleveraging” – which also just happens to be the title of Gary’s latest book. Whether you call it that or call it the End Game, as I have, it shapes up as a profoundly different and challenging era for all of us. Gary identifies 9 causes of slow global growth in the years ahead:

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  • The Age of Deleveraging

    Before we get into this week’s outstanding Outside the Box, I want to comment on QE2 and the efforts by some Republican economists to urge legislators to get involved to stop it (see the front page of Monday’s Wall Street Journal). That pushes my comfort zone a little too much.

    First, I am not a fan of QE2. Never have been. If it had been my call, I would have punted and told the guys in the Capital that the ball was in their court to get their fiscal house in order, because that is the main source of the problem. But Bernanke and the Fed felt they had to “do something,” to demonstrate they got the seriousness of the situation. If the only policy tool you have left is the hammer of printing money, then the world looks like a nail.

    Second, I doubt it works. It might be interesting to see what would happen (theoretically) if they decided to print $3-4 trillion. Now that would have a (probably very negative) impact. But it would show up on the radar screen. I think $600 billion just gets soaked up in bank balance sheets, sloughed off to world emerging markets (that don’t want it) and other hot spots, with some drifting into the stock market. But does it increase real final demand, which is what the Keynesians are so seemingly desperate for? I doubt it. And I just don’t see the transmission mechanism for QE2 to produce new employment of any statistical significance.

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  • Long-Term Outlook: Slow Growth And Deflation

    This week I am really delighted to be able to give you a condensed version of Gary Shilling's latest INSIGHT newsletter for your Outside the Box. Each month I really look forward to getting Gary's latest thoughts on the economy and investing. Last year in his forecast issue he suggested 13 investment ideas, all of which were profitable by the end of the year. It is not unusual for Gary to give us over 75 charts and tables in his monthly letters along with his commentary, which makes his thinking unusually clear and accessible. Gary was among the first to point out the problems with the subprime market and predict the housing and credit crises. You can learn more about his letter at http://www.agaryshilling.com. If you want to subscribe (for $275), you can call 888-346-7444. Tell them that you read about it in Outside the Box and you will get not only his recent 2009 forecast issue with the year's investment themes, but an extra issue with his 2010 forecast (of course, that one will not come out for a year. Gary is good but not that good!) I trust you are enjoying your week. And enjoy this week's Outside the Box....

    And if you have cable and get Fox Business News, I will be on Happy Hour tomorrow Tuesday the 17th at 5 pm Eastern. Have a great week....
  • The Paradox of Deleveraging Will Be Broken

    We are clearly not having as much fun taking off leverage as we had putting it on, or at least the vast majority are not. This week in Outside the Box we look at some very thought-provoking insights from my good friend Paul McCulley, who helps us think about how we got here and what will be the end point. From the letter: 'But what ailed Lehman was but a manifestation of what ailed, and ails the global financial intermediary system: the presumption that grossly levered positions in illiquid assets can always be funded, because those doing the funding will always assume the borrower is a going concern.' You need to read this when you have the time to think. The quotes from Keynes are important....
  • When the Chickens Come Home to Roost

    Can the credit crisis get any worse? In this week's Outside the Box my London partner Niels Jensen shows that it indeed can. Banks, and mainly European banks, have large exposure to emerging market debt of all types through both sovereign, corporate and individual loans. Just as banks have had to write down large losses from the subprime crisis and other related problems, next will come a wave of potential losses from yet another source. Niels then goes on to give us a look the size and problems with hedge fund deleveraging. Altogether, this is a very interesting letter and one that is written from a non-US point of view that I think you will find instructive....
  • The Paradox of Deleveraging

    I have often commented about the problem of personal savings. We worry about the lack of savings here in the US, but many do not understand that if everyone started to save 5% of there income immediately that it would seriously impact consumer spending, pushing the US into a recession. It is a paradox, as Paul McCulley points out, that what may be good for the individual may not be good for the collective country. And in this week's Outside the Box, good friend and this week's Maine fishing buddy Paul McCulley writes about another paradox called the Paradox of Deleveraging. This Paradox is at the heart of the credit crisis. Many of you will not like his conclusions, as it calls for the government to step into the breach created by the problem he describes. But as I often point out, the purpose of Outside the Box is to make us think about ideas which may not be in our usual sources of information. Paul is the Managing Director at PIMCO, the world's largest bond manager....