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John Mauldin's Outside the Box

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  • Three Competing Theories

    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.

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  • China Security Memo: Looking into 'Reverse Mergers' on Wall Street

    The saying goes that you can learn something new every day. If you're paying attention that is - and more importantly if you know where to look. Today I was getting my morning fill of geopolitical intel from my friends over at STRATFOR (on everything from personal security to country economic profiles) and stumbled onto their weekly China Security Memo, this particular edition on Looking into Reverse Mergers on Wall Street. Is this another head-scratcher in the less-than-conventional foreign policy coming from China or a regulatory end-around by some enterprising Chinese companies?  Take a few minutes to read this report, which also goes through everything that happened in China this week that matters.

    This article discusses the SEC's ongoing investigation of the "reverse mergers" where questionable Chinese auditing allowed companies to list on U.S. stock exchanges despite their fraudulent accounts. The report is a superb example of the detail and insight STRATFOR gives its customers. If you're into the idea of learning something new on a daily basis (the desire grows with age, I believe...) you'll enjoy learning about the current state of Chinese regulations (or lack thereof) for companies that list on US stock markets, State-Owned Enterprises (SOEs) that compete with American businesses, recent bank robberies, tensions with the Catholic church, and bottled water contaminated with E.coli. In other words, you'll definitely meet your novel knowledge quota for the day, all while getting the deepest insight on the security situation in China.

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  • Economic & Copper Advisory Services: Economic Report – June 2011

    This week’s Outside the Box is from one of the more interesting thinkers and observers of the markets I know, Simon Hunt. When we get together in London, conversations are lively, as we don’t always see eye to eye; but we can always discuss, in a very civil manner, the affairs of the world. This particular piece is wide-ranging and thought-provoking. Simon is always ready to apply actual times to his predictions, and he has held steady on them for years.

    It is late here in Geneva and I have to get up early for a speech. A big thanks to Hervig von Hove of Notz Stucki for hosting one of the more stimulating dinners with 16 people I have enjoyed in a long time, at his home out in the country, on a perfect night. I will probably make the discussion there the topic of this week’s letter. Charles Gave was in rare form. The Swiss gnomes were so very fascinating, and we had such an international table. These are the nights I wish my 1 million closest friends (a few of whom were there) could listen in on. More to come on Friday!

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  • Biotech and the Unintended Consequences of Moore’s Law

    Today we turn away from Europe and QE2 and talk about something I find far more interesting, if not as immediate. I have been talking and emailing with Pat Cox of Breakthrough Technology Alerts a lot lately. There is just so much happening in the biotech space and, as long-time readers know, that is my hobby and the one place I actually buy stocks in this market.

    There is just so much misinformation (and sometimes borderline lies by short-sellers). I asked Pat to give us an update on the state of the stem-cell world, and in typical Pat fashion he gives us a lot more to think about. Indeed, Moore’s Law is changing more than just computers.

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  • The Stark Choice for Europe

    This will be one of the more controversial Outside the Box posts in a great long time. Indeed, I debated with myself at some length. It will make some readers mad, but I decided it is more important to make most readers think. And, as it happens, there are parts of this week’s essay that I rather aggressively disagree with. That being said, there is a great deal of truth here. This represents a serious body of thought that is being debated, and we need to hear all sides, rather than just the ones we like.

    Michael Hudson is a research professor of economics at the University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College, which is a serious place, so this is no ill-informed screed. I generally like their stuff.

    Hudson first lays the European crisis at the feet of banks and the institutions (ECB, IMF, and the EU) that are taking the Greek (and other) bank debt and putting it into public hands. He has a very real point. Then he points out that Greece is far better off just walking away, a la Iceland (at least read the last part of this post, on Iceland). And in polls he cites, 85% of the Greek people are against taking on the debt and paying the banks.

    As I wrote last week, there is a revolution going on all over Europe, slowly building up as people realize that the “solution” being offered benefits banks and not German taxpayers or Greek creditors. Ireland will be watching. There is no easy way out. If there is a referendum on this new “troika” proposal, it is likely to lose. This is not over.

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  • Visegrad: A New European Military Force, by George Friedman

    Today, I'm sending you a week-old article. Fear not, dear reader—though the news peg is several days gone, the significance is historic... and when this author says "pay attention," I do. Today's piece is from my friend George Friedman, founder & CEO of STRATFOR.

    During the week of Palestinian protests and the IMF scandal, George chose to write about an obscure decision by Poland, Slovakia, the Czech Republic and Hungary to form a battlegroup. Though you may wonder why, we're all about to care about the Visegrad Group.

    The decision revolves around the new reality of a resurgent Russia, a weakened Europe and a fractured NATO. I don't think you'll wonder why you should care about Russia, Europe and NATO.

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  • Macro E.U. — D.O.A.

    I am attending the Global Interdependence Center’s latest conference here in Philadelphia, writing you from the Admiral’s Club on my way to Boston. The chatter last night at dinner and between sessions was focused on the risks in Europe. I did an interview with Aaron Task on Yahoo’s Daily Ticker, where I noted that European leaders are starting to use the word containedwhen they talk about Greece. Shades of Bernanke and subprime. This too will not be contained.

    And that brings us to this week’s Outside the Box. Greg Weldon has graciously allowed me to use his latest missive on Europe’s woes. A teaser:

    “The EU, like the US, suffers from what we might call the 'Cyrenaic Syndrome', a dynamic linked to the ancient Greek philosophers Aristippus and Hegesias of Cyrene, who, in 3rd and 4th Centuries BC, hypothesized that the goal of life was the avoidance of pain and suffering. Addicts accomplish this thru substance abuse. The EU is trying to accomplish this thru pure denial, and an outright refusal to accept that austerity, like sobriety, is the ONLY way to actually deal with the problems it faces.”

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  • Still Home Sick

    Everyone is curious about the state of housing in the US. My friend Gary Shilling recently did a lengthy issue on housing as it is today. I asked him to give us a shorter version for Outside the Box, and he graciously did. And you want to know what Gary thinks, because he is one of the guys who really got it right early, from subprime to the bubble and the price collapse, and has been right all along. No one is better. This very readable edition is full of charts and fast reasoning.

    The quid pro quo for getting him to give us something that is normally behind a velvet rope is that I put a link in to let you subscribe to his wonderful monthly letter. He really is one of the better analysts out there. He has spoken at my conference the last two years and is one of our highest-rated speakers.

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  • U.S.-China Strategic and Economic Dialogue

    A true understanding of geopolitics (and therefore geopolitical risk) is an essential piece of the puzzle in managing investments wisely. You're bright people, I know. If you need to know what's going on in China to inform your investments, you...
  • Does Unreal GDP Drive Our Policy Choices?

    I am back from Rob Arnott’s conference in Laguna Beach, and I must confess that if I had attended it before I wrote last week’s e-letter I might have had lower odds on the US political class solving the debt crisis, absent a real economic crisis forcing them to. There were several presentations that made the problems quite clear. It remains a tough issue.

    This week’s Outside the Box is a recent white paper by Rob, where he argues that the traditional way we look at GDP is flawed, because it overstates what is happening in the real, private part of the economy, which is the productive part. Government spending is either money collected from the private sector in the form of taxes or borrowed money that future generations must repay. While not likely to become a mainstream economic view, this is very useful for our own thinking about what constitutes productivity and investments. This is a short but powerful piece from one of America’s most honored economic writers.

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  • Restoring Fiscal Sanity in the United States: A Way Forward

    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.

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  • Iraq, Iran and the Next Move

    For those of you that have read about my new book, Endgame, you know I make the point that, while there are no good options for dealing with the debt crisis, the worst choice of all is doing nothing. In today's Outside the Box, you'll see a similar argument—but this "lesser of two evils" situation deals with the U.S. troop withdrawal from Iraq, and the ever-present Iranian push to dominate the Persian Gulf region.

    George Friedman—my friend, and founder of STRATFOR, a global intelligence company—discusses the potential "bad options" the U.S. has in its attempt to rein in Iran, and arrives at what he considers the least detrimental: negotiation. The worst of course is doing nothing, thus allowing Iran to increase its hold on the entire region—a region on which the global economy is dependent for its oil... You can see why all this matters.

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  • The Mess in Europe

    The disconnect in Europe just gets worse and worse, as I sadly predicted at least a few years ago, and have made a big deal out of over the last year, with the very pointed note that a European banking crisis is the #1 monster in my worry closet. Today, within 15 minutes of each other, I ran across the following three notes, from Zero Hedge, the London Telegraph, and the Financial Times, with a quote from Bloomberg as well. Read them all. And then try and figure out how they can all get what they want. There are going to be tears and lots of them somewhere. Greek three-year rates are now at 21%. And so I decided to link these three short pieces into your Outside the Box this week. To kick things off, a few teaser quotes and observations:

    “On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008.

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  • Charles Plosser and the 50% Contraction in the Fed’s Balance Sheet

    Dr. John Hussman is no stranger to Outside the Box readers. And his recent posting has my mind reeling. In essence he is saying that if the Fed wants to stop the QE and allow rates to rise, they must either reverse the QE or bring on inflation. And he does it with numbers and his usual strong reasoning. I really did read this 3-4 times, thinking through the implications.

    “There are a few possible outcomes as we move forward. One is that the economy weakens, and the Fed decides to leave interest rates unchanged, or even to initiate an additional round of quantitative easing. In this event, it's quite possible that we still would not observe much inflation, provided that interest rates are held down far enough. Unfortunately, the larger the monetary base, the lower the interest rate required for a non-inflationary outcome. T-bills are already at less than 4 basis points. In the event of even another $200 billion in quantitative easing, the liquidity preference curve suggests that Treasury bill yields would have to be held at literally a single basis point in order to avoid inflationary pressures.”

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  • The End of QE2: Major Policy Shift Ahead

    This week’s Outside the Box is from my friend David Galland, an interview he did for The Casey Report, and it represents a philosophical train of thought more in line with Austrian economics and libertarianism than my own. But if we only read what we already think, then how do we learn? It is only when your ideas are challenged and you must determine why the other guys are wrong and you are right, that you can either become more firm in your beliefs, or change. And much of what David says in this interview resonates. (I wrote about the end of QE2 a few weeks ago.)

    The guys at Casey are natural resources, commodities, and precious metals investors. Yet David argues that cash might be the wise thing now, after pounding the table for years on gold. He believes that the end of QE2 will be more important and dramatic than most think. That it is coming to an end I have no doubt, so it is important to think about what the effects, if any, will be. There are those who argue that we can live without it now. I argued (and still do) that we should have never had it. The unintended consequences are the ones I worry about. We just don’t know. It was a crazy experiment, with no understanding of what would really happen. But hoping for the best is not a strategy, so let’s think about it. David provides us with some different ways to look at the process.

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