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  • It’s All Greek To Me

    Long-time readers will be familiar with Michael Lewitt, one of my favorite thinkers and analysts. He has gone off on his own to write his letter, and I am encouraging him to write even more. I call Michael a thinker because he really does. He reads a lot of thought-provoking tomes and then thinks about them. And then writes, making his readers think. The world needs more Michael Lewitts.

    Today, he roams the world, commenting as he goes, starting of course with Europe. I have permission to use the first half of this most recent letter as today’s Outside the Box, leaving off the investment recommendations that he shares with his subscribers. If you are interested you can subscribe at www.thecreditstrategist.com.

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  • Perspectives on the Crisis in Europe

    This week's Outside the Box will be unusual. Rather than one essay, I give you a number of short ones, and links that are representative of the confusion that is Europe, along with a little history. As I noted this weekend, last week's Eurozone announcement was short of details, and very little of the real work had been done. Merkel has to get her own country on board, keep the other nations that are in trouble from demanding haircuts, and keep the markets from trashing Italian and Spanish debt. Berlusconi has to figure out how to get the Italian budget balanced while staying out of jail and "balancing" his social calendar. Maybe he can dollar-cost average with a 70-year-old date? (Sorry, that was snarky, but it is so easy.)

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  • The European Banking Crisis: Assessing the Damage and a Look Ahead

    In my letter earlier this week, our guest writer, Grant Williams, gave Europe about the same odds of escaping crisis as a pitcher throwing a perfect game in baseball. That's 40,000 to 1. Take a look at this decision tree on Europe (below) from STRATFOR, a private intelligence company. Looks like they give Europe something more like the odds of a major-league pitcher leading in home runs. Not gonna happen.

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  • Things That Make You Go Hmmm…

    Do we need a law that makes it illegal to push a moose out of a moving aircraft? In baseball, what are the odds of a perfect game? How difficult will it be to solve the problems of the Eurozone? These and other issues are meditated upon by Grant Williams in his Things That Make You Go Hmmm… letter, which is this week’s Outside the Box. Maybe it was the baseball set-up (as my Rangers battle the Cardinals in the World Series) or that I keep getting asked about Europe here in New Orleans at the 2011 Oppenheimer Wealth Management Roundtable, but Grant really pulled me through his weekly missive when I got started, and I believe you will enjoy it as well. Long and short, Grant lays out the problems that we face in a very realistic assessment. I will also point out that he makes me look like a euro-optimist.

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  • Germany's Choice: Part 2

    For today's special edition OTB, let's turn our fiscal eye across the pond to all that's going haywire in Europe. But not the continent's banking crisis, per se. Today's piece takes a broad look at who's really running the show. I'll give you a hint - they've done it before, and it wasn't too long ago. The folks at STRATFOR (a global intelligence publication) have spent the better part of two years saying that Germany will run Europe. The newly redesigned EFSF (European Financial Security Facility) can be considered concrete evidence of such.

    From Berlin's point of view, the Eurozone is its sphere of influence, and its preservation is in Germany's national security interest. It's a new Europe, where Germany's not just the checkbook anymore, but holds some reins.

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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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  • 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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  • 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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  • Egypt's Next Crisis: The Economy

    Mubarak resigned, journalists packed their gear, and CNN went back to talking about obesity statistics - but Egypt's troubles are far from over. After weeks of protests (leading to strikes and, understandably, no tourists), the country's economy took an estimated 1.5 billion-dollar punch to the face.

    This appears to be the tip of the iceberg for Egypt's economical woes, however - as you'll read in the piece below from STRATFOR, a global intelligence company I've come to know and love. Mubarak's gone... as are his son's banking reforms. Resurrected is the military's practice of borrowing money from banks with no intention of paying it back - likely leading to a debt level of bailout proportions. The nation's not about to find the extra $16 billion a year it needs in its couch cushions.

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  • Intelligence Guidance: The Situation in Egypt

    When protests started in Egypt last week, mainstream news outlets cried "democracy!" and compared the situation in Egypt to the Berlin Wall and Tienanmen Square. Meanwhile, STRATFOR (an intelligence company I've followed for years) spoke of a different possibility.  At the time it may have been counter-intuitive for most institutions to draw parallels to 1979 Iran, but my friend and the company's founder George Friedman produced an internal document that raised that possibility.   Days later, news outlets began asking questions about groups like the Muslim Brotherhood, and realizing there could be other forces behind the unrest than simple calls for Western-style democracy.

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  • Global Aging and the Crisis of the 2020s

    From the fall of the Roman and the Mayan empires to the Black Death to the colonization of the New World and the youth-driven revolutions of the twentieth century, demographic trends have played a decisive role in many of the great invasions, political upheavals, migrations, and environmental catastrophes of history. By the 2020s, an ominous new conjuncture of demographic trends may once again threaten widespread disruption. I am, of course, talking about global aging, which is likely to have a profound effect on economic growth, living standards, and the shape of the world order.

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  • How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis

    I am in New York this afternoon attending and speaking at the Bank Credit Analyst Conference. I have to say that the panel on emerging markets gave me some real food for thought and an idea or two for a future e-letter. I have been a fan of emerging markets in general (with some exceptions) for some time but I should become even more so I think.

    For today’s Outside the Box I have something a little different. Michael Hudson has written a book called The Monster about the Mortgage industry, and specifically Ameriquest and Lehman. Someone sent me his introduction and I read it on the plane. I will buy the book. It made me angry. And the new financial regulations don’t address some of the real problem here.

    It is an easy read, well written and lots of great quotes and stories. I won’t say enjoy but do take the tine to read and then think about what you just read and about the culture in our country.

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  • Insolvency Too

    As readers know, I was in Europe a few weeks ago, making a LOT of presentations. My London-based partners seem to feel that an hour or two of down time is wasted and only for sissies. I learn as much as I impart, and come away with lots of interesting information. Every now and then I learn something that gets into the category of what in the wide, wide world of (multiple expletives deleted) economics is going on? Subprime was like that when I first read about it. Could you really design CDOs that were so patently absurd and then sell them to the Europeans and Asians? Turns out you could.

    Last week, Niels Jensen (head of Absolute Return Partners) and I were talking with a variety of pension funds. They started telling us about this thing called Solvency II. Outside the arcane world of European pension funds and insurance companies, it is not on the radar screen of most people. But it may be one of the more explosive problems in our future. Cutting to the chase, the new rules require insurance companies and pension funds to buy more bonds to match their liabilities. But as yields go down they are required to buy yet MORE bonds and then yields go down some more. And so on. The possibility of serious defaults by these same pension funds in the wake of these new rules (setting aside whether it makes sense to actually require pension funds to set aside enough assets to pay their obligations) is all too real. And more pervasive than we now think.

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  • Sovereign Subjects: Ask Not Whether Governments Will Default, but How

    As I am traveling in Europe for a few more days, it seems appropriate to review the very fascinating work of Arnuad Mares of Morgan Stanley in London. He poses the very provocative question: “Ask Not Whether Governments Will Default, but How?” and comes up with some very interesting statistics. He suggests that simply looking at debt to GDP misses the point and offers four other ways we should also evaluate sovereign debt risk. This is a very worthy contribution to Outside the Box.

    The question I get over and over as I travel and present my thoughts is “When is the US going to get real about its fiscal deficits?” There is little sympathy for the massive deficits we are running. We are making Europe, or at least the part of Europe I am visiting, very nervous. Let us hope after the next elections we can say we are getting a handle on the deficits, and from both sides of the aisle and not just the Republicans. This is going to require cooperation.

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  • The Importance of Start-ups

    This weekend I wrote about the problems of being an entrepreneur in our Muddle Through Economy. I would like to follow that up with two brief (but somewhat controversial) essays on two aspects of starting up small businesses. The first, by Vivek Wadhwa, points out that start-ups account for all of the net new jobs, and is a summary of a paper from the Kaufman Foundation. (You can read the 12 page paper at http://www.kauffman.org/uploadedFiles/firm_formation_importance_of_startups.pdf)

    The second is by my friend William C. Dunkelberg, the Chief Economist of the National Federation of Independent Business. He asks a very simple question: Why is thrift getting such a bad name? And if we take the potential savings from “the rich,” where will the savings come from to invest in start-ups?

    Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at the School of Information at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University.

    The both make for thought-provoking reading, and offer some challenges to the conventional wisdom, which is what Outside the Box is supposed to do.

    Your doing his part by creating start-ups analyst,

    John Mauldin, Editor Outside the Box

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