Comments on economics by John Mauldin and friends

Gloss on John Mauldin's newsletters: John Mauldin in my opinion is one of the most astute observers and analysts of contemporary world economic trends and investment opportunities. He publishes an excellent weekly newsletter - "Thoughts from the Front Line". And also publishes most weeks another letter - "Outside the Box" in which he features excellent essays by many of his friends in the economics fraternity. His web site is at - There you will find also the archives of past essays - or also or Mauldin also is author of an excellent book on investing "Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market", John Wilen & Sons, Inc. Hoboken, New Jersey, 2004. (see recommendedreading.htm for comments.) The book's subtitle describes the author's opinion on the future economic investment environment as of 2004. He predicted the then coming market collapse. Actually, he had been predicting market trends for years. One really needs to read as many of the weekly newsletters as possible to understand the full story as Mauldin sees it because it is developing as he writes and we read. Here we will try to comment on the weekly articles starting with the most recent and going back as far as time permits. I plan on adding each new letter at the top of this web site so readers can find the latest issue first. But to begin I am adding as many of the past letters as I can at the bottom of the pile so to speak to get them into chronological order. But this will take a great amount of time and you can go to Mauldin's own web sites to read all the articles in his archive. I am trying to provide more depth in analysis at my web site on recommended reading. I will present my comments in red font.

Jan. 17, 2011, "Outside the Box", Volume 7, Issue 3, Hoisisngton Fourth Quarter Report, by Van Hoisington and Dr. Lacy Hunt

One of the most brilliant essays on the current economic situation in recent memory - a must keeper.

Jan. 15, 2011 Thoughts from the Front Line, Thinking the unthinkable

Jan. 12, 20111, "Outside the Box", Volume 7, Issue 2, Global Ageing and the Crisis of 2010, by Neil Howe and Richard Jackson

Jan. 08, 2011, Thoughts from the Front Line, "Forcast 2011: Better Than Muddle Through"

Jan 07, 2011, "Outside the Box", Volume 7, Issue 1, In Defense of the "Old Ways", James Montier

Jan 06, 2011, "Outside the Box", Volume 7, Special, Where we have been and Where we are Going, George Friedman

A Stratfor analysis

Dec. 20, 2010, "Outside the Box", Volume 6, Issue 51, Apple, Google, Newscorp and the Future of Content, Michael Whalen

Dec. 17, 2010, Thoughts from the Front Line, Kicking the Can down the Road,

Dec. 10, 2010 Thoughts from the Front Line, Uninended Consequences

Dec. 06, 2010 "Outside theBox", Volume 6, Issue 50, The Three Stages of Delusion, Dylan Grice

Dec. 03, 2010, Thoughts from the Front Line, "Texas, Ireland and Ten little Indians"

Dec. 02, 2010, "Outside the Box", Volume 6, Special, Geopolicical Journey Part VI, Ukraine, by George Friedman

An excellent report on Mr Friedman's visit to Ukraine during which he met with officials and ordinary citizens and observed typical activities in the streets.

Nov. 29, 2010, "Outside the Box," Volume 6, Number 49, "The Rational Optimist", Matt Ridlely

Nov. 26, 2010, Thoughts from the Front Line, "Recessions are on the margin",

Nov. 19, 2010, Thoughts from the Front Line, "O, Deflation, where is thy sting?",

Nov. 16, 2010, "Outside the Box," Volume 6, Number 47, Age of Deleveraging - review of Gary Schilling book

Nov. 12, 2010, Thoughts from the Front Line, "Lets Lower the Bar",

Nov. 11, "Outside the Box," Volume 6, Special, Geopolitical Journey Part I The traveler by George Friedman

This is the first of a coming series describing Mr. Friedman's views during and from his tour in Eastern Europe. This essay describes his thoughs on geopolitics and the proper way to study it.

Nov. 08, 2010, "Outside the Box", Volume 6, Number 46, The Effects of Obamacare by Lisa Cummings

Nov. 05, 2010, Thoughts from the Front Line, "Thoughts on Liquidity Traps", http;//www.frontlinethoughts. com/pdf/mwo110510.pdf

Oct. 29, 2010, Thoughts from the Front Line, "Be careful what you Wish for",

Oct. 28, 2010, "Outside the Box",. Volume 6, Special, U. S. Midterm Elections, Obama and Iran, by George Friedman

A Stratfor analysis

Oct. 25, 2010, "Outside the Box", Volume 6, Number 45, How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America and Spawned a Global Crisis, by Michael Hudson.

This is an extract from Hudson's new book The Monster, which Mauldin says makes him furious. I believe it will make you furious also. But from this extract it appears that the author has not included the politicians whose demands to increase home ownership, especially among those who could not afford it enabled the private predators to thrive. Not to mention the FED creation of very low interest rates that helped provide the financial fuel.

Oct. 23, 2010, Thoughts from the Front Line, "Subprime Debacle: Act 2, Part 2,

Oct. 15, 2010, Thoughts from the Front Line, "The Sub Prime Debacle: Act 2,

One of the most important of Mauldin's recent letters. He quotes extensively from studies about the current condition of the housing and mortgage market and then quotes a dire report about the potential disaster steming from the break in the notarized change of ownership of the notes that homebuyers sign showing who holds the ownership on the property. This is a huge potential danger to banks, mortgage brokers, title insurance companies and others.

Oct. 14, 2010, "Outside the Box", Volume 6, Special, China and the Future of Rare Earth Elements, by Stratfor

A typical comprehensive report on the importance of the Rare Earth Elements to a vast variety of modern technology including especially defense systems and the significance of current Chinese near monopoly in mining and nanufacturing of many of these. But the report also indicates that over time mines and manufacturing in other countries may mitigate the situation.

Oct. 11, 2010, "Outside the Box", Volume 6, Number42, Time Loves a Hero, by Greg Weldon

Oct. 08, 2010. Thoughts from the Front Line, "The Ride of the Keynesian Cowboys", http://www.frontlinethoughts. com/pdf/mwo100810.pdf

Oct. 06, 2010, "Outside the Box," Volume 6, Number 41, Insoslvency too,, by Niels Jensen

Oct. 01, 2010, Thoughts from the Front Line, "The Morality of Chinese Growth,

Sept. 30, 2010, "Outside the Box," Volume 6, Special, Pakistan and the U.S. Exit from Afghanistan, by George Friedman

Sept. 27, 2010, "Outside the Box," Volume 6, Number 40, All QE2, All the Time by Ed Yardeni

Sept. 24, 2010, Letter, Thoughts from the Front Line, "Pushing on a String"

Sept. 20, 2010, "Outside the Box", Volume 6, Number 39, Soverign Subjects Ask not whether governments will default, but how, by Arnuad Mares

Sept. 17, 2010, Letter, Thoughts from the Front Line, "The Chances of a Double Dip - by Gary Shilling,

Sept. 16, 2010, "Outside the Box", Volume 6, Special, Looking to 2010, China's Next Generational Leaders, Stratfor essay.

Sept. 13, 2010, "Outside the Box", Volume 6, Number 38, Market still deluding itself by Albert Edwards

Sept, 10, 2010, Letter, Thoughts from the Front Line, "The Last half",

Sept. 6, 2010, Thoughts from the Front Line, "The Problem with Pensions",

Sept. 2, 2010, "Outside the Box", Volume 6, Special U.S. Draw Down From Iraq Leaves Void, Stratfor video presentation

August 30, 2010, "Outside the Box", Volume 6, Number 36, America's Greatest Wealth Creation Engine, by Alex Daley and Doug Hornig

August 27, 2010, Letter, Thoughts from the Front Line, "The Dark Side of Deficits,

August 23, 2010 "Ouitside the Box", Volume 6, Number 35, The Importance of Stock Options, by Vivek Wadhwa and William Dunkelberg

August 20, 2010, Letter, Thoughts from the Front Line, "How We Get Through this Mess,

August 19, 2010, "Outside the Box", Vol 6, Special, China's GDP and Questions of Strength a Stratfor video

August 13, 2010, Letter, Thoughts from the Front Line, "Gulf Oil Spill Disaster"

August 10,2010, "Outside the Box", Vol 6, Number 33, GaveKal Five Corners by Francis-Xavier Chauchat and others

August 5, 2010, "Outside the Box", Vol 6 Special, Arizona, Borderlands and US-Mexican Relations by George Friedman

August 2, 2010, "Outside the Box", Vol 6 Number 32, Demographics, Destiny and Asset Values by George Magnus

August 2, 2010, Thoughts from the Front Line, "TheDismal Science Really is",

July 30, 2010, Letter, Thoughts from the Front Line, "Are we there yet?" http://www.mwo072010.pdf

July 27, 2010, "Outside the Box", Volume 6, Number 31, Running through a minefield backwards - by Bedlam Asset management

July 25, 2010, Thoughts from the Front Line, "The Risk of Recession",

July 24, 2010, Letter, Thoughts from the Front Line, "Some thoughts on Deflation",

July 22, 2010, "Outside the Box", Volume 6, Special Despatch: China Factors in US.-South Korean Relations, by George Friedman

July 19,2010, "Outside the Box", Volume 6, Number 30, Asia's Paradigm Shift by Louis Vincent Gave

July 17, 2010, Letter, Thoughts from the Front Line, "The Debt Supercycle" http://www.mwo071710.pdf

July 12, 2010, "Outside the Box", Volume 6, Number 29,Recession, Deflation, and Deficits, by Hoisington Investment

July 11, Thoughts from the Front Line, "The Frog in the Frying Pan",

July 9, 2010, Letter, Thoughts from the Front Line, "It's more than just Birth-Death" http://www.mwo070710.pdf

July 4 2010, Thoughts from the Front Line, "There's a Slow Train coming",

June 24, 2010, "Outside the Box," Volume 6, Special, U.S. TheAfghanistan Strategy after McCrystal ,by George Friedman

June 21, 2010, "Outside the Box", Volume 6 Number 27 What is the point of Macro? by Dyeon Grice

June 18, 2010, Letter, Thoughts from the Front Line, "Be careful what you wish for", http://www.mwo061810.pdf

June 14, 2010, "Outside the Box", Volume 6, Number 26Print, Baby Print, by Dyeon Grice

June 2, 2010, "Outside the Box", Volume 6, Number 24 The Ultimate Hedge in economic Activity by Patrick Cox

"The current health care bill is a relevant example of the policy based on premises that are fundamentally obsolete and flawed". Patrick Cox specializes in finding innovative technology and the companies that create it. He is especially focused on coming bio-technology advances. He thinks new bio-tech developments will change human life span and eliminate many current killer aliments.

May, 28, 2010, Letter. Thoughts from the Front Line, Six impossible things. (http://www.mwo052810.pdf

May 22, 2010, Thoughts from the Front Line, "The Case for a FED Rate Hike",

May 15, 2010, Thoughts from the Front Line, "Europe Throws a Hail Mary Pass",

May 7, 2010, Thoughts from the Front Line, "The Center Cannot Hold",

May, 06, 2010, "Outside the Box", Special Global Crisis of Legitimacy by George Friedman

May 05, 2010,"Outside the Box", Volume 6, Num ber 21,Was the Demise of the USSR a Negative Event? by Charles Gave

May 03, 2010, "Outside the Box", Volume 6 Number 20, The Great Reflation by Tony Boeckh

April 30, 2010, Letter, Thoughts from the Front Line,

April 28, 2010, "Outside the Box", Volume 6 Number 19 Macro Europe: The Titanic is Sinking by Greg Weldon

April 26,, 2010, "Outside the Box", Special The Making of a Greek Tragedy by George Friedman

April 22, 2010 "Outside the Box", Volume 6, Special Ecuador: Correa's Play for Greater Influence on Oil Sector by George Friedman

April 19, 2010, "Outside the Box", Volume 6 Number 18UK Economy Must Perform Rebalancing Act - and Growth to Fix by Martin Wolf

April 16, 2010, Letter, Thoughts from the Front Line 'First, Lets Tell the Angels"

April 08, 2010, "Outside the Box", Volume 6 Special Mexico the Failed State Revisited by George Friedman

April 09, 2010, Letter, Thoughts from the Front Line, "Reform we can Believe in"

April 08, 2010, Letter. Thoughts from the Front Line

April 05, 2010, "Outside the Box", Volume 6 Number 17Where are Rates Headed and Whyby Barry Habib and California Crisis Borat Bonds, by Spencer Jakob

April 02, 2010, Thoughts from the Front Line, "Is This a Recovery?",

March 29, 2010, "Outside the Box", Volume 6 Number U.S. Stock Market Returns - What's in Store by Dr. Prieur du Plessis

March 06, 2010, Thoughts from the Front Line, Welcome to the Future,

March 04, 2010, "Outside the Box,"

Feb, 22, 2010 "Outside the Box", Volume 6 Number 11 A five Step Gude to Contagion by Todd Harrison

Feb. 19, 2010, Letter, Thoughts from the Front Line, "The Pain in Spain"

This letter can be found at Mauldin first comments on the arguments between Greeks and Germans over the Greek sovereign debt and possible 'bailout'. He notes his opinion of the strength of the Euro. He then turns to Dennis Gartman and David Kotok for their opinions. Mr Kotok thinkis the Euro will be even stronger and it is the U.S. dollar that is weak. But Gartman thinks the Germans will NOT help Greece and the conflicts within the EU will continue to weaken the Euro. Mauldin thinks both friends have good ideas. Their differences stem from their different backgrounds, contacts and ways they view markets. Mauldin thinks the Euro will survive because it must. But that its value relative to the dollar will continue to fluctuate and is an insignificant issue anyway. He comments. "But the valuation of the euro is not in and of itself a reason for the euro to disappear. At one time it was $.82. Then over $1.60. All currencies fluctuate, some more than others. What destroys them is political malfeasance." Indeed, political malfeasance - the lead up to sovereign defaults and bank crises. He continues, "What would put the euro at risk of a bad political decision? A Greek bailout without serious conditions would be the one thing that could be a very bad start to a downward spiral. If Greece is bailed out, then why not Portugal or Spain or Ireland? What about the emergency room crisis that is Austrian banks?" The clear but not stated point is that the 'bond vultures' will set the agenda eventually. Mauldin then turns to Spain. The situation there is more serious, because Spain is much larger than Greece economically and its default would be a much more serious problem for Europe and the Euro. Once again, Mauldin quotes from two expert groups he highly regards who have opposite views on the viability of Spanish debt and its coming impact. Again, Mauldin notes that the very different appraisals are based on different assessments of the POLITICAL policies and preferences of the Spanish government and people. Mauldin then provides a very interesting graph by David Henninger published in the WSJ. It shows a rapidly escalating rise in Federal expenditures versus a flat household median income. Mauldin notes that this is "unsustainable". Again it is a political issue. He comments, "This is the definition of an unsustainable path. Spending has grown 7 times as much in real (inflation-adjusted) terms as median household income over the last 40 years. Like Greece and Spain and much of the rest of the developed world, we will be forced to make hard choices." And these choices are POLITICAL. The bond vultures are circling the U.S. as well. The next 5 or so years will tell the tale.

Feb. 18, 2010, "Outside the Box', Volume 6, Special Edition, The Meaning of Marjah by Kamran Bokhari, Peter Zeihan, and Nathan Hughes

Another of the special reports from Stratfor. A brief commentary on American strategy and how the current offensive at Marjah fits in.

Feb. 15, 2010, "Outside the Box", Volume 6, Issue 10, Is the Recession Over by William Hester

Lots of graphs and inconclusive conclusions.

Feb. 12, 2010, Letter, Thoughts from the Front Line, "Between Dire and Disastrous"

This week Mauldin returns to the current financial situation in Greece and Europe generally. The text is available at

He believes the extensive commentary in the media now misses the most significant aspects and proceeds to provide his analysis. He believes the Greek situation is but the 'precursor' to a general period of soverign debt crises. "Path dependence" means that today's decisions are influenced and limited by the series of past decisions. And future choices will be limited by what we choose today. He notes that he has been commenting on 'bad choices' for years. And the options are becoming more and more limited. Now, here he makes a major point I don't see often enough. "Our economic future is more and more a product of the political choices we make, and those are increasingly difficult." So much of the analysis by economists these days is narrow economics rather than real 'political/economy". This includes the excellent book by Reinhart and Rogoff that is a must read "This time is different'.. So Mauldin remarks that the choices for Greece are 'either dire or disastrous'. He then provides a short historical discussion on the Euro and how the Mediterranean countries continued to get into fiscal trouble despite joining and promising to abide by the rules. They were alowed in despite "exchange rate that overvalued their currencies relative to the northern countries, but especially to Germany". Then Greece lied about its own fiscal - budget situation. (The New York Times now claims Goldman was involved in this deception.) But high currency value resulted in high labor costs, and a trade deficit. He notes the current deficit is "254 billion Euros" with anouther "64 billion Euros" coming this year. They cannot continue to borrow without help. So far the European leaders have given vague expressions about such assistance. They indicate such help will only be provided with very significent Greek reforms - that is budget cuts. Mauldin provides some perspective on what that would require in U.S. budgets and notes it would cause a recession and higher unemployment. He gives cogent facts about the nature of the Greek economy and taxation system. "over 50% of GDP is government spending , and Greece has one of the highest public employee levels as a percentage of the population in Europe." He headlines this as a "National Suicide Pact". He notes that such austerity measures would actually decrease revenue which would then require more cuts. (This is a common problem facing all the welfare states.) Then Greece would have to borrow even more with added debt. If Greece was independent of the EU it might devalue its currency, but its currency is the EURO. So Mauldin writes that the 'dire' situation is budget cuts and recession and the 'disasterous' situation is an outright default. The problem for Germany and the EU is that a bailout of Greece would impact on the situation in Ireland and Portugal and Spain. Again, I have been preaching ever since reading Philip Bobbit's book, Shield of Achilles and David Hacket's book, The Great Wave - that all this is a result of the coming collapse of the 'welfare state' generally. Mauldin turns to information supplied by the BIS on which banks hold the Greek debt. It turns out that France, Switzerland, Belgium and Germany each have quite a bit. But the debts of Ireland, Portugal and Spain on the books of German banks are much larger - up to 15 times the size of the Greek debt. He continues,. "Greek debt is $350 billion with about $270 billion of that spread among just three European countries and their banks." Thus a Greek default would be a much more serious crisis than the media generally note. "That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen." Mauldin provides several ideas on what might happen. He next turns to Ambrose Evans-Pritchard, an excellent analyst and author who writes for the London Daily Telegraph. He writes that the European politicians did NOT provide anything concrete. But the alternative ideas he suggests might happen are all disasters. The politicians are hearing strong warnings from their publics. The Euro itself and indeed the EU are at risk. Mauldin concluds with a lengthy of four options the Greek government might attempt. And he notes it is a political situation. Just what I have been writing for years. Inflation, devaluation, deficits, defaluts, all described in pure econometric terms by Reinhart and Rogoff are all Political decisions, not simply economic results. 1 - The Greeks can accept austerity and have a depression of some years. 2 - They can simply default and go into a longer depression but with damage to other countries as well. 3 - they can leave the EU and return to their own currency and sovereignty. Already individual Greeks are quickly moving their funds out of Greece. 4 - they can promise to make budget cuts and borrow from whomever is willing to gamble. But the world financial market is NOT going to let Greece get away with it for very much longer. Mauldin quotes David Kotok who thinks the situation will be resolved eventually. Finally Mauldin extends his thoughts to the impact on other countries. "It's More than Just Greece". He remarks, "This is not just a Greek problem. Debt and out of control deficits are a problem all over the developed world. The Greeks are just the first". Exactly, bravo. He mentions that Niall Ferguson, another currently popular commentator since publication of his excellent book on the History of Money (another must read) has written in the Financial Times that this epidemic is coming to the U.S. "You cannot spend your way out of a fiscal crisis." Again, bravo. Mauldin won't name names but the economists he mentions, who sluff all this off, are well known. (Well, they have Nobel Prizes, so you can guess or try Krugman.) They continue to claim the U.S. is immune to all this. Just want Reinhart and Rogoff meant. Mauldin returns to his pitch "We are in the fullness of time approaching the End Game." So in this weekly letter we have another installment in the epic saga of our times. Read it and weep.

Feb. 8, 2010, "Outside the Box", Volume 6, Issue 9, February Economic Report by Simon Hunt

Mauldin first comments on the situation in Greece, adding to his previous notes. He believes it is very serious and could lead to financial problems throughout Europe and the world. If the problem spreads to Spain, Portugal and Italy there is a potential of 1 trillion Euros of debt that could be downgraded in the bond markets. He believes this is just the beginning of a major crisis in sovereign debt. The situation in Greece Europe generally is right out of the Reinhart and Rogoff book. The report by Simon Hunt is an analysis of the financial problems from a very long range perspective. Hunt comments that 2010 will be a year of 'surprises'. Governments will be even more active interventionists and markets will suffer for it. Currently China is seeing inflation due to lax fiscal policy. There are growing labor shortages and production problems. Export is being impacted. Expect increasing prices for Chinese exports. But Hunt comments 'China's industrialization has been nothing short of miraculous - stunning - yet there remain many pitfalls ahead." The rise of China in the world economy is generating political issues as well. He expects some improvement this year followed by successive declines until 2018. Specific conclusions are - slow growth in first half of 2010 - recovery in last half and in 2011. Another credit crisis due to government debt in 2012 and 2013 - Another global recession from 2013 to 2015 - growth starting in 2018. This long range forcast is based on Hunt's belief in 'long wave' movements - one has to question the basis for such predictions.

Feb. 10, 2010, Letter, Thoughts from the Front Line, "A Bubble in Search of a Pin"

This issue is available from Mauldin again notes that he is personally beginning to invest in leading biotechnology - especially 'regnerative genetic' companies. He follows Patrick Cox, who is a leading student of new technologies. He then turns to the latest unemployment data, some of which shows ups and some downs in numbers of employed and unemployed. He quotes The Liscio Report that claimed enployment numbers have increased. Lots of statistics here. Mauldin turns to David Rosenberg, who notes that the tital employment number - 129.5 million is the same today as it was in 1999. But the working age population has expanded by 29 million. Plus, Mauldin adds a Rosenberg chart that depicts male employment from 1996 to 2009. The graph depicts a gradual rise from 50 million in 1996 to over 54 million in 2007 and a rapid decline back to 50 million in 2009. Moving on, Mauldin discusses NFIB data with another chart about credit conditions for small businesses. Mauldin throws in the remark that if Congress does not come off tax increases we will have another recession. The meat of this letter comes with the "Bubble in Search of a Pin" title, which is an extended commentary on the Reinhart and Rogoff book previously recommended This Time Is Different. I review this book on the web. Mauldin poses the question on the basis of the extensive historical record in this book about what happens repeatedly when credit=debt gets out of hand - Should not Greenspan and Bernanke have known this and done something? Mauldin's direct quotes make the answer very clear. Great quotes, but get the book and read it yourselves. Unfortunately neither Reinhart & Rogoff nor Mauldin discusses WHY the government officials, not only Greenspan and Bernanke but Congress refused to admit (if they recognized) the causes of the bubble and collapse - namely the government attempt to make 'afordable housing' an entitlement in the face of a world - wide deflation. Mauldin then recommends Andrew Smithers book - Wall street Revalued: Imperfect markets and Inept Central Bankers. Hen notes that the book is a devastating critique. It is also a critique of the Efficient Market Hypothesis (EMH) and other theories. He presumes that the two bankers could not recognize the bubble due to their belief in this theory - that is "the efficiency of markets". Well, as I note that is not the main reason. We might mention at this point Talib's 'Black Swan'. Well, enough of that - Mauldin turns to the latest fiasco - The Greek debt=credit bubble - about which he quotes Donald Morris. A really choice bit about the history of Greek individualism. Mauldin sets the situation into context. However I have to laugh when he comments. "It is doubtful that German and French voters will be happy with any bailout using their tax money that does not impose serious cuts in Greek Budgets...." But the Germans and French are in a similar situation to the Greeks, only less so at the present time.

Feb. 2 2010, "Outside the Box", Volume 6, Issue 8, If PIIGS Could Fly, two articles by Mohamed El-Erian and Niels Jensen,

Mauldin first includes an article from Financial Times by Mohammed El-Erian, chief executive of PIMCO with link to it The topic is the serious financial situation of Greece - its sovereign debt - and thoughts about what Greece and the EU might do about it. He comments that it is a big 'game of chicken' in that both parties are hoping the other will somehow take proper measures. But, he notes, 'there is no solution to the country's debt issues without a deep and sustained policy effort." Indeed, but at what political cost. Mauldin then turns to Niels Jensen's Absolute Return Letter of February 2010, a much longer and more detailed essay. The article begins with discussion of deleveraging and provides a graph showing that bank loans remain at an all time high. He comments that 'Years of excessive debt accumulation cannot be reversed in 18 months, and it will take at least another 5-6 years to play out." Note the point that it is leveraging and de-leveraging rather than 'velocity' which is cited. The next chart supports Mr. Jensen's note that the U.S. government borrowing campaign has barely replaced private debt with public (government) debt. So not much deleveraging has really taken place. The great increase in sovereign debt should be considered in the light of the Reinhart and Rogoff book. And also note Moody's warning about the 'deluge of debt' and its impact on credit ratings. The next topic is a return to the 'basket case named Greece' . A chart depicts the huge increase in basis points of credit default swaps for this debt. Jensen notes that Felix Zulauf comments that Greece has been "in default for 105 of the last 200 years." See Barron's investor analyst round table in the last three issues for Zulauf's views on investments in 2010. Jensen then quotes from a research report of the Danske Bank in Copenhagen for ALL EU members, with a table showing the dire debt-to-GDP ratios. Another table depicts the annual tighgtening of primary deficit necessary to bring this ratio down to the official EU target. The point is that Greece has a nearly politically impossible task ahead. Next up Jensen asks "Is Spain next?". This point is that of Greece falls then the speculators will turn against Spain and perhaps Portugal. Jensen opines 'The outlook is very grim". A chart asks "Are our governments solvent". A graph reveals the stark difference between the official net debt to GDP ratio and the actual one that includes government promises such as pensions and off book liabilities. Jensen then turns to "The end game for Japan?" with charts showing that Japan's previously favorable demographic situation is rapidly deteriorating as the population ages and savings will be used to support retirements. Jensen wonders then why in view of the dire situation stock markets have gone up so far and so fast in 2009, "despite the grim outlook". He gives some popular reasons that he does not quite believe. His conclusion 'Summing it all up, the fate of global equity markets is very much in the hands of bond investors..... the end game is approaching' There is more that I hope everyone will study.

January 29, 2010, Letter Thoughts from the Front Line, "This Time is Different"

The text is available at In this letter Mauldin begins with his recommendation of the Reinhart and Rogoff book - This Time is Different. which I include in the recommend reading list on web. The authors have examined many financial crises over the past 200 years and take their title from the all too common pitch by 'experts' that no one should worry because 'this time is different' when of course it is not. By this the 'experts' mean that somehow the 'old rules' of value and investment advice no longer apply. Somehow they think that 'modern' methods and insight and their own skill have made investments bullet proof and the boom will continue. Of course the historical record of such failures is used as a basis for commentary on how and why Goldspan and Bernanke (and others) could continue to claim all was well, when the crisis was right on them. Mauldin then comments on recent GDP numbers that the media tout as proof the economy is now doing much better. He has his doubts and gives reasons. This is why he calls it 'a statistical recovery' meaning caution that it may not be so real. The main topic then is the book cited above. I had to buy the book and read it back and forth and make notes, so how Mauldin got enough out of it via a Kindle I don't know. But he is right that it is an important book. In my commentary about it I write that it is about the 'trees' of financial change (crises) but David Hackett's book - The Great Wave - is about the forest. So read them both. Mauldin provides extensive choice quotations. The focus is on the build up of debt into a mountain that then collapses. Further, he points to the authors' view that a crisis is generated by a 'crisis of confidence'. The point is that all fractional banking and all extension of credit rests on the confidence of those lending their hard-earned wealth ( creditors) about the ability of the debtors to repay. There is no way to predict when the confidence of enough creditors will break sufficiently to create a systematic failure. Mauldin's expansion on the authors' theme is excellent. He believes that a banking crisis is much different from a basic business-cycle recession. In this letter Mauldin only begins his commentary on the book and lessons to be drawn from it. His next topic is the Greek debt crisis - an all too typical example of the book's subject matter. This crisis also is hitting suddenly. It was triggered by an effort of the Greek government to peddle a large bond issue when it is running an annual deficit of 12.5%. Mauldin provides a graph showing that Greek debt is huge - 254 Euros - when Russian debt was only 51 Euros when its government defaulted in 1998. The Greek situation illustrates the fundamental problem brought on by such debt. In order to bring it down over a reasonable number of years they would have to cut their annual deficits by 4% of GDP, but that would throw the country into a recession which would in turn reduce government income from taxes which would force even more budget cuts. Apparently no one believes the Greek government's 'plan' to address this problem. Meanwhile, since Greece, is a member of the European Union, its problem impacts the whole of the Union. Will there be a run on Greek banks? But what about the United States and its debt? Mauldin concludes with a graphic depiction of 'spending' versus' revenue' Mauldin comments "Greece is an object lesson for the world, as Japan soon will be. You cannot cure too much debt with more debt'. AMEN

January 25, 2010, "Outside the Box", Volume 6, Issue 7, An Insider's View of the Real Estate Train Wreck, by David Galland

David Galland is the editor of Casey's Report, available for free subscription from Internet and a daily read I highly recommend. This issue is an interview Galland had with Andy Miller, a major investor and analyst of commercial real estate. It also appeared more recently in Whiskey and Gunpowder daily email from AGORA. The theme is that a very serious crisis is coming in commercial real estate. Galland notes that Miller was among the first to predict the housing and credit crash back in 2007. Galland asks a series of questions and reports Miller's answers. 1 - what is coming in the housing market, is it getting better - Answer - NO, the home housing market has been 'nationalized' The government via the GSE's and FHA has subsidized the great majority of recent mortgages. But this government intervention MUST stop eventually because it is financied ultimately in the bond market. When this happens the original problem remains. - 2 What about default on FHA backed mortgages - Answer - The GSE's are losing billions. 3 What about commercial real estate? - Answer - There was as big a bubble in commercial as in home real estate and it has not yet been fixed. 4 So what is happening? Answer People are learing that prices will not go up forever but can come down. But they lived in 'fantasy land for 10 years'. Now lenders are sitting on non-performing loans. 5 What about banks? - Answer Defaults are already rising but will become worse in 2nd quarter of 2010. The Treasury and FED and FDIC will be involved. They are allowing banks to keep non-performing loans on the books without taking paper losses. They hope to prevent 1 - 2 thousand small banks from going bankrupt. This is the Japanese method - to prevent the banking system from outright collapse they left bad loans on the books but this prolonged the problem. The overall economic effect is to keep capital tied up in unproductive limbo. But the longer one delays taking the loss the worse it becomes. Both the borrower (owner of the real estate) and the bank have a vested interest in delay - preventing the loss from being realized with the resulting hits. It looks like the federal government will find ways to support the commercial real estate market just as it is supporting the home real estate. It is a political scheme but the result is 'nationalization' without Congress or the public becoming aware or responding. Eventually the properties must be valued at their real level and there will be huge losses. But somehow the American economy will survive.

January 22, 2010, Letter Thoughts from the Front Line, "Thoughts on the End Game",

The text is at Mauldin plans to focus on 'the end game' in his letters this year. What is going to happen as the current financial crisis reaches its conclusion? What about Japan? How safe is the Euro? He mentions the coming fiscal-debt crisis in Greece. Mauldin then discusses the concept of 'this time it is different and highly recommends a book by Carmen Reinhart and Kenneth Rogoff, This Time it is Different - of course that is such a common expression that various brokers and others use to justify some idea they have, that usually turns out false. But these authors this time have it precisely right. It is different, we will have to read the book to find out if they understand WHY. But according to the brief extract Mauldin supplies the authors have studied over 250 financial crises during an 800 year period. He quotes them, ''The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits." Bravo - indeed. They focus on the huge leverage created over past 25 and more years with massive credit=debt by all segments of the economy, private and public. Mauldin then switches to provide an extensive report from Van Hoisington and Dr. Lacy Hunt, their "Quarterly Review and Outlook - Fourth Quarter 2009" in which they also cite the same book. They again focus on the disasterous result of the massive credit=debt binge. Their subtitle "Hard Road Ahead" The U. S. faces a very difficult future in attempting to "correct for over-indebtedness". They report that there currently is $3.70 of debt for every dollar of GDP. The deleveraging - unwinding of this hyper debt - will take a long time and create significant pain. As usual they provide excellent graphs. One shows that the total U.S. debt as a percent of GDP reached 299.8% in 1933 and then collapsed. But now it is 369.7 % in third quarter of 2009. They note the danger of excessive debt unwinding is deflation. (But it is deflation that forces the unwinding.) They comment 'Debt overwhelms Monetary Policy'. And, "Over-indebtedness Creates excess Supply" And, "Deficit spending only provides a transitory boost to the economy." They provide a graph depicting their point that the yield on Treasury bonds has been moving down since 1990. And that so far inflation has not resulted from the massive expansion of U.S. debt (FED actions and all) because the economy is continuing the deleveraging from contraction of credit=debt. But nevertheless the government will raise taxes thus causing further reduction in economic growth and recovery. Therefor, they note, they are buying long Treasury bonds in expectation that there will be no significant inflation in the near future.

January 18, 2010, "Outside the Box", Volume 6, Issue 6, 2010 Investment Strategy: Six areas to buy, Eleven to sell by Gary Schilling

Extracts from the January edition of Schilling' Insight Schilling first recommends buying Treasury Bonds as he believes Treasuries will continue to be favored by everyone fleeing more risk. He expects a decline in yields - hence an increase in price. He cites previous periods in which Treasury bonds outperformed equities. He believes the huge federal deficits coming will not generate inflation as individual savers will continue to reduce their private debts and buy Treasuries rather than stocks or consumer items. Second, he recommends purchase of Income-producing securities such as high quality corporate and municipal bonds and utility stocks and health care firms paying good dividends. Third, he recommends consumer staple and food companies. Fourth, he recommends small luxury makers, that is companies that make luxury products that sell for lower prices. Fifth, he recommends buying the dollar. He insists that the dollar will strengthen as everything else weakens. But sell the British pound and the Euro. Even commodity currencies such as Canada and Australia will fall along with the prices of commodities. Sixth, he recommends buying Eurodollar futures. Shilling turns to sales and recommends first U.SD. Stocks in general. He writes that the S%P 500 index is at a high P/E. Second, sell homebuilders and related companies. Next, sell various big-ticket consumer discretionary names as consumers will continue to save rather than buy plus deflation will continue to push prices down. Next, sell banks and financial stocks as these companies will continue to de-leverage and demand for loans will remain weak. Next, sell consumer lenders' stocks as they are in the same situation as banks. Consumers will continue to cut back on doing business with these outfits.. Next, sell low and old technology capital equipment producers as the supply of their products will continue in excess while new technology will suplant them.. Next, if you want to sell your house, you should have done so already, but do it now if you have not. He expects home prices will fall another 10%. Next, sell junk bonds and commercial real estate for the same reasons. Next, sell most commodities as deflation continues and demand is weak. Finally, sell stocks and bonds of developing countries. He believes that China and India do not have consumer buying power sufficient to sustain growth and will suffer along with the rest of the world in deflation. He notes. "China's economy looks like a house of cards." So, this set of predictions and recommendations was published in early January and so far much of it appears to be coming true.

January 15, 2010, Letter Thoughts from the Front Line, "When the Fed Stops the Music"

Mauldin notes that the FED has repeatedly stated that it will end its quantitative easing program at the end of March 2010. But its buying of mortgages has been critical in keeping the interest rates low. And it is financing the federal government debt as well. This is because the banks and institutions selling mortgages to the FED are then buying the Treasury bonds which gives the money back to the FED. But foreign institutions also bought a large amount of the new federal debt. So Mauldin asks ' who will buy the coming debt issues?' He also wonders who will buy the trillions of new debt the foreign countries also plan to sell. He quotes Bill Gross of PIMCO who wrote that the public needs to be very vigilant. Assets now have been raised in nominal value by the FED expansion of money supply. Private debt is being transfered to government debt. "if exit strategies proceed as planned, all U.S. and U. K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009." In other words the 2009 market bubble has been due to the government pouring money out and absent this continual expansion these assets may decline rapidly. Mauldin continues that we have no historical reference as to what may happen if the FED suddenly stops buying bonds. He asks "Why, therefore, would anyone want to be long the dollar or treasuries?" Both the dollar and the pound are in trouble - plus, Mauldin mentions Greece and Spain. He believes the volatility of the Euro is 'huge'. He thinks the dollar may rise versus these other currencies in early 2010 since world traders will need dollars to conduct their business. But the dollar remains weak for the future. He suggests one consider the Canadian and Australian dollars. He thinks gold may be worth buying. Most importantly, in this issue he focuses on the current 'recession' and so correctly notes that 'this recession is different'... 'itis a deleveraging recession'. "We borrowed too much (all over the developed world) andn ow are having to repair our balance sheets...." However it is outside Mauldin's task to ask why and answer the questions - Why did all the countries get such huge debt burdens in the first place and why has deflation occured and why are the governments doing what they are doing. That gets into politics. He quotes at length a study by mcKinsey Global Institute on the outcomes of periods of over leveraging followed by efforts to de-leverage and lengthy periods of slow growth. He provides 6 of their findings. Note, the discussion again is all about leverage and de-leveraging - not about 'velocity'. The report can be found at . Mauldin then turns to the Lex column from the Financial Times which comments on this same report. The Times notes that the longer governments delay in solving the debt -leverage problem the more painful it will be. But governments are so reluctant. Mauldin here notes about Japan - "Japan, as I have noted, is a bug in search of a windshield". Well, I think the same will soon be said about the U.S. as well. Mauldin notes again that the "bond vigilanties" will be coming soon. His final advice "I would be very cautious about being long the stock market. It is now a trader's market. I would not be buying long-duration bonds."

January 11, 2010, "Outside the Box", Volume 6, Issue 5, Coming BioTech Bubble by Patrick Cox

Mauldin writes that he is so impressed with the views Patrick Cox has on the coming revolution in health and longevity due to breakthroughs in Biotechnology that he is going to start buying stocks of companies in this industry. Patric Cox writes an expensive investment letter as part of the AGORA family of letters. He appears to have a strong following. In this special essay for Mauldin he focuses on one of the revolutionary technologies he follows. This is the leading aspects of biotechnology. It is clear that Cox does his research homework. In this essay he describes - Vitamin D - nanotech sensing technologies applied to biologics - RNAi (interference) - nanotech viricides,- stem cell technologies. The last is most important - Cox terms it 'regenerative medicine' that is methods for regenerating specific humans cells. RNAi is a field I have been following for some years and I have bought into one company. Cox discusses 'nanotech/biotech convergence' a field that will enable medicine to focus on individuals rather than whole populations This is a very persuasive essay so it is no wonder that having spent several years discussing all this with Cox Mauldin is convinced enough to start buying into the industry.

January 8, 2010, Letter Thoughts from the Front Line, "2010 Forecast: The Year of Uncertainty"

Mauldin notes that this is his 10th annual prediction issue. He is optimistic that the coming decade will be much better than the last. Nevertheless there currently is a high level of uncertainty. He notes also that the readership has grown from 2000 to over 1.5 million - quite an achievement. And everyone is encouraged to subscribe at He mentions that there are a lot of forcasts published these days. He describes the Birinyi Associates summation of this mass. Result is that there is a lot of 'uncertainty' with prognostications all over the map. So, first he wants to consider where 'we are' now. He has recently read James Montier's book - The Little Book of Behavioral Investing which he highly recommends. The author states that people are 'prisoners of their preconceptions'. Mauldin reports extensively on the psychological studies described in this book. Of course as military professionals we are well aware of this phenomenon. In the investing context people believe either in bullish or bearing futures depending on their preconceptions. From this he comments on current popular views on the state of the economy. Then he discusses the consumer confidence survey and actual unemployment data including the number of people receiving unemployment income. Despite very bad unemployment statistics the statistics on GDP appear too positive. Mauldin coins the term 'Statistical Recovery' for this apparent divergency. Conclusion is that the economy is not in a good a shape as some reports seem to indicate. When he looks to the future, Mauldin sees great problems - unemployment continuing - Congress raising taxes - stocks already at high valuations - a very difficult medium term future. He believes, "This is a trader's market. It is not time to buy and hold large indexes or high-beta stocks and expect to be made whole over the next ten years." He continues with discussion of the coming actions of the FED. The market is expecting interest rate increases by fall. But Mauldin believes that political pressure will force continuation of the current easy money policy. He notes that Bernanke is much aware of the results when rates were raised prematurely in 1937. And the unilateral Treasury policy of authorizing the GSE's to continue to buy mortgages will cost the tax payers billions.

January 7, 2010, "Outside the Box", Volume 6, Special Issue, The Year Ahead for Russia, by George Friedman

I skip commentary on these Stratfor essays. They are available from Stratfor.

December 18, 2009, Letter Thoughts from the Front Line, "The Age of Deleveraging"

This letter may be found at brief end of year letter is focused on the deleveraging that has taken place since 2007 and is continuing in the credit markets. The first section is "It's All about Deleveraging". There is a link to a video of a discussion John Mauldin had with Jeremy Sigel. Sigel is a relative bull for the economy come 2010 expecting a GDP growth of 5-6%. While Mauldin remains bearish predicting growth of 1-2%. Sigel is famous for his 'buy and hold' strategy. But the US market now is lower than it was in 1999. Mauldin predicted the deflationary period and maintains that it persists and will continue to persist with a secular bear market into 2010. The letter includes graphs and data. Then Mauldin discusses the 'nature of recession' and "Commercial Woes" in which he describes the dangers in commercial mortgages. He concludes with a personal note about the birth of his first grand child.

December 14. 2009, "Outside the Box", Volume 6, Issue 3 Will the Three Trends of 2009 Prevail in 2010? by GaveKal

The full report is at This is actually five essays by members of the GaveKal team of which the first has the above title. The three trends given in the first essay are: 1. Impressive weakness in the U.S. Dollar, 2. Significant rally in commodities, 3. Pronounced out-performance of emerging markets, including Asia. The initial thought is that these are 'running out of steam'. Theexamples of Saudia Arabia and Dubai are cited. The second essay discusses three alternate views of investments named for Ricardo, Schumpeter and Malthus. The GaveKal investors seem to fall into one or another of these three camps. Disciples of Ricardo focus on comparative advantage and seek to find investments where comparative advantage has not yet been fully realized. Disciples of Schumpeter focus on the creation of new industries and methods based on entrepreneural and knowledge-based breakthroughs. The Disciples of Malthus focus on demographics - increases in population that surely will drive demand for commodities and rising incomes. The company believes in the future according to a combination of Ricardo and Schumpeter and not Malthus. The third essay, by Arthur Krober, is on "China's Two Turning Points" China has led the world in economic development recently. But export values have declined for the first time. Despite this overall growth will continue. The first 'turnning point' is the shift from external - export - based expansion to internal - infrastructure and consumption based expansion. The second 'turning point' is coming in a few years when the present favorable demographic situation turns negative. For the past decades China has been favored with a positive "dependency-ratio" - that is relatively fewer dependents per working person. This is the source of significant savings available for investment. But after 2015 the ratio will begin to shift as the numbers of elderly people increase while the numbers of working-age people decline relatively. Krober concludes "These two turningpoints in the export sector and demographics mean that China's traditional growth model - wich relied on favorable demographics, rapidly expanding exports, and capital deepening - is nearing its use-by date." The next essay by Louis-Vincent Gave is about "Why Invest in China Now?" Interestingly the author points out that investment in China and HongKong markets - listed companies - from 1994 to date actually underperformed investment in Italian government bonds. Who would have guessed this either before the fact or now? But the chart they provide does not lie. The author gives his idea on reasons. The focus is on the "efficiency of capital" This efficiency has been very low but now is improving as it must. The very inefficiency remaining provides great opportunities for investors If 'efficiencyh of investment' can be achieved there is great room for a sustained bull market. The final essay, by Gavin Bowring, on "Categorizing Europe's Weakest Sovereigns" is certainly timely considering the Greek problem. The author discusses 1 - problems within the core of the European Union and 2 - problems in the fringe countries. The latter include the East Europe and Baltic states In these politics will play a big part in finances. He includes the PIIGS within the European core. Ireland has a huge debt to GDP ratio but is working hard on corrective measures. Spain and Greece are resisting the hard choices. The European banks are at risk from these bad assets. The author believes the Euro is "very overvalued". He recommends selling the Euro against the dollar.

December 11, 2009 Letter Thoughts from the Front Line, "Thoughts on a Statistical Recovery"

This letter may be found at In this letter Mauldin first discusses in a section "Lies, Damm Lies and Government Statistics" the recent government statistics on unemployment and describes the problems. In the next "Problem of Seasonal adjustments" he continues. Then he discusses job creation engine and the posibility of a 'double dip recession'. There is much of value here but I am behind schedule.

December 4, 2009, Letter Thoughts from the Front line, "Conversation with John Mauldin"

This letter may be found at This is an interview Mauldin had with questions by Damien Hoffman - transcript can be viewed at The discussion ranged from Mauldin's personal background to his thoughts on future. He sees huge demographic and technological changes transforming society throughout the world. He again mentioned biotech and medical advances. Then they discussed emerging markets which Mauldin favors especially India and China. Another topic was 'life cycles of empires'. Mauldin predicts huge tax increases and advises get used to it. He notes that the economic models that economists all use whether bears or bulls are based on a different past - now we are in a major deflationary period.

December 3, 2009, "Outside the Box", Volume 6, Special Edition Obama's Plan and the Key Battleground by George Friedman - a Stratfor report

The focus is on Afghanistan and some comparisons with the war in VietNam. Friedman identifies three core elements to Obama's plan from his West Point speech - 1 maintain pressure on al Qaeda on the border and around the world. 2 blunt the Taliban offensive by sending more troops 3 use the space created by the counteroffensive and resulting security to train and build Afghan military and civilians. Friedman notes that there is no expectation to actually 'defeat' Taliban. US force is a 'stop gap ' effort. Since the capability of the Afghan army will be the key, Friedman wants to evaluate that force. Friedman continues by discussing comparisons with VietNam.

November 30, 2009, "Outside the Box". Volume 6, Issue 3, Reckless Myopia by John Hussman

The November 28, 2009 Letter Thoughts from the Front Line, "Why I am an Optimist"

This letter may be found at

November 24, 2009 "Outside the Box", Volume 6, Issue 2, Government Debt Spirals by Ambrose Evans-Pritchard and Edmund Andrews

November 21, 2009, Letter Thoughts from the Front Line, "Where the Wild Things Are"

This letter may be found at

November 16, 2009, "Outside the Box', Volume 6, Issue 1, Eclectica November Fund Commentary by Hugh Hendry

November 14, 2009, Letter Thoughts from the Front Line, "If this is Recovery..."

This letter may be found at

November 12, 2009, "Outside the Box", Volume 6, Special Edition Video Dispatch: Israel and Intrigue at the White House by George Friedman - a Stratfor report

No comment, folks can look at the video - Stratfor has interesting but not always perfect analysis.

November 10, 2009, "Outside the Box", Volume 5, Issue 52, The Uncomfortable Dance Between V'ers and U'ers by Paul McCulley

November 6, 2009, Thoughts from the Front Line, "The Glide Path Option"

This letter may be found at

November 2, 2009, "Outside the Box", Volume 5, Issue 51, Just Desserts and Markets Being Silly Again by Jeremy Grantham

The October 30, 2009 Letter Thoughts from the Front line, "Catching Argentinian Disease".

This letter may be found at John Mauldin is giving a lengthy series of lectures in South America. In this letter he presents his thoughts about hyperinflation generated by his discussions with Argentinian economists and investors. First he comments on and strongly recommends Niall Ferguson's recent book, The Ascent of Money. I have been recommending it also. It is in my list of recommended readings. I am so delighted that Mauldin so strongly supports the view that one simply MUST study and understand history (and by that I don't mean simply the 1970's) to see where we are and where we likely will be going. But Ferguson's is not the only important book on the history of money and banking that are so essential - see the reading list. Mauldin then notes that the US faces very serious choices due to so many bad choices already made. The first major section to this letter is "Catching the Argentianian Disease". By this he means the recuring bouts of hyperinflation that strike Argentinia. (And also Brazil and other countries). He quotes Ferguson's book on this topic. ..."it is once again necessary to see that inflation was a political as much as a monetary phenomenon...' "Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon....." Well, monetary policy itself is a political policy. And David Fischer "The Great Wave' shows, inflation has more underlying causations than being the result only of monetary phenomenon, including political policies. See recommended reading and study Fischer's book. But Fischer also shows that political responses to inflation have then turned it into hyperinflation. Friedman was looking only at the instances of inflation in the US and only since 1783. But there were three major inflationary waves in Western history before that. Mauldin notes that the Argentinian answer to inflation was to print the money. Fischer notes the same response by governments throughout history. But Mauldin does not describe the causation - what government policies turned the prosperous Argentina he notes, into the fiscal basket case. The answer is the attempt to institute a 'welfare state' with all its ultimately unpayable promises.
Mauldin repeats a showing of an important graph. This indicates that the "US government fiscal deficit will approach $2 trillion in 2019". Mauldin writes that the US consumers must undertake a massive saving regime and moreover, must put that saving into US government debt. He repeats his previous point that the Obama administration must have a valid plan to lower the deficit. But they do not. He cites Ferguson again 'that hyperinflation is a political decision. "Governments have to choose to print money." Indeed, and in the past they clipped coins and substituted base metals and indeed created various forms of paper money.
He lays great store in the 'independence' of the FED. "For the record, I do not think the US will experience hyperinflation as long as the Fed maintains its independence." But the FED is NOT independent - it was created by the government to accomplish government purposes, chief of which is the 'outsourcing' to the banking system of the fundamental Constitutional function of creating the money supply. Mauldin continues,. "I have been writing for a long time that the main force in the economy right now is deflation. The Fed will fight deflation tooth and nail. But they don't have to buy government debt to fight deflation. They can buy mortgage securities, credit card securities, commercial paper, etc...." Indeed they can and they are. But all of these and more are part of the money supply. It is the de-leveraging collapse of these instruments that are part of the deflation itself. There creation in the first place was part of the expansion of credit necessary to keep the 'welfare state' afloat. So what will the Fed do with these 'assets=liabilities' on its books? Already the government is urging the banking system both to lend more to business and home owners and also to increase its asset base. The banks are taking federal money at near zero interest rate and investing it right back into the FED at a higher rate.
The next section is "The Independence of the Fed Threatened" Mauldin thinks that there are pending political demands that would create changes that would compromise the Fed Independence. Indeed there are and Mauldin spells some out. But these are of the nature of reducing an already small amount of independence. The history of the creation of the FED shows it was not designed to be really independent - only to appear so in order to cover the politicians - while having as its purpose simultaneously to protect and enhance the banking system while providing the gradually expanding money supply essential for the fiscal needs of the welfare state. Among the many books that stress this is Ferguson's which Mauldin needs to read again. But Mauldin here describes some Obama administration initiatives that are generally not well known in public but should be stressed. No mention is made, for instance. of the Humphrey- Hawkins law that theoretically demands that the FED also defeat unemployment.
Mauldin concludes with quotations from three experts, Mich Shedlock, David Rosenberg, and John Williams about this weeks phoney government statistic reporting that GDP rise 3.5% and the real nature of the results of the so-called 'stimulus' package.

The October 26, 2009 Letter Outside the Box - Liquor before Beer - in the Clear, is a speech by David Einhorn to the "Value Investing Congress"

Mauldin is on a lecture tour in Argentina. David Einhorn is President of Greenlight Capital - a hedge fund. His role in predicting the financial crisis is well known. This is from his speech at this congress. It is very long and full of important views, so please take the time to read the full Mauldin letter. He begins by analyzing a mistake he claims to have made in 2005. That was to under estimate the coming impact of the housing bubble and its underlying debt bubble. The lesson he says he has learned is "it isn't reasonable to be agnostic about the big picture." He says he was focused on 'bottom up' analysis of individual investments and discounted the large scale -systemic - risks. The result was he lost quite a bit in the subsequent housing crash. The following is his assessment now of the large scale - systemic risk and he immediately focuses on politics - economic risk coming from government - political policy. He notes two fundamental problems steming from the government - political system - 1. politicians favor short term policies in their urgent desire to be re-elected. The political desire to evaluate every thing in the short term permiates society and financial markets And, 2 - 'concentrated benefit versus diffuse harm'. This is a well known circumstance. The concentrated efforts of narrow, special, activist interest groups dominates politics in their favor while the broad public is left to bear the consequences.
Einhorn continues with a focus on the current crisis and the 'organized banking lobby', which he claims has used its influence in its own behalf. He describes the well-known recent government response in which billions of taxpayer dollars were given to the banks - to 'rescue' them on the grounds they are 'too big to fail'. He repeats the standard belief that it was the banks that played a part in creating the crisis. He quotes President Obama about the danger of 'too big to fail' and then notes that the government response has been 'exactly the opposite'. In many paragraphs he denounces the government policy and program. "The proposed reform takes us in the polar opposite direction." "The bailouts have installed a greatdeal of moral hazard". "The proposed reform does not deal with the serious risks that the recent crisis exposed." All so true and he expands on this at length. There is much more in his denunciations. The speech is an excellent summary of the Obama administration policy and critique of its errors and failings. Then he cites some history from the Great Depression of the 1930's and the failures of govenment policy responses. All well worth study. He continues with this devastating analysis. "Over the next decade the welfare states will come to face severe demographic problems.... It is no coincidence that we experienced an economic boom between 1980 and 2000, as the Boomers reached their peak productive years... Social security and Medicare commitments to them are astronomical'. His analysis of the results of this should be sent to every politician. "As we sit here today the Federal Reserve is propping up the bond market, buying long-dated assets with printed money. It canot turn around and sell what it has just bought'. There is much more in his speech. He then cites the failure of Japan, even with their very different cultural approach to saving. He forsees a collapse of the Japanese government and economy ending in either a "government defalut of hyperinflationary currency death spiral." He continues, "I believe there is a real possibility that the collapse of any of the major currencies could have a similar domino effect on re-assessing the credit risk of the other fiat currencies run by countries with structural deficits and large, unfunded commitments to aging populations." He says that the current crisis has changed his view of investments and what is safe and what an investor needs to do. He poses the key question, "how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters?" He has changed his opinion about gold and now believes a prudent investor should be placing a goodly bit of his assets in gold as all the other fiat currencies are weak like the dollar. Finally he comments that whereas the popular notion used to be that all of this government deficit spending would be foisted on our grand children to pay of, now he sees the 'day of reckoning' as Bonner terms it coming very soon. "The recent economic crisis and our response has brought forward the eventual reconciliation into a window that is near enough that it makes sense for investors to buy some insurance to protect themselves from a possible systemic event." Well, there you have it, a very powerful recommendation by a hedge fund professional. But he does not discribe reasons behind the political causation of the crisis.

The October 23, 2009 Letter -Thoughts from the Frontline is "The Best of Times"

This letter may be found at This week John Mauldin discusses his views on deflation and current FED efforts to recreate inflation. And then he reproduces a very interesting exchange of views he had with Bill Bonner, the founder of AGORA investment newsletter empire. But first Mauldin recommends that everyone read Tom Hayes' book Jump Point: How Network Cuture is Revolutionizing Business. I have not read this book yet, but I do subscribe to several publications that make this same point. Mauldin notes that Hayes' thesis is that "we are experiencing a cultural change every big as profound as the Industrial Revolution and that this would create a major shift when 3 billion people get on line in another two years or so." Well, back in 1973 I read a Soviet book on 'cybernetics' that pointed out that the Industrial Revolution was essentially a leveraging of man's muscle power via chemical and mechanical means. But that the 'cybernetic revolution' would be a leveraging of man's brain power and that it would be impossible to predict the vastness of the outcome.
The main section of the letter is devoted to 'The Elements of Deflation". Mauldin lists and discusses several 'elements' of deflation. I may be wrong, but in reading this I get the implication that Mauldin is implying these are 'causes' of deflation. I disagree with this idea. These elements are not 'causes' but rather results of deflation. "The first element is Risisng Unemployment." Mauldin writes that "there has never been a sustained inflationary period without wage inflation." Maybe true enough in the20th century but there have been periods of wage inflation that were NOT sustained inflationary periods. Mauldin notes that today wages are flat and falling. And he notes that in America unemployment is rising. But what is the cause of this? I believe it is one of the results of deflation not a cause and it is a result of the deflationary impact of the sudden, historically unprecedented entrance into the world employment and wage pool of several billion of low wage workers. Mauldin notes the Keynes recommended that government "stimulate the economy in recessions in order to bring back consumer spending." But Keynes was wrong - and at any rate was thinking of a country as an autarchy not impacted by a world market. Mauldin mentions in passing the Austrian School - a favorite subject of mine for another time.
The next 'element of deflation is massive Wealth Destruction." Again, I believe this is a result and not a cause of deflation. Mauldin notes the impact of two bear markets and the housing collapse on consumers. He does not mention the other examples of 'wealth destruction' in the collapse of the commercial real estate market and the evaporation of credit carried as an asset on the books of financial institutions (not limited to banks).
The third 'element' Mauldin notes as "Then we have Reduced Borrowing and Lending, as consumers are paying down debt and banks are reducing their lending." Indeed an element of the current scene, but a result of deflation and moreover directly an aspect of the 'wealth destruction' already listed. Consumers must pay down debt due to their overextension and the collapse of a major funding source - real estate value - which is what 'wealth destruction' means.
The next element is 'Decreased Final Demand and its counter part Increased Savings'. Well this is another way of saying the same thing as the previous 'elements'.
Mauldin next points to 'the element of Low Capacity Utilization, which he notes reduces business pricing power. His point is that this prevents inflation. Now we are getting to a real cause of deflation, but in a rather backwards formulation. I think a causal 'element' of deflation is massive and rapid increase in productivity which results in excess supply relative to demand that must be countered by both labor unemployment or wage decline and reduced utilization of manufacturing and other productive assets. So, yes indeed, it prevents inflation - it creates one of the bases for deflation. The chart he provides tells the story graphically.
Next he turns to "Massive Deleveraging and $2 trillion in Bank Losses and a Very Weak housing Market. Which brings us to a Slowing Velocity of Money." Are not these very real aspects of the current economic situation restatements of the previous points? "Bank Losses are part of "Wealth Destruction" and the 'weak housing market' is a result and also cause of the collapse of consumer credit structure that forces the increased saving and decreases demand.
He continues with some elaboration of this term of art 'Velocity of Money". It is a fundamental part of economic establishment theory and one of the terms in their equations for GDP and all. What the term references is the way in which the financial system (banks and non-banks) increases the effective money supply by leveraging on the official 'money supply' created by the Treasury and FED. But to me 'velocity' is a term for speed - not size or amount. Mauldin continues,. "If the velocity of money is slowing, the amount of money can rise without bringing about inflation. It is a delicate balance, but nonetheless the hyperventilation in some circles about the coming hyperinflation is, well, overinflated. "
Well, for one thing he here is considering the narrow definition of money when he writes ' the amount of money can rise..." What he is refering to is that the FED has massively expanded ITS portion of the money supply but the banks are taking their share and investing it right back into FED account and Treasuries. So, contrary to the government desire they are not LEVERAGING their asset accounts by LENDING and thus creating expanded credit. To me this process, which has been the basis for the US banking system since 1913 is a matter not so much of 'velocity=speed" and it is of expansion=leveraging. But never mind the semantics, the point is right that so far the huge increase in the basic 'money supply' that shows up in typical graphs has not been leveraged into expanded private credit markets - and has not even equaled the size of the deleveraging resulting from the collapse of credit and increased savings and failure to expand new credit. So I think Mauldin is right that inflation is not a near term threat. But at the same time I note that the critics who do insist on coming inflation are thinking about what will happen WHEN the banking system DOES do what the government demands and does leverage credit=debt back up to 30 and more times. The credit in the system IS money in the real world.
Finally in this section Mauldin states his confidence in Bernanke and the FED, but in a strange way. He writes, "The FED IS going to do what it takes to bring about inflation (in my opinion) (of course it is) "But they will not monetize US government debt beyond what they have already agreed to." He expands on this thought and remarks 'that the Fed will maintain its independence'. But I believe the Fed has NEVER been actually independent from its creation as the government contractor to inflate the money supply, in a way that attempts to absolve the Treasury itself from the action .. The FED can use the same leveraging method it used to create the over expansion of credit, once the furor over insolvency of the banking system is reduced.
Mauldin then comments, "There is a day of reckoning coming with the US debt. And thank God for that." No doubt, but the reckoning will show the mathmatical imposibility of the promises of the 'welfare state' so won't take place without a political revolution.

"It is the Best of Times" is the title for a very different section of this letter. In this part Mauldin engages in a dialog with Bill Bonner, his contemporary in many private and business activities. I find this section to be particularly revealing and an interesting read. That is probably since I have read Bonner's works for years prior to even finding Mauldin. Both of these fine writers are here describing their thoughts about the future in terms of what their children will face. Certainly a central concern of mine also (grand children). Mauldin notes that Bonner 'is a tad pessimistic." That is an understatement for sure. He recommends Bonner's new edition of "Financial Reckoning Day". I have the original edition and recommend it. The essence of Mauldin's reply is that we should all be optomistic about the wonderful future and that Bonner is really more optomistic than he appears to be in his financial writing. But read Bonner 's Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics. Bonner is an Hobbsian or Augustinian in that he is not merely pessimistic about current financial conditions, but rather holds a classic negative view on the whole of human nature. He believes, and provides a lot of historical examples, that the public - the Mob - or 'lumpenpatsies' as he terms it - is intrinsicly subject to delusions produced by demagogic leaders -'Messiahs' - and that the resulting political/economic structures - 'Markets' - are therefore inherently unstable and subject to bubbles, crashes, unexpected (or even expected) disasters. Please do read this book also. And do subscribe to Daily Reckoning - a free economic report -
Mauldin quotes interesting Bonner writing (that appears in his daily column) including a bit about the creation of the Bonner 'family office' in Ireland. Anyone who wants explaination of 'family office' please contact me. What is interesting to me is that a couple months ago, I an no doubt the other subscribers to Bonner's (AGORA) daily letters received in invitation to participate - to join and become a member of this expanded form of 'family office' with a rather minimal purchase of a share in the operation. Very tempting but still too rich for my meager financial situation. The obvious purpose of the invitation is to expand the total size of the capital under control to acheive better leverages and reduce pro-rated overhead.
Mauldin presents an extended comparison of the present and future with the 1970's (the period in which he and Bonner began their careers) and which I well remember from a very different perspective. He notes the role of Volker in defeating inflation (but does not mention the essential political role of Reagan that enabled Volker). And he gives a valid, upbeat prediction about the promise of the future. The Futurist and other writing I read predicts the same and I believe it. I have always focused as he does here on preparation of the offspring to prosper in this future environment. But all this will require and be the result of a coming revolution that Mauldin does not discuss. For instance he points out that life expectancy will greatly lengthen. Yes, but the current welfare state Social Security cannot even finance current life expectancy, nor can the Medicare system and the proposed changes being promoted by politicians include measures to actually reduce the 'burden' of the old folks on the financial system. I hope everyone will read and think about this letter from John Mauldin.

The October 17 - 2009 Letter Thoughts from the Frontline is "Muddle Through, R.I. P?

This letter may be found at Now Mauldin has been describing his perception of the future trend in the investment world and the economy as a whole as a 'muddle through' situation since he coined the term in 2002 - that is that conditions are bad and will get worse, but in the not too distant future after we 'muddle through' the situation will get much better. In this essay he is beginning to have second thoughts about how serious the future economic situation will be and how soon it might recover.
On page 1 he restates his definition of 'muddle through' - slow growth of 1-2 % and "slack employment' as was the case in 2002. In 2007 he predicted there would be a return to recession and another 'muddle through' period. Now in this newsletter he expresses "surprise" that the Federal Reserve has resorted the massive response that includes monetizing a significant amount of federal debt and extremely low interest rates. He 'assumes' that the FED might reverse these measures, and if so there will be a recovery. He provides a graph of possible future trends in the annual budget deficit from Heritage Foundation that is very frightening - going to $1,883 billion by 2019. Mauldin remarks that he never dreamed of such a scenario.
My opinion is that the FED will NOT reverse its policies any time soon and that in fact the annual deficit will likely grow even larger.
Mauldin next provides the standard economic text formula for the Gross Domestic Product - namely it is equal to the sum of Consumption (C) plus Investment (I) plus Government Spending (G) plus the net of Exports (E) and Imports (I).
GDP=C + I + G + (E - I) |
In this equation national savings results from subtracting from GDP the number for consumption and government spending. This indicates that investment then is equal to savings plus net exports. So far so good. Although in my opinion this number for GDP is not a good one to use as an indication of a country's economy, because the larger consumption is the greater is the GDP, but consumption destroys wealth rather than creates it. But that is not Mauldin's fault.
However, he continues by noting that if there is a government deficit then "there must be savings by both consumers and businesses plus capital flow in from outside the country to provide any funds left over for investment." And "absent savings a government deficit crowds out investment in the long run." But government can also fund its deficit not only from taxation and borrowing but also by creating more money - and it does this through the fractional reserve banking system.
Mauldin notes that some of his correspondents claim he is 'too worried' - that is pessimistic. I think he is too optimistic.
He then discusses the case of Japan which experienced and still does a prolonged deflation despite government efforts to generate growth via massive government deficits. He provides excellent analysis on why the Japanese case is much different from that of the United States. (He cites the article from Hoisington Asset Management that he published the previous week and which we will discuss as well.) Hoisington essay included the great comment "In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt."
The discussion on the Japanese case is very important. Then Mauldin comments "I am sympathetic with the idea that in the short run the government should step in and the Fed SHOULD print (within limits) money to keep us from deflation."
With this I much disagree - for one thing deflation is good for us and for another it is essential as the cure for the 20th century inflation. Deflation is the necessary detoxification program the economy must have to overcome the addiction to massive credit=debt. The 3 previous eras of equilibrium in which deflation arrested a lengthy wave of inflation were the three best social-cultural periods in western history - Renaissance, Enlightenment and Victorian era.
Mauldin correctly notes "The way out of the current morass is to create jobs and increase productivity." - Indeed - but this can only be done on a sound basis after deflation has wrung the excesses out of the 20th century inflation. And this means also repudiated the premises of the 'welfare state'.
Mauldin next discusses the question of who will buy the massive federal debt amounting to at least 1.5 trillion each year. He notes that perhaps $400 billion will come back to the US from the trade deficit. He notes that much debt will be bought by US banks and provides graphic description of the process.
Well, yes, but there can continue to be a lot of dollars floating around the world outside the US. A significant part of the actual printed currency is outside the US. I remember when in Russia in early 1990's I could pay a merchant with a 20 or even a 100 dollar bill and receive change in dollars from his ready cash box. And of course there are still plenty of Eurodollars around.
Still, Mauldin's point is excellent. He shows that bank lending is falling now. Here is discusses the 'carry trade' that is now going on in the US (without using that term). Namely banks are playing the FED and Treasury off against each other by borrowing at .5% from one and lending (by buying bonds) at 2 % from the other. The FED is printing money, the banks take it and leverage it up to 10 to 1 and putting it back into the FED. Mauldin explains why this is taking place. The government sees the private side of the bank's balance sheet deteriorating as credit leverage is falling and it is replacing this with government debt (as an asset) on the bank's balance sheet. Thus all this 'printing' of money by the government is not yet causing inflation because it is not even matching the decline in the money supply represented by the private credit markets. Mauldin notes that banks hold some 45% of commercial real estate loans compared to only 21% of the single-family mortgages (These of course are now held by the GSE's and FDIC). The banks are facing an immanent decline in value of that commercial real estate - already down some 30%. So over a trillion dollars in commercial real estate loans are coming due soon. (I note that also insurance companies and pension funds hold real estate paper.)
Mauldin then notes that the Congress wants to raise taxes. And taxes have a 3 fold impact on GDP - A tax increase will decrease GDP by 3 times the size of the tax increase. So a tax increase will increase unemployment and reduce output and ultimately also make the deficit worse. Finally Mauldin comes to his new opinion on 'muddle through' . He believes the 'new normal' economic level will be less than the market believes now. He now thinks the situation won't get better until into 2011 and then only if government changes its policies. He is still optimistic (as always) but now thinks the situation is "Just not one as benign as I used to think" He expects a 'double dip recession starting within 18 months at most with another drop of 40% in the stock market. (I think we already had 2 dips and the coming one will be the third.)

The newsletter for 15 October was a Stratfor analysis of China. I will not comment on these issues.

The October 12, 2009 letter Outside the Box - Volume 5 Issue 48, Quarterly Review and Outlook - Third Quarter 2009 from Van R. Hoisington and Lacy H. Hunter

This is the Quarterly Review and Outlook - Third Quarter 2009 from Van R. Hoisington and Lacy H. Hunter. Mauldin notes that they have been advocates of the view that 'deflation is the problem'. And that they base their assessment on history. Well, I believe that deflation has been the situation since 2000 but that it is not a problem, but rather the solution and one dictated by historical developments.
So lets see what they have written. The subtitle to the first section is excellent 'Ponzi Finance", as indeed it is. They begin by noting that the FED reports total U.S. debt at $52.8 trillion but that this does not include 'off the balance sheet' financing and liabilities for future welfare promises. In other words Enron-style accounting.
They note that current GDP was $14.2 trillion which means the acknowledged debt is $3.73 for every dollar of U.S. output. They provide a clear graphic chart to illustrate this. What makes this situation worse is that the asset side of the balance sheet bought by debt is falling in price and that the money borrowed to finance the assets was "fraudulently expended". Terrific, I am glad a respected authority has the courage to show this. They continue "Neither the borrower nor the lender really expected the debt to be serviced." Exactly, this is the premise of the 'welfare state' in a nutshell. And the current administration does not expect its massive debts to be serviced either. Hosington notes, "Each party expected the asset price to rise extinguishing the debt". Precisely, but HOW will the asset price rise? Answer, via inflation generated by depreciation of the currency. The central activity of the FED since 1913. They quote the great economist, Hyman Minsky, "Financial Instability Hypothesis", in which he described three phases of debt financing. Please read the full article several times. They continue by citing Irving Fischer's book, "Econometrica" Again, please read the full analysis. But Fischer's study was based on the normal credit collapse cycles of the 19th century. And these were relatively isolated events that occurred during a century of overall secular equilibrium, as David Fischer shows. "The Great Wave'. This time we are at the beginning of one of the rare historical deflationary eras generated by the collapse of the 20th century great inflationary wave. So, while I am glad to agree with Hoisington's analysis as far as it goes, I think it is missing the full picture. However, they comment that Fischer (that is Irving) 'seems to be not so historical as prescient'. Their conclusion from this analysis is that major business cycle fluctuations are caused by over-indebtedness and the fall in asset prices, and that the present situation mirrors these previous cycles. And the conclusion then is that the current situation may get worse. Well, again, I agree but they have not focused on what causes the asset prices to fall. But David Fischer describes the causes for the end of a major inflationary wave and the blow off in a deflationary period that brings on eventually a new state of equilibrium.
The next section is titled "The Impossible Promise" - how apt. But now they focus on the current Federal government promise to extricate the economy from this recession by increased spending 'increasing the public debt'. They cite Professor Robert Barro's book Macroeconomics - a Modern Approach" The essence of this is that there is a real short run boost in economic activity from such a stimulus, but that eventually it will depress economic activity. The stimulus based on increasing public debt will merely 'indenture' (another great word) the citizens further. They cite research that indicates that there is 3 to 1 relationship - thus a 1 percent increase in taxation used in an effort to pay of this debt will create a 3 percent DECREASE in GDP. Final conclusion from this is that the current fiscal policy will result in lengthened stagnation. More graphs illustrate this conclusion. They also cite comparison with the experience in Japan. They then write "The promise of the government to revive growth through increased indebtedness is, indeed, an impossible promise.
No doubt true. But the relatively brief excursion into history results in an understatement. It is my contention that the IMPOSSIBLE PROMISE is the continuation of the welfare state itself. The central difference between the inflationary wave of the 20th century and the previous inflations in history is the role of the modern state (and its government) in creating this inflation and making it all the worse. And similarly, during the previous deflationary blow offs that cured the excesses of those inflations there was no government bent on preserving inflation as an essential basis for its 'welfare state' policies. In fact there was NO welfare state prior to the 1880's. Thus the current government policies (not only the US but all the major welfare states) will prolong the process.
Hoisington continues with a section titled "The Hesitant Fed'. (they do have a way with words). They note, 'the write-down of debt and distress selling tends to destroy money deposits and lower the velocity of money". "Our Current FED authorities appear to be oblivious to the lessons of the past. But now they applaud the FED effort to increase the money supply and fault it for not continuing to do this enough to offset the continuing decline that is caused by de-leveraging as credit (loan) volume collapses. Again please read the section.
The final section is titled 'Dollar Weakness". Here they conclude that the failure of the FED to fight credit volume collapse by expanding the money supply even more is resulting in actual deflation continuing rather than inflation returning. They write that dollar weakness also will not create inflation. Even increased imports made possible by a cheaper dollar will not offset this as imports are only 13% of GDP. They note that Roosevelt devalued the dollar versus the price of gold and the dollar fell in value by 60% without ending deflation. But they believe that any further dollar depreciation today will not offset insufficient domestic demand. Thus in 2010 the dollar will remain low, the GDP deflator will fall to zero or negative. Long term interest rates will fall. And long term treasury rates will remain low . They cite Japanese 10 year rates still at 1.3% and 30 year bond rate at 2.1%.

October 9, 2009, LetterThoughts from the Frontline- "Killing the Goose".

This letter may be found at John Mauldin begins by referencing Peggy Noonan about a concern that US government policies will not only take the golden eggs but kill the goose - that is the strong American economic system. Which notes is 'the US free-market economy'. He states that he does not think the situation will deteriorate to that extent, although it is possible. The letter is a discussion of this posibililty. Fine, but I maintain that there is no such thing as a 'free market' now or in the past or future.
Mauldin asks, "what were we thinking?" when we (the US) made so many bad choices that led to the current crisis. He provides an extended quote from Hayman Advisors who in turn cite the research of Professor Peter Bernholz (author of the important book, Monetary Regimes and Inflation: History, Economic and Political Relationships,). The content of this research is analysis of some 28 periods of hyperinflation in the 20th century. According to Bernholz these were all caused by government financing of huge public budget deficits by creating (printing) money - that is expanding the money supply. The inflation became 'hyper' when the "government deficit exceeded 40% of its expenditures." Hayman then gives the current US government expenditures and notes already the government is financing about 40% via borrowing. Mauldin then provides more statistics on expenditures, borrowing and interest payments. He reprints a table from Woody Brock that shows the future trends of US federal debt under various projected GDP growth rates. Mauldin notes that there may be a gap of some $1.13 trillion dollars between expenditure and expected investments in government debt. This, he notes, is about 8% of total GDP. He comments, "There are only three surces for the needed funds: either an increase in taxes or people increasing savings and putting them into government bonds or the Fed monetizing the debt, or some combination of all three." The Fed is already monetizing some of the debt. Mauldin describes the current process in which deflationary de-leveraging of credit is being offset in part by government monetizing. The banks are putting the government money they borrow at zero right back into the Fed at higher interest. Mauldin expands on this theme, noting the role of Paul Volker (but not that of Ronald Reagan) in responding to the demands of the bond market. He thinks that the bond market may again raise demands via higher interest rates.
He describes the situation that Japan has faced for over 20 years of deflation and which how is bringing the Japanese ratio of debt to GDP to near 200%. The US faces a similar struggle between the forces of deflation and the government efforts to create controlled inflation. He sees dire consequences coming if nothing effective is done. This is a very long and detailed discussion. He then gives some suggestions about possible government policies that could make a difference. "First, we must acknowledge the deficit is out of control, and spending must be cut." And raising taxes is not the answer. Rather, tax increases have a 3 times impact that would reduce GDP. Raising taxes would have the same result they had in 1937 throwing the economy back into recession. Mauldin suggests quite a few reductions in government expenditure, including Federal civilian payroll, Social Security, Medicare and more. He recommends major changes in immigration policy and housing. Most amazing of all he recommends a new VAT tax, but also a reduction in corporate taxes and for sure no 'insance' carbon tax. There is much more. He admits that all these will be very unpopular.

Coming when I get a chance.

The October 5, 2009 letter Outside the Box - Volume 5 Issue 47, "A Country of Old Men and a Bit of Samba" by Niels Jensen

John Mauldin - Thoughts from the Frontline weekly for October 3, 2009 - titled - "Another Finger of Instability".

This letter may be found at A short letter quoting Nietzsce and Mark Buchanan's book Ubiquity: Why Catastrophes Happen on the complexity of markets. Mauldin uses the metaphor of an avalanche to note that everything can seemingly be in repose and then suddenly a huge avalanche happens. Mauldin also discusses Hyman Minsky's idea that stability itself breeds instability. He mentions Nash's idea abaout equilibrium in game theory. And then he notes Paul McCulley's idea 'stable disequilibrium". He provides a graph from Chad Starliper showing the debt-to-GDP ratio in the US already at 1,000% counting future promises. He quotes a famous line I also use "Ifsomething can't happen, then it won't' to note that the US government simply cannot run trillion dollar deficits every year for the next 10.

The September, 2009 letter Outside the Box - Volume 5 Issue 46, "Into the Fourth Turning", by Neel Howes and David Galland

John Mauldin - Thoughts from the Frontline weekly for September 26, 2009 - titled - "Welcome to the New Normal"

This letter may be found at The theme of this letter is current and future unemployment. At the writing the official figure was 9.7% but when counting the marginally attached workers it came to 11%, and adding part-time workers brought it to 16.8 %. Then he notes that the US adds about 1.5 million new workers each year just from population growth. He concludes that over the following 5 years the country will heed to add 7.5 million jobs or at least 125,000 a month. But some authors write it should be 9 million jobs. Then counting the unemployed the number comes to 15 million jobs just to return to a 5% unemployment level or 250,000 jobs per month. The tables he provides show the data for job creation going back to 1999. The average monthly job addition since 1989 is only 91,000 a month. Mauldin then notes that the proposed Obama tax increases will be suicide and create a second recession.

John Mauldin - Thoughts from the Frontline weekly for September 19, 2009 - titled - "The Hole in the FDIC"

This letter begins with part 3 of Mauldin's discussion of the 'elements of deflation'. He faults the bureaucracy for providing phony statistics such as hedonic measures of consumer price levels. The hole in the FDIC is the gap on its balance sheet between assets and liabilities being incured from bank failures.

The September 17, 2009 letter Outside the Box - Special Edition, "A German Pre-election Win and Emerging U.S. Tensions", by George Friedman

The September 14, 2009 letter Outside the Box - Volume 5 Issue 45, "Penury, Self-imposed or Inflicted, The New Normal?" by Philippa Dunne and Doug Heuwood

John Mauldin - Thoughts from the Frontline weekly for September 12, 2009 - titled "Elements of Deflation: Part 2 "

In this letter Mauldin describes the standard economic theory about deflation. He focuses on the money supply - is it growing or not - and the concept of 'velocity' with the standard equation Y=MV and provides a graph showing the GDP divided by M2 and M3 and the CPI inflation moving average from 1900 to 2005. This letter deserves considerable discussion.

John Mauldin - Thoughts from the Frontline weekly for September 5, 2009 - titled "Elements of Deflation"

The September 13, 2009 letter Outside the Box - Special edition, "Reactions to a Proposed Energy Law", by George Friedman

The August 31, 2009 letter Outside the Box - Volume 5 Issue 44, "Spain - The Hole in Europe's Balance Sheet", by Variant Perception

The August 28, 2009 Letter Thoughts from the Front Line, "An Uncomfortable Choice"

The August letter 27Outside the Box - Volume 5, Issue 43 "Between Rock and Hard Place", by Bank Credit Analysts and London Office of Morgan Stanley

The August 21, 2009 Letter Thoughts from the Front Line, "The Statistical Recovery, Part Three"

The August 20 letter Outside the Box - Special edition, "Iraq End Game", by George Friedman

The August 17 letter Outside the Box - Volume 5, Issue 42 "Growth in Potential GDP", by Dr John Hussman and GraveKal

The August 14, 2009 Letter Thoughts from the Front Line, "The Statistical Recovery, Part 2"

The August 10 letter Outside the Box - Volume 5, Issue 41 "Slow Long Term Growth and Government's Response", by Gary Shilling

The August 7, 2009 Letter Thoughts from the Front Line, "The Six Impossible Things before Breakfast"

The August 6 letter Outside the Box - Special Edition, "The Recession in Central Europe: Part 2, Country by Country, by George Friedman

The August 4 letter Outside the Box - Volume 5, Issue 40 "U.S. GDP Review - Consuimers, where art Thou?", David Rosenberg

The July 31, 2009 Letter Thoughts from the Front Line, "The Great Reflation Experiment"

The July 27 letter Outside the Box - Volume 5, Issue 39 "Breakfast with Dave", by Dave Rosenberg

The July 24, 2009 Letter Thoughts from the Front Line, "The Statistical Recovery"

The July 23 letter Outside the Box - Special Edition, "Russia, Ahmadinijad andIran Reconsidered", by George Friedman

The July 20 letter Outside the Box - Volume 5, Issue 38 "Should the Fed be Responsibly Irresponsible"", by Ambrose Evans-Pritchard and Paul McCully

The July 17, 2009 Letter Thoughts from the Front Line, "Europe on Brink"

The July 13 letter Outside the Box - Volume 5, Issue 37 "Debt and Deflation", by Van Hosington and Dr. Lacy Hunt

The July 9 letter Outside the Box - Special Edition "TheU.S. Russian Summit", by George Friedman

The July 6 letter Outside the Box - Volume 5, Issue 36 "Make Sure you get this one Right", by Niels Jensen

The June 29 letter Outside the Box - Volume 5, Issue 35 "A 20-Year Bear Market?", by David Galland

The June 26, 2009 Letter Thoughts from the Front Line, "The End of Recession?"

The June 22 letter Outside the Box - Volume 5, Issue 34 "A Tale of Two Depressions", by Barry Eichengreen and Kevin O'Rourke

The June 19, 2009 Letter Thoughts from the Front Line, "This Time its Different"

The June 18 letter Outside the Box - Special Edition, "Iranian Elections, Israel and The United States", by George Friedman

The June 15 letter Outside the Box - Volume 5, Issue 33 "Fear of Lost Decade", by Paul Krugman

The June 8 letter Outside the Box - Volume 5, Issue 32 "History of Economists in Thrall to Keynes", by

The June 4 letter Outside the Box - Special Edition "Geography of Recession", by Peter Zeihan

John Mauldin - Thoughts from the Front Line weekly for May 29, 2009 - titled "This Way There Be Dragons"