Gold Speculator - Thoughts from the Frontline

Gold Speculator - Thoughts from the Frontline http://www.gold-speculator.com/ Editorials by John Mauldin, President of Millennium Wave Securities. www.2000wave.com. John Mauldin is the creative force behind the Millennium Wave investment theory. John is a New York Times best-selling author with a unique ability to present complex financial topics and make them understandable to the lay reader. He has authored Just One Thing, Eavesdropping on Millionaires: Secrets of the World’s Wealthiest Investors, and Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market. en Fri, 10 Sep 2010 07:05:14 GMT vBulletin 60 http://www.gold-speculator.com/images/misc/rss.jpg Gold Speculator - Thoughts from the Frontline http://www.gold-speculator.com/ The Last Chapter http://www.gold-speculator.com/thoughts-frontline/37470-last-chapter.html Sun, 05 Sep 2010 09:14:21 GMT The Last Chapter
Let's Look at the Rules
Six Impossible Things
Killing the Goose
Home and Then Europe

This week you will get a kind of preview as this week's letter. I am desperately trying to finish the first draft of my book and am one chapter away from having that draft. I have promised my editor (Debra Englander) that she would see a rough draft next week, and the final version will be delivered on the last day of September. More on that process for those interested at the end of the letter. But this week's letter will be part of what will probably be the 4th or 5th chapter, where we look at the rules of economics.

There is just so little writing time left that I have to focus on that book for a little bit. I am writing this book with co-author Jonathan Tepper of Variant Perception (who is based in London), a young and very gifted Rhodes scholar with a talent for economic analysis and writing. We each write the first draft of a chapter and then go back and forth until the chapter has been much improved. Alas, gentle reader, you will only get my first draft. You will have to wait for the book to get the new, improved version. But this is the last one I have to write. And Jonathan has done all his initial chapters. We are on the home stretch.

But first, my partners at Altegris Investments have written a White Paper entitled "The New Normal: Implications for Hedge Fund Investing." It is a very instructive read. If you are in the US and have already signed up for my Accredited Investor letter, you should already have been sent a link or a copy. If not, and you are an accredited investor (basically net worth of $1.5 million or more) and would like to see the paper, or are interested in learning more about how hedge funds, commodity funds, and other absolute-return strategies might fit into your investment portfolio, I suggest you click on www.accreditedinvestor.ws and fill out the form, and a professional will get back to you. And if you live outside the US and are interested, I have partners around the world who can work with you, so you can sign up as well. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC. Member FINRA.) And now let's look at part of a chapter from The End Game.

Let's Look at the Rules

There are rules in sports. Three strikes and you're out. You have to make ten yards in four downs to get another first down. You can't touch the soccer ball with your hands.

Baseball is a confusing game for most non-Americans. There are so many rules and subtleties. I (John) confess to not understanding the rules in soccer, although I am getting better. And forget about understanding hockey.

There are rules in economics as well, they're just not as well-known. And breaking these rules has consequences for individuals, companies, and countries. Sadly, there is no independent referee who can blow a whistle and stop the game, assess a penalty, and make you obey the rules. There is, however, a market that can decide not to buy your currency or your bonds if you don't play by the rules.

We are going to look at some of the more important rules in this chapter. But, gentle reader, don't panic. These rules are fairly easy to understand if we take out the academic jargon often associated with them. And if you "get it" then it is much easier to understand the consequences of what happens when a nation violates the rules, both from a policy perspective and a personal investing point of view.

Also sadly, there is not necessarily an immediate penalty for a violation. As we saw in the last chapter, a country can rock along for a very long time before that Bang! comes along and the flag finally gets thrown. But in the fullness of time, if a country does not correct its misbehavior, the end will be full of weeping and wailing and gnashing of teeth. And a lot of finger pointing - it is always the other side's fault.

Note that the rules are the same for everyone and every country. These are basically accounting rules known as identity equations. They are like E=MC2 or F=MV (force is equal to mass times velocity). They are just true. If they are not, then a thousand years of accounting is wrong. You may not like what they say, or not like the consequences, but you have to deal with the real world, take it or leave it.

John here: in 1976, as a very young entrepreneur (no one would hire me, so I had to work for myself), I had launched my first business, and my best friend did my taxes. I thought I had sent the IRS more than enough to cover me. Then he came to me with a tax bill that was more money than I had ever seen in one place. I guess the concept that I had to pay the employer's side of Social Security had escaped my attention in my quest to simply survive, along with all sorts of alternative minimum taxes and other things I had never heard of. Reality can be a real bitch.

The importance of knowing the rules was forcefully driven home. And the rules we will now look at are every bit as important as knowing those tax laws. Even if you don't know about them, they exist and will eventually come to haunt you (whether you're an individual, a company, or a nation) if you ignore them.

The Federal Reserve and central banks in general are currently attempting a major and highly experimental operation on the economic body, without benefit of anesthesia. They are testing the theories of four dead white guys: Irving Fisher (representing the classical economists), John Keynes (the Keynesian school), Ludwig von Mises (the Austrian school), and Milton Friedman (the monetarist school). For the most part, the central bankers are Keynesian, with a dollop of monetarist thrown in here and there.

Six Impossible Things

Alice laughed. "There's no use trying," she said, "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."

- From Through the Looking Glass, by Lewis Carroll

Economists and policy makers seem to want to believe impossible things in regard to the debt crisis currently percolating throughout the world. And, believing in them, they are adopting policies that could will well lead to tragedy.

Let's look at the basic equation that summarizes a nation's Gross Domestic Product.

GDP = C + I + G + Net Exports (that is, exports minus imports)

Which is to say, the Gross Domestic Product of a country is equal to its total Consumption (personal and business) plus Investments plus Government Spending plus Net Exports. Again, this equation is known as an identity equation: it is true for all countries and times. And it is rather simple in concept but has profound implications.

Let's examine some of those implications. First, what happens if the C drops? That means that, absent something happening elsewhere in the equation, GDP is going to drop. That circumstance is typically called a recession.

Keynesian economists argue that the correct policy response is to boost the G through fiscal stimulus, allowing consumers and businesses time to adjust and recover, and to gradually remove that stimulus as the economy returns to its normal growth trajectory. And, as an added measure, it helps if the central bank will become more accommodative, with lower interest rates and an "easy-money" policy to give further stimulus to business and consumers. In most places and in most times in recent (as in 60) years, these policies have worked to help bring an economy through a recession.

There are, however, those who argue that such a policy also keeps in place the imbalances that cause the problems (such as ever-increasing growth in consumer borrowing, housing bubbles, etc.), and we'll return to that argument later in the book; but for now let's acknowledge that a boost in G provides a temporary boost in GDP. Elsewhere we will show that the boost is indeed temporary, but few will argue that it does make a short-term difference. We believe that the recent stimulus in the US, as an example, did in fact have a temporary effect and kept the US out of what might have been a depression, but not without its own costs. That debt must be repaid.

Again, the idea is to try to offset the effects of a retrenching consumer and business sector and give the overall economy time to recover. The US began to withdraw from the stimulus in the summer of 2010. And sure enough, the economy is slowing down. Only time will tell whether the economy is strong enough to return to a sustainable growth trajectory.

The hope is that with the stimulus you can give a jump-start to consumer final demand. In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. This is the demand for the gross domestic product (GDP) of a country when inventory levels are static.

Remember that for most developed economies consumer spending is a big part of the economy. In a recession, final demand (consumer spending) retreats; therefore the objective of stimulus is to get demand back on track. For economic theories that see final demand as the driving force behind growth, recessions are simply a problem of a lack of consumer spending. Get that back in gear and you the economy moves forward.

Now, in fairness to Keynes, he also asserted that governments should run surpluses in good times, something that most countries have not seemed to be able to do. In our view, one of the main faults of the Bush administration, in conjunction with a profligate Republican Congress, was that they squandered the surpluses that we now need. We will deal with Vice President Cheney's assertion that "deficits don't matter" in due course.

Before we go into the other, more profound implications of our equation, let's visit a few other topics that will give us needed insight into them.

Delta Force

There are two, and only two, ways that you can grow your economy. You can either increase your (working-age) population or increase your productivity. That's it. There is no magic fairy dust you can sprinkle on an economy to make it grow. To increase GDP you actually have to produce something. That's why it's called gross domestic product.

The Greek letter delta (?) is the symbol for change. So if you want to change your GDP you write that as:

?GDP = ?Population + ?Productivity

That is, the change in GDP is equal to the change in population plus the change in productivity. Therefore, and I'm oversimplifying a bit here, a recession is basically a decrease in production (as normally, populations don't decrease).

Two clear implications: The first is that if you want your economy to grow, you must have an economic environment that is friendly to increasing productivity.

While government can invest in industries in ways that are productive, empirical evidence and the preponderance of academic studies suggest that private companies are better at increasing productivity and producing long-term job growth.

Going to the US for a second, studies show that it is business startups that have produced nearly all the net new jobs over the last 20 years. Let's look at this analysis by Vivek Wadhwa.1

"The Kauffman Foundation has done extensive research on job creation. Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics, which provides details about the age and employment of businesses started in the U.S. since 1977. What this showed was that startups aren't just an important contributor to job growth: they're the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually.

"When analyzed by company age, the data are even more startling. Gross job creation at startups averaged more than 3 million jobs per year during 1992-2005, four times as high as any other yearly age group. Existing firms in all year groups have gross job losses that are larger than gross job gains.

"Half of the startups go out of business within five years; but overall they are still the ones that lead the charge in employment creation. Kauffman Foundation analyzed the average employment of all firms as they age from year zero (birth) to year five. When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.

"So we can't count on the Intels or Microsofts to create employment: we need the entrepreneurs."

Run through the data from around the world. Where has the vast majority of long-term net new jobs come from, even in China? The private sector. And what is the mother's milk of the private sector? Money. Investments. Angel investors. Private banking. Private offerings. Public offerings. Loans. Personal savings. Money from friends and family. Borrowing against houses. Credit cards. And anything else that provides capital to business.

(We are reminded of the improbable story of Fred Smith, the founder of FedEx, who early in the history of the company could not make payroll. So he flew to Las Vegas and wagered what little cash they had, and incredibly made enough [$27,000] to keep the company alive. Not exactly orthodox investment banking procedure, but it is illustrative of the crazy, gung-ho nature of some entrepreneurs. Eighty percent of all business startups do not exist after five years (at least in the US). We guess Fred figured he could get better odds in Vegas.)

Want to increase productivity and jobs? The best way it seems, is to encourage private business, and especially startups.

Now let's go back to our first equation. You remember,

GDP = C + I + G + Net Exports

We will spare you the mathematical rigamarole, but if you play with this equation some, you come up with the following:

Savings = Investments

That is, the savings of consumers and business are what is available for investment in businesses, which grow the economy. But there is a rather large but.

Those savings are also what finances government debt. Unless a central bank elects to print money, government debt must be financed by the private sector. That means, if the fiscal deficit is too large it will crowd out private investment. But as we have seen, private investment is what fuels productivity growth, so if you don't have enough savings to satisfy private investment needs, you are choking off productivity growth and the creation of new jobs.

Japan is an instructive example. The government debt-to-GDP ratio has risen from 51% in 1990 to over 220% by the end of 2011, absorbing almost all of the rather enormous savings of the Japanese public. And what have they gotten for their largesse? Nominal GDP is where it was 17 years ago, and there have been no net new jobs for two decades. Think about that for a moment. In 1990, many pundits were proclaiming that Japan would overcome the US in the near future. Now they have suffered two lost decades and are on their way to a third as government debt has absorbed whatever capital would have been available to private investment. (See our analysis of Japan further on.)

If you are a country facing a population decline (like Japan), to keep your GDP growing you have to increase your productivity even more. That is why we have so much to say about demographics later in the book. Population growth (or the lack thereof) is very important. Russia is facing a very serious problem over the next 20 years that will require either a significant increase in productivity or large immigration to stave off a collapsing economy. Russia's population has declined by almost 7 million in the last 19 years, to 142 million. UN estimates are that it may shrink by about a third in the next 40 years. But that's a story for another book.

Note: We are not against a healthy government sector. But when government becomes too big or absorbs too great a share of private savings, it chokes off productivity and growth. And that hurts job creation. And that is especially true when a government runs large fiscal deficits.

Back to Vice President Cheney's famous assertion that "deficits don't matter." In one sense he is right. Let's play a thought game.

Suppose we start a business that watches its income grow by $100,000 a year every year. Assuming 5% interest rates, we could borrow $1 million every year and never really encounter a problem, as our income would be growing at twice the rate of debt service. We are running a "deficit" as a business (spending more than we make), but the deficit doesn't matter, since our profits and productivity increase more than the debt service. In ten years we owe $10 million, but we are making $1 million and could actually pay down the debt in less than ten years if we stopped borrowing so much money.

For that business, deficits don't matter.

But what if interest rates rose to 10% and our profits dropped in half? Then, Houston, we have a big problem. Now our profits don't cover the interest payments. In fact, we have to borrow money just to make the interest payments. As long as friendly bankers cooperate, we can survive. And because we were so profitable for so long, they might just keep lending, assuming that things will get back to normal.

But at some point we need to start showing a profit or they will stop making those loans and suggest we sell assets, or even take them from us.

In that case, deficits matter a whole lot.

It is the same for countries. Governments cannot run deficits in excess of the growth in GDP without eventual consequences. As we saw last chapter, things go along well until Bang! bond investors lose confidence in the ability of a government to pay its debt, even if that debt is denominated in a currency the government can print! Bond investors become concerned that the currency will lose its value faster than the interest on the bond will grow. Then interest rates rise, making it even harder for the country to pay back its debt.

We all know about Greece, but let's look at the US. Our fiscal deficit for 2010 is projected to be about 9% of nominal GDP (now roughly $14.3 trillion), down from 12-13% a short while ago. The Congressional Budget Office currently projects that the deficit will still be $1 trillion in ten years. The Heritage Foundation thinks a more realistic estimate is closer to $2 trillion in just nine years. Either one is very troubling.

Dr. Woody Brock has written a very important paper on why a country cannot grow government debt well above nominal GDP without causing severe disruptions to the overall economic system.2

We are going to reproduce just one table from that piece. Note that this was Woody's worst-case assumption, adding 8% of GDP to the debt each year, and not the 9-12% we are experiencing today. The Congressional Budget Office long-range projections are growing worse with each estimate, and that assumes a very rosy 3% or more growth in the economy for each of the next five years. Under Woody's scenario, the national debt would rise to $18 trillion by 2015, or well over 100% of GDP. Take some time to study the tables, but note that we are going to focus on 2015 and not the outlier years.

Woody makes the assumption that US debt will grow about $1.5 trillion a year. That means that by 2015, even assuming an average of 2% growth of the economy, the debt-to-GDP ratio would be 110% (or 1.1 in Woody's table)

And in just another ten years, by 2025, if the deficit were not brought under control, debt-to-GDP would climb to 200%. Note that the Heritage Foundation suggests that, under current budgetary law, the deficit will grow by more than the $1.5 trillion a year that Woody projects, in the not-too-distant future.

The point here is not to predict some future catastrophe but to point out what can happen very quickly if deficits are not brought under control.

It is our contention that long before we ever get to that point (say 2020) the bond market will revolt and interest rates will rise and the results will be very unpleasant.

Killing the Goose

Governments can increase their debt as long as the increase is less than the growth in nominal GDP. It may not be a wise choice to do so, but it does not "kill the goose." That is why Cheney argued that deficits don't matter. The deficit he was commenting on was less than the growth in nominal GDP. We assume that he never thought we would see deficits of 12% (worse in some countries). But he should have.

Voters around the world are increasingly worried that governments are not only taxing the goose that lays the golden eggs but risking the very life of the goose. And unchecked deficits do in fact risk the economic life of a country. You can get away with them for a while, but at some point you have to deal with them or risk becoming Greece. Or Argentina.

Let's look at another serious implication, again using the US as our example.

A $1.5-trillion-dollar yearly increase in the deficit means that someone has to invest that much in Treasury bonds. Let's look at where the $1.5 trillion might come from. Let's assume that all of our trade deficit comes back to the US and is invested in US government bonds. That could be as much as $500 billion, although over time that number has been falling. That still leaves $1 trillion that needs to be found to be invested in US government debt (forget about the financing needs for business and consumer loans and mortgages).

$1 trillion is roughly 7% of total US GDP. That is a staggering amount of money. And again, that assumes that foreigners continue to put 100% of their fresh reserves into dollar-denominated assets. That is not a safe assumption, given the recent news stories about how governments are thinking about creating an alternative to the dollar as a reserve currency. (And if we were watching the US run $1.5-trillion deficits, with no realistic plans to cut back, we would be having private talks, too.)

There are only three sources 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.

Leaving aside the monetization of debt (for a later chapter), using taxes or savings to handle a large fiscal deficit reduces the amount of money available to private investment and therefore curtails the creation of new businesses and limits much-needed increases in productivity. That is the goose we will kill if we don't deal with our deficit.

It is time to hit the send button, as this letter (and chapter) is getting long. But next week we will pursue this theme. We will see why trade deficits matter, how these problems affect currencies, and why everyone can't export their way out of the problem at the same time, which may be the most contentious of all future problems.

As Ollie said to Stan (Laurel and Hardy), "Here's another nice mess you've gotten me into!" A nice mess indeed.

Home and Then Europe

I got back from LA yesterday. We went out to look at the new web sites (among a lot of other things). They are coming along very nicely. Tiffani and I are quite excited. New look and feel, but more importantly, a new ability to serve you, with reader forums, audio podcasts, a better search engine, and so much more. It is really coming together. Right now it looks like we will be "live" before the end of the month.

I leave for Europe in about eight days and will be there for two weeks. Amsterdam, Malta, Zurich, Mallorca (with my partners from Absolute Return Partners in London, at Neils Jensen's fabulous mountain home overlooking the ocean, and joined by Enrique Fynn, my Latin American partner – I can assure you the whole weekend will be strictly business!). Then it's Copenhagen for open meetings and a dinner with the team from Jyske Bank (Thomas and Lars), and then on to London.

I will be speaking in Houston October 1, at a public forum. You can sign up at www.streettalklive.com.

When Tiffani became pregnant, we decided we would just adjust our lives so she could continue working and still be a mother (Dad desperately needs her to run the business!). That means nannies come along on trips, and granddaughter Lively is at the office most days, with some time for Tiffani to be a mother every day. It is working out better than I thought it would, to be honest, and it is huge fun to watch my granddaughter grow up day by day. She sits in on meetings and is absorbing it all!

And raising a kid is a lot different these days. Nine-month-old Lively is in love with a kids' TV show called Yo Gabba Gabba. She already "dances" to the music and loves the large puppets and songs. I looked over on our flight to LA, and Lively was sitting in Tiffani's lap, with her baby headphones on (who knew they made special baby headphones?), watching Yo Gabba Gabba on an iPad! Is this a happy baby or what?

For the record, that picture is from an iPhone. The new one is 5 megapixels. And sometime I will write about my iPad. I love it. It is now my favorite toy. I can so see not needing a heavy laptop in the future. The iPad is a game changer. I know other guys are coming out with cool competitive products, and I cheer them on. Apple will have to make this even cooler or lose out. Video chat? Cameras? My phone? Skype or the equivalent? Can we get a decent version of Word? Powerpoint? Excel? Unchain me!

Oh, and coming to an iPhone and iPad near you as soon as we can: the Mauldin apps. Way cool.

Your wondering how it is possible to have so much fun analyst,

John Mauldin

[1] Vivek Wadhwa is an entrepreneur turned academic. He is a visiting scholar at the School of Information at UC Berkeley, a senior research associate at Harvard Law School, and director of research at the Center for Entrepreneurship and Research Commercialization at Duke University.

[2] If you have not read Dr. Brock's paper, or would like to read it again, it is at http://www.investorsinsight.com/blog...gdp-ratio.aspx

Click here for the original post... ]]> Thoughts from the Frontline RssFeed http://www.gold-speculator.com/thoughts-frontline/37470-last-chapter.html The Dark Side of Deficits http://www.gold-speculator.com/thoughts-frontline/36974-dark-side-deficits.html Sun, 29 Aug 2010 07:46:23 GMT Secular Bull and Bear Markets
It's Not the (Stupid) Economy
The Consequences of a Credit Crisis
The Dark Side of Deficits
LA, Europe, Kansas City, and Houston

In the pre-crisis days, I used to write about things like P/E ratios, secular bull and bear markets, valuations, and all of the things we used to think about in the Old Normal. But what about those topics as we begin our trip through the New Normal? It's time to reconvene class and think through what might change and what will remain the same. I think this will be a fun read - and let me tip my hand. I come out on the side of a new secular bull that gets us back to trend - but not just yet. The New Normal has to have its turn first. (Note: this will print out longer than usual, as there are a lot of charts.)

And speaking of first, I once again need some help from readers. I will be in "jail" next week for the Muscular Dystrophy Society. I need you to help bail me out. You can go to https://www.joinmda.org/downtowndallas2010/johnm and make a donation to help kids and families who really need help in these difficult times, and also help sponsor research that will eventually cure this disease. If you follow the link, you can see a cute video - and then make your donation!

I thank you and I am sure Jerry's kids thank you too!

Secular Bull and Bear Markets

Market analysts (of which I am a minor variety) talk all the time about secular bull and bear cycles. I argued in this column in 2002 (and later in Bull's Eye Investing) that most market analysts use the wrong metric for analyzing bull and bear cycles.

(For the record, even though I am talking about the US stock market, the principles apply to most markets everywhere. We are all human.)

"Cycles" are defined as events that repeat in a sequence. For there to be a cycle, some condition or situation must recur over a period of time. We are able to observe a wide variety of cycles in our lives: patterns in the weather, the moon, radio waves, etc. Some of the patterns are the result of fundamental factors, while others are more likely coincidence. The phases of the moon occur due to cycles among the moon, the earth, and the sun. In other situations, though, apparent patterns are no more than the alignment of random events into an observable sequence.

All cycles have several components in common. Cycles have a start and an end, they have characteristics that repeat from cycle to cycle, and they often have an explainable cause.

Stock market observers have identified what they believe to be scores of cycles, patterns, correlations, and relationships that have spawned a seemingly endless inventory of predictions and trading schemes. Every trader has his favorite system, well-fortified with back-tested "research" and "facts." These systems all work fine until you begin to use them with real money.

The patterns are so numerous that some market experts discount all theories and acquiesce to a philosophy of randomness (that would be you, Burt!). However, just because we don't understand it, doesn't mean there's not useful information contained within a pattern.

I argue that we should use valuations and not prices as the criterion for determining secular bull and bear cycles. If you use valuations, the cycles jump off the page at you. Using prices, it is very difficult. Let's look at a table prepared by my good friend Ed Easterling of Crestmont Research. Ed co-authored the two chapters in Bull's Eye Investing on stock market cycles and has a treasure trove of charts and tables on a wide variety of investment topics at www.crestmontresearch.com. And his book Unexpected Returns is a must-read for anyone who manages money, whether their own or someone else's.

OK, the following chart shows secular bears in terms of valuations. There have been four bulls and five bears (we are in one now) since 1900. (You can see a larger chart at Ed's site, under secular cycles.)

Secular bulls begin with low valuations and continue until valuations get "too high" in terms of P/E ratios. The opposite for secular bears. The average cycle over the last 110 years lasted about 13 years. These are not short-term phenomena.

Within those longer-term secular cycles you can have so-called cyclical swings based on price, and some of those counter-trend cycles can be quite large!

The first cycle of the twentieth century was a bear. It started in 1901 with the market P/E ratio cresting at 23. Twenty years later, with the P/E ratio firmly in single digits at 5, the bear went into hibernation. Over the twenty years of that secular bear, the Dow Jones Industrial Average (DJIA) had managed to tick up from 71 at year-end 1900 to 72 at year-end 1920.

But, during those two decades, the market moves were far from calm. Annual returns from New Years' Eve to New Years' Eve ranged from -38% to +82%! The best-performing three years were +82%, +47%, and +42%. After each of those years I am sure the pundits proclaimed the death of the bear. Yet the three worst years were -38%, -33%, and -31%. As we'll see with most secular bear cycles, the period was as violent and choppy as the high seas in a monsoon. Across the 20 years in this bear cycle, 45% were positive-return years - but never more than two in a row! The 11 down years were generally singles or pairs, with only one three-year stretch at the start of the cycle. Although the average gain was +30% and the average loss was 17%, the change from beginning to end was a paltry +2% in total.

Yet during that secular bear cycle, the economy grew and earnings rose. However, P/E valuations declined and offset virtually all of the economic growth. The market's price (P) was essentially unchanged from start to finish, and E (earnings per share) rose sharply. So with the market price (P) virtually unchanged, it is clear that the decline in the P/E ratio offset the gains in earnings (E). Earnings growth is often strong in bear markets - and that growth is eroded by declining P/E ratios.

Most investors do not think of the years 1933-36 as being part of a bull cycle, as the markets did not make a new high from the 1929 high. We think of those times as the heart of the Depression. But P/E ratios rose from single digits to 19, and the market tripled in just a short time. It behooves those who are genetically predisposed to a bearish position to remember that markets have a logic of their own.

The critical factor is to notice that at the start of each bull cycle, the markets had single-digit P/E ratios, with no exception. NO secular bull market ever began with high P/E ratios, even though significant rallies often started from high P/E ratios. The lesson of history is that all periods of high valuations come to an unhappy end.

And that will be the case for cycles to come. Notice that real secular bull cycles begin with low double-digit or single-digit P/E ratios. Today the P/E on reported earnings is 16.3, down from the 42 at which this cycle started, but still a long way to go until we get to low double digits.

You hear a lot of BS on various media about forward P/E ratios being only 11.5; so if that is the case then stocks are cheap, even by my standards. But those stock touts and shills use operating earnings, something that was really never done until the 1990s, and that is a way for companies and people who want you to buy stocks or mutual funds to maintain that valuations are better than you think. Operating earnings estimates are over 39% higher than estimated as-reported earnings.

Reported earnings are real, in our pockets, what we put on our tax returns. Operating earnings are of the EBIH variety, that is Earnings Before Interest and Hype, or Earnings Before Interest and Bad Stuff (the BS of earnings). Those are the expenses they ignore because they pinky swear those mistakes will never happen again. Anybody using operating earnings on TV should have a flashing warning underneath their picture that says "stock promoter" or "cheerleader" or worse. I lose patience with such pandering.

That being said, using reported earnings estimates, by the end of 2011 stocks may be getting to the place where there is some value in the broad market, based on history. Not by a lot, but enough that the next ten years might not be a write-off, again by historical standards. Enough to make me a bull? No, because we will likely not be down close to single digits. But we will be getting there.

It's Not the (Stupid) Economy

How many times are we told by the financial "experts" that the economy drives the stock market? It's often emphasized that when the economy picks up, the stock market will follow (or even lead).

While this may be true in the short term, the data clearly shows it is not so in the long term. The economy and earnings can be rising even as the market falls or drifts sideways. Over time, the stock market is driven by two major factors: long-term earnings and price/earnings (P/E) ratios. We do recognize that the economy clearly affects long-term earnings. As a matter of fact, research demonstrates a strong relationship between earnings and nominal economic growth.

However, the most significant driver of stock market returns is the valuation embedded in the P/E ratio. Over the past century, P/E ratios have cycled from higher levels to lower levels. The range from high to low has been substantial.

Let's accept that earnings are generally growing, increasing over time. When P/E ratios are rising, the double impact of rising earnings and rising P/E's produces substantial stock market gains - secular bull markets. When earnings are rising yet P/E ratios are declining, the offsetting impact is a choppy, flat stock market with some rather large downdrafts from time to time - a secular bear market.

Does the economy matter? Yes. Does the stock market necessarily follow the economy? No. The key to knowing the longer-term direction of the market is to know the longer-term direction of the P/E ratio.

Thus, the question of the day becomes: how can we know the direction of P/E ratios?

Interestingly, average P/E ratios tend to trend over long periods of time, and markets move around them. Let's look at some charts that Ed sent to me this morning. The first is the move in P/E ratios since 1970, with Ed giving us the trendline as a dotted line. The red portion going into 2011 is based on estimated earnings. Notice that after being way below trend we are on our way (if estimates are right) to being back above.

Now, let go back to 1900 and project forward on that trend line until 2030.

Notice that earnings rise to almost $180 (in real terms), well more than double from where they are today. And that has been the trend for 110 years, so it is fairly well established. But now let's look at this same chart on a log scale, and with me adding a few lines of my own.

Now, let me explain how I have marked up Ed's graph. First, I have circled in yellow the period from about 1930 through 1940. Note that the trend growth in earnings per share was well below the smoothed line we saw in the previous graph. No surprise, we were in a deflationary depression. But the point is that we got back to trend after the war and continued merrily on our way. Those ten years were not fun, but we did recover.

Now fast forward to today. What if something like the same phenomena happened over the next 20 years? I penciled in a black line going sideways (from 2010) for about 7-9 years as earnings rise, but not as fast, and then a true boom back to the "normal" trendline by the end of 2030. And what a boom it would be to get back to the long-term trend!

The Consequences of a Credit Crisis

I have written in numerous letters that the aftermath of a credit-crisis recession is a lengthy period, maybe as much as ten years, where all sorts of markets are more volatile and there are more frequent recessions. By definition, recessions are not good for earnings. We should expect two recessions between now and the end of the decade. That is what comes with the end of a credit crisis and the ensuing deleveraging cycle.

That is going to weigh on corporate earnings. But it will do more. Think about the period from 1966 through 1982. Four recessions, volatility, and P/E ratios ending up at 7, as Business Week famously declared "The End of Equities" on its cover. Who wanted to own stocks? Investors were disgusted.

Could that happen this decade? I think it is very possible. The stock market goes sideways and P/E ratios keep marching right on down, as we go through two more recessions and people get disgusted with stocks, just like in the early '80s. Then, as we (hopefully) get our government fiscal house in order, and as new technologies kick in, we see a true boom in the 2020s! It is once again the Roaring 20s!

The Dark Side of Deficits

Two last charts from Ed. The first is the average GDP for the last 110 years, and the next is a graph of real GDP above and below that average of 3.3%. Note that GDP per capita in the 2000s was the second lowest for the last 110 years. Also that real GDP was the second lowest. Not pretty.

One could take comfort from the long perspective that the US will get back to trend GDP growth of 3.3% and that earnings will go back to trend, as I illustrated in a previous chart. That would require a decade well above trend growth to balance things out. And that is what SHOULD happen.

There is one caveat. The research of Reinhardt and Rogoff demonstrates that when the government debt-to-GDP level gets to about 90%, trend growth seems to drop by about 1%. They do not offer an explanation, just an observation. My speculation is that it might be government spending and debt crowding out private savings, not leaving enough for productive private investment.

But whatever - if we do not get control of our deficit spending, we (in the US) risk putting our growth in jeopardy. If we do indeed see trend growth slip to 2.3%, then my optimistic "we get back to trend earnings by 2030," along with a roaring bull market, is at serious risk.

Let me jump on Paul Krugman again. He writes a great op-ed in the NY Times today questioning whether we are in recovery, and then pounds the table for more stimulus money. He (and all neo-Keynesians everywhere, with too many in the government) only see the next 6-12 months. Running up debt today? No problem.

Yet we risk our future potential growth if we continue on our present track. The research is clear. If we wish avoid some pain today, we create even more pain, and not that far in the future. There are those among us who are like teenagers, wanting to make the easy choice and avoid the pain today, not worrying about the consequences down the road. Not getting our fiscal deficits under control risks the whole economy.

Let's summarize. We are still in a secular bear market. Valuations, while lower, are still not at what could be called historical cyclical bottoms. Patience is the order of the day. We will get there.

And for the record, I will probably become a bull way too early and have to endure some pain on the way to profit. Such is life.

And we risk that ultimately positive scenario if we do not get our federal fiscal house in order. If that does not happen, all bets are off. ALL BETS.

LA, Europe, Kansas City, and Houston

I was going to comment on Bernanke's speech, but this letter is near its end. Besides, what is there to really say? I have often complimented Bernanke on giving very clear speeches. This was not one of them. He was a three-handed economist (on the one hand, but on the other hand, and then on the other!) He covered every possible scenario, so no matter what happens he will have had something in the speech that was right. Oh, and he did say that more quantitative easing is on the table, even though the FOMC is deeply divided on that topic. Oh well.

I (and Tiffani, Ryan, Lively, and the nanny) have to fly to LA on Tuesday for two days of previously unscheduled meetings, and then it's back to Dallas for a speech to the local Tiger 21 group. Then, starting September 11, I fly to Amsterdam for the International Broadcasting Conference, then to Malta, Zurich, Mallorca, Denmark (speech open to public), and London, home for one day, and then off for a speech to Cambridge Brokers on the 24th. Then I'm in Houston on October 1 for another public speech.

And speaking of October, I turn 61 on the 4th. Where did the year go? It seems like we were just having my 60th birthday party a few weeks ago!

I am experiencing an interesting new period of life. Tiffani has the nanny bring Lively (now 9 months) to my home office 2-3 days a week for the day, plus at lots of other times. I had forgotten what it is like to watch a baby grow up so fast - that first crawl, the first time she pulls up, first a lot of things. I am so lucky to be able to see all that! She recognizes my voice and gives me the biggest smile. And then Lively goes home and I don't have to change diapers. Is life great or what?

Time to hit the send button. A late happy hour awaits. Have a great week. Henry turns 29 this weekend, so some of the kids will gather to wish him the best. They just keep growing up.

Your waiting to channel his inner bull analyst,

John Mauldin

Click here for the original post... ]]> Thoughts from the Frontline RssFeed http://www.gold-speculator.com/thoughts-frontline/36974-dark-side-deficits.html How We Get Through This Mess http://www.gold-speculator.com/thoughts-frontline/36449-how-we-get-through-mess.html Sat, 21 Aug 2010 18:04:23 GMT The group was a Vistage group in which my daughter Tiffani participates. This is an organization of 12 businesspeople (in this case all CEOs of small businesses) who meet once a month to share and learn about better business practices, accountability, planning, and all the aspects of running a business. Every person I have ever met who has been involved in Vistage has had good things to say about it. I have watched it help Tiffani a lot. She truly runs our business now, allowing me to read and write and travel and speak. I am a very lucky man and proud Dad. I have particularly watched my partners at Altegris really truly transform their business model through their involvement with Vistage. First the CEO, Jon Sundt, joined, and now the partners have all joined Vistage groups focusing on their roles in the business. Sundt was always a good businessman, but the level of professionalism of his whole company has gone up a notch. It is a pleasure to watch them grow, and they give Vistage a large measure of the credit for their success. In fact, when I went to the Vistage web site to get the link, I saw a brief video of Sundt talking about his experience. (http://www.vistage.com/) I am proud to be their partner. If you have a business and could use some help and professional mentoring, you should look into finding a Vistage group that works for you. They match businesspeople in different industries but with roughly same size businesses. In tough times you need all the help you can get. I talked to them about the current economic environment and what I saw coming down the road. Long-time readers know that I think we are in for an extended period of slow growth, high and sticky unemployment, and volatile markets punctuated by more frequent recessions. That is what you get when you have a deleveraging environment resulting from a credit crisis. It is what happens when the Debt Supercycle ends. We start the journey to the New Normal and it just takes time. *"Where Is My V-Shaped Recovery?"* Remember all the bulls and cheerleaders late last year and into this one talking about a V-shaped recovery? They were making their projections based on what had happened in past recessions. I (and others) argued that that data was meaningless, as it did not reflect the fact that a balance-sheet recession requires years of deleveraging, is inherently deflationary, and all the factors that produce the normal "V" are no longer in play. Bank lending is still dropping. Savings rates go up. Debt gets paid down. Governments run into limits as to how much they can stimulate the economy without creating large and destabilizing debt. Central banks push rates to zero, and then what? This is a far different environment than we have had for the last 70 years. Using past performance to predict future results when the future environment is significantly different than the period in which the data was collected is misleading at best and worthless at worst, leading to bad decisions. Much better to deal with reality. And just to show that I am really the optimist in the room, let's turn to my good friend David Rosenberg, writing this morning under the following headline: *"U.S. RECESSION NEVER ENDED; GDP TO CONTRACT IN Q3 * "Our suspicions have been confirmed - the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the 'build in' for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak-to-trough contraction in the 2001 recession was 1.3%! That is incredible. "Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting." Politicians are going to be greeted with a GDP number for the third quarter, right before the elections. Will it be negative like Rosie thinks? I am not sure, but in any event it will not be good. Structural unemployment will still be over 10% and deficits will be high. Look at the following graph from my friends at The Liscio Report. Unemployment and continuing claims have started to rise again. This is not what happens in V-shaped recoveries, gentle reader. The ONLY reason the headline unemployment number has dropped a little is that the Labor Department has dropped so many people from the labor force. Again, if you have not looked for a job for four weeks, they do not count you as unemployed. If you use the labor-force number from just last April, unemployment is 10.5%. Brutal. Who doesn't know too many people without jobs? Image: http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/thoughts_5F00_from_5F00_the_5F00_frontline/image001_5F00_2CCF3A7B.jpg But it is not just rising unemployment claims. Yesterday's Phillie Fed report was just awful. Buried in the details was the fact that the hours-worked index is collapsing, consistent with previews to past recessions. Very worrisome. (From my favorite slicer and dicer of data, Greg Weldon: www.weldononline.com (http://www.weldononline.com)) Image: http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/thoughts_5F00_from_5F00_the_5F00_frontline/image002_5F00_71123278.gif Bottom line? It is going to be a tough environment for the next 6-8 years. That is just what happens when you have a deleveraging / balance sheet / deflationary / end of the Debt Supercycle recession. It is what it is, and no amount of wishing or finger pointing can change the facts. Let me take a moment and offer some sympathy to President Obama. This recession/slow period is not his fault. Obamacare? A now-trillion-dollar stimulus? Those he owns. But the recession/credit crisis would have happened if McCain had been elected. And it is not Bush's fault. Did he make some mistakes? Oh yes. Squandering those surpluses is huge in my book. Not vetoing all that excess spending is at his feet. And there are other issues, but that is not my point. *We Have Met the Enemy, and He Is Us* There is a great line from the old cartoon strip Pogo: "We have met the enemy, and he is us." (Ah, I miss Walt Kelly and Pogo. But I show my age!) Image: http://www.investorsinsight.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/thoughts_5F00_from_5F00_the_5F00_frontline/image003_5F00_7A01C4B7.jpg Neither Clinton nor Bush forced people to borrow money against their homes. Yes, some of the laws made it easier. Yes, Greenspan pushed rates lower than they should have been. Allowing banks to go to 30:1 leverage was stupid (courtesy of the Bush administration). Repealing Glass-Steagall in hindsight was not wise (Clinton era). But we the people borrowed and spent. Congress taxed and spent and we voted for the SOBs and collectively asked for more goodies. Maybe not you, gentle reader, because all my readers too smart to have engaged in such reckless activity, but those other guys sure did. Probably the readers of Paul Krugman. (Did I say that?!?) So, the current problems are not Obama's fault. But how he deals with them is. Raising taxes in what can only be called a soft environment gives him ownership of the consequences. And it is more than just the Bush tax cuts going away. Obamacare gives us a host of new taxes. (If you want to see more, read http://www.atr.org/six-months-untilbr-largest-tax-hikes-a5171) *So Where's the Good News?* Ok, I could go on for hours, sorting through the problems. Where is the good news I promised? Here's what I should have said to Tiffani's group: Let's face it. Running a small business is never easy. I am a serial entrepreneur. I have started and run a lot of very different businesses. Some have been very, very good and some went down in spectacular flames. I can remember some near-death experiences when the economy was booming. I have watched a million-dollar income stream dwindle to zero and there was not a damn thing I could do about it, except enjoy the money while it was there and use it to buy the next income stream. I have had to rebuild several times from scratch as markets shifted drastically underneath my feet. And I've changed directions as new opportunities revealed themselves. In all this I'm like every other small-business entrepreneur out there. It is never easy. But that is what we do. We get up in the morning and figure it out. Some 80% of startups die within ten years. But we pick ourselves up and start over. I know unemployment is 10%. But that means almost 90% are employed. Consumers are saving more. So adjust. Figure out what your New Normal looks like. The '70s were a bitch. I woke up many times in the middle of the night with real pains in my stomach wondering whether to pay the rent or make payroll. So did a lot of people. But look at all the new companies that came out of that era and changed everything: Microsoft, Apple, Intel, etc. Cell phones. The internet. The list is long. Yes, we have to make our way in this Muddle Through World. It will be challenging, but I can almost guarantee you that when we do get through there will be other challenges. If it was easy everybody could do it and there would be no money in it. Embrace the challenge! I asked one of my really close (36 years) friends and business associates last year how his business was doing. "We are doing great!" he said. That was not the answer I was expecting. "Why? How?" I asked. "Well, most of our competitors have folded. We survived and got the business." Ultimately, that is how we get out of this. A hundred million families and millions of businesses figuring it out, learning how to adapt to the New Normal. Sadly, some of them won't make it. But most of us will! As I said, I am a serial entrepreneur. I have a friend who designs and oversees large teams of programmers of really robust analytic software, very cutting-edge stuff. She is a winner, and I am backing her (I know nothing about software but the rule is, invest in people!). We'll see how it goes, but my bet is that in a few years there will be a lot of people getting jobs because we take on some risk now. We are adapting our own business here. We will soon have new websites. I will be doing (at first) an audio podcast called the Mauldin Minute and then (hopefully) by the end of the year morphing into video. That's the wave of the future and I need to keep up. I am addicted to information and reading . We are going to try and make some money from my addiction. What would you pay to look over my shoulder and read the 5-10 most important things I find in a week? I will become your personal reader. Will that be a life-style changer? No, but it will provide some income diversification. When Tiffani made her presentation to her Vistage group about our business, she had a lot of charts and graphs. I was surprised how our sources of income have varied over time. Some previously large (at least on my scale) sources literally dried up within a few years, completely askew from our original optimistic expectations. It was very apparent that we cannot sit and assume things will be the same year to year. So we adapt. I have been presented with a very different opportunity in a non-finance field that is right in my wheelhouse, as they say. Tiffani and Ryan and I are going to pursue it. Will it thrive? Be a real business in five years? We will see, but I have the ability to take that risk and I am going to do so. And so will hundreds of thousands of other visionaries and dreamers. That is how we get through this. We work through the ugly and then we get to the 2020s, and I think we will once again be talking about the Roaring 20s! Whole new industries will come into existence. Pay attention to the advancements in robotics. Biotech will be HUGE this decade, but we need to change the rules so we don't lose the intellectual property and the jobs. Electric cars will boom as we replace our fleet all over the world. Nanotech later in the '20s. Green energy and nuclear. Artificial intelligence (finally!). Really cheap (I mean really cheap!) wireless high-speed broadband all over the world will open the door to all kinds of possibilities. I met last night with very credible scientists who have developed a way to filter water very cheaply. A desalinization module that fits in a cargo container. Yes, they need a lot of money to finish, but they will figure it out. And on and on. The opportunities are going to be huge. Trillions will be made. So, we get through this. We Muddle Through. We figure it out, one business and family at a time. And as a culture, a world, we get to a better place. My bet is that in 2020 no one is going to want to go back to the good old days of 2010. We will be excited about the future and all the cool stuff that is happening. Recessions and tough times are God's way of telling you that you need to adjust a few things, both on a personal and business level – also nationally and globally. I am an optimist. I believe we will adjust and grow, not just in the US but as an emerging world. There are just so many opportunities. So, don't let the problems I write about in this letter make you crawl into a cave. Just be realistic and figure out where your opportunities are. And then go make them happen! You are responsible for creating your own future. And I hope it is a good one. I plan on making mine one. *LA and Europe* I am in San Francisco at the MoneyShow. There is a good crowd and I have dropped in on a few presentations. There seems to be some talk about a bond bubble, whatever that is. I just see Boomers realizing they need to be more conservative, and a deflationary environment. The bubble is in sovereign debt. That is not going to end easily. For many countries it will end in tears. It looks like I am going to have to shoot to LA week after next for some meetings and a check-in with the design/imaging/branding group that is developing our new web presence strategies. Within a few months you will be able to comment on my writing, communicate with fellow readers (civilly, of course!), and ask questions which Ryan will try to corral me into answering. Lots of new and cool things coming. Oh yes, the book. Sigh. A personal situation has delayed me a week, but I swear I'll get the final chapter written next week and then out to some friends for comments and off to the publisher. My schedule for Europe is shaping up. I will be in Amsterdam September 11-14, then Malta, Zurich, Mallorca for some fun with my London partner Niels Jensen and team for the weekend, then to Copenhagen for a day (at least one session will be open to the public), and then on to London and back home. Drop me a note if you want to meet, and I will get it to the keeper of the schedule. And thanks to Charles Githler for being such a great host at the MoneyShow! Amazing, this is their 32nd year of doing the show here. Where does the time go? He was a 21-year-old kid when he started this, and he has created a really significant business, with conferences all over the world. And he started in 1978 and lived through two recessions. It can be done! It is time to hit the send button. I have yet another presentation in 37 minutes and need a few minutes to prepare. Have a great week and enjoy the moment! I am, although sitting in a hotel room in San Francisco is not my preferred environment. I do love this city. But that, gentle reader, is the small price of the privilege of writing to you each week. Your ready to get out of this room analyst, John Mauldin Image: http://www.investorsinsight.com/aggbug.aspx?PostID=5063 Image: http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?d=yIl2AUoC8zA (http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?a=sKPUCIG2L_4:EenF7aaWOy4:yIl2AUoC8zA) Image: http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?i=sKPUCIG2L_4:EenF7aaWOy4:F7zBnMyn0Lo (http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?a=sKPUCIG2L_4:EenF7aaWOy4:F7zBnMyn0Lo) Image: http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?i=sKPUCIG2L_4:EenF7aaWOy4:V_sGLiPBpWU (http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?a=sKPUCIG2L_4:EenF7aaWOy4:V_sGLiPBpWU) Image: http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?d=qj6IDK7rITs (http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?a=sKPUCIG2L_4:EenF7aaWOy4:qj6IDK7rITs) Image: http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?d=l6gmwiTKsz0 (http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?a=sKPUCIG2L_4:EenF7aaWOy4:l6gmwiTKsz0) Image: http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?i=sKPUCIG2L_4:EenF7aaWOy4:gIN9vFwOqvQ (http://feeds.feedburner.com/~ff/Thoughts_From_The_Frontline?a=sKPUCIG2L_4:EenF7aaWOy4:gIN9vFwOqvQ) Image: http://feeds.feedburner.com/~r/Thoughts_From_The_Frontline/~4/sKPUCIG2L_4 Click here for the original post... (http://feedproxy.google.com/~r/Thoughts_From_The_Frontline/~3/sKPUCIG2L_4/how-we-get-through-this-mess.aspx)]]> How We Get Through
"Where Is My V-Shaped Recovery?"
We Have Met the Enemy, and He Is Us
So Where's the Good News?
LA and Europe

< encouraging. more little a be to said have should I what will letter week?s this so said, could is there reflection upon But tried. And laugh. humor gallows of kind with them, for news good any didn?t whether me asked one presentation my after and environment, economic current the about entrepreneurs businessmen group small spoke week>The group was a Vistage group in which my daughter Tiffani participates. This is an organization of 12 businesspeople (in this case all CEOs of small businesses) who meet once a month to share and learn about better business practices, accountability, planning, and all the aspects of running a business. Every person I have ever met who has been involved in Vistage has had good things to say about it. I have watched it help Tiffani a lot. She truly runs our business now, allowing me to read and write and travel and speak. I am a very lucky man and proud Dad.

I have particularly watched my partners at Altegris really truly transform their business model through their involvement with Vistage. First the CEO, Jon Sundt, joined, and now the partners have all joined Vistage groups focusing on their roles in the business. Sundt was always a good businessman, but the level of professionalism of his whole company has gone up a notch. It is a pleasure to watch them grow, and they give Vistage a large measure of the credit for their success. In fact, when I went to the Vistage web site to get the link, I saw a brief video of Sundt talking about his experience. (http://www.vistage.com/) I am proud to be their partner.

If you have a business and could use some help and professional mentoring, you should look into finding a Vistage group that works for you. They match businesspeople in different industries but with roughly same size businesses. In tough times you need all the help you can get.

I talked to them about the current economic environment and what I saw coming down the road. Long-time readers know that I think we are in for an extended period of slow growth, high and sticky unemployment, and volatile markets punctuated by more frequent recessions. That is what you get when you have a deleveraging environment resulting from a credit crisis. It is what happens when the Debt Supercycle ends. We start the journey to the New Normal and it just takes time.

"Where Is My V-Shaped Recovery?"

Remember all the bulls and cheerleaders late last year and into this one talking about a V-shaped recovery? They were making their projections based on what had happened in past recessions. I (and others) argued that that data was meaningless, as it did not reflect the fact that a balance-sheet recession requires years of deleveraging, is inherently deflationary, and all the factors that produce the normal "V" are no longer in play. Bank lending is still dropping. Savings rates go up. Debt gets paid down. Governments run into limits as to how much they can stimulate the economy without creating large and destabilizing debt. Central banks push rates to zero, and then what? This is a far different environment than we have had for the last 70 years. Using past performance to predict future results when the future environment is significantly different than the period in which the data was collected is misleading at best and worthless at worst, leading to bad decisions. Much better to deal with reality.

And just to show that I am really the optimist in the room, let's turn to my good friend David Rosenberg, writing this morning under the following headline:

"U.S. RECESSION NEVER ENDED; GDP TO CONTRACT IN Q3

"Our suspicions have been confirmed - the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the 'build in' for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak-to-trough contraction in the 2001 recession was 1.3%! That is incredible.

"Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting."

Politicians are going to be greeted with a GDP number for the third quarter, right before the elections. Will it be negative like Rosie thinks? I am not sure, but in any event it will not be good. Structural unemployment will still be over 10% and deficits will be high.

Look at the following graph from my friends at The Liscio Report. Unemployment and continuing claims have started to rise again. This is not what happens in V-shaped recoveries, gentle reader. The ONLY reason the headline unemployment number has dropped a little is that the Labor Department has dropped so many people from the labor force. Again, if you have not looked for a job for four weeks, they do not count you as unemployed. If you use the labor-force number from just last April, unemployment is 10.5%. Brutal. Who doesn't know too many people without jobs?

But it is not just rising unemployment claims. Yesterday's Phillie Fed report was just awful. Buried in the details was the fact that the hours-worked index is collapsing, consistent with previews to past recessions. Very worrisome. (From my favorite slicer and dicer of data, Greg Weldon: www.weldononline.com)

Bottom line? It is going to be a tough environment for the next 6-8 years. That is just what happens when you have a deleveraging / balance sheet / deflationary / end of the Debt Supercycle recession. It is what it is, and no amount of wishing or finger pointing can change the facts.

Let me take a moment and offer some sympathy to President Obama. This recession/slow period is not his fault. Obamacare? A now-trillion-dollar stimulus? Those he owns. But the recession/credit crisis would have happened if McCain had been elected.

And it is not Bush's fault. Did he make some mistakes? Oh yes. Squandering those surpluses is huge in my book. Not vetoing all that excess spending is at his feet. And there are other issues, but that is not my point.

We Have Met the Enemy, and He Is Us

There is a great line from the old cartoon strip Pogo: "We have met the enemy, and he is us." (Ah, I miss Walt Kelly and Pogo. But I show my age!)

Neither Clinton nor Bush forced people to borrow money against their homes. Yes, some of the laws made it easier. Yes, Greenspan pushed rates lower than they should have been. Allowing banks to go to 30:1 leverage was stupid (courtesy of the Bush administration). Repealing Glass-Steagall in hindsight was not wise (Clinton era).

But we the people borrowed and spent. Congress taxed and spent and we voted for the SOBs and collectively asked for more goodies. Maybe not you, gentle reader, because all my readers too smart to have engaged in such reckless activity, but those other guys sure did. Probably the readers of Paul Krugman. (Did I say that?!?)

So, the current problems are not Obama's fault. But how he deals with them is. Raising taxes in what can only be called a soft environment gives him ownership of the consequences. And it is more than just the Bush tax cuts going away. Obamacare gives us a host of new taxes. (If you want to see more, read http://www.atr.org/six-months-untilb...ax-hikes-a5171)

So Where's the Good News?

Ok, I could go on for hours, sorting through the problems. Where is the good news I promised?

Here's what I should have said to Tiffani's group: Let's face it. Running a small business is never easy. I am a serial entrepreneur. I have started and run a lot of very different businesses. Some have been very, very good and some went down in spectacular flames. I can remember some near-death experiences when the economy was booming. I have watched a million-dollar income stream dwindle to zero and there was not a damn thing I could do about it, except enjoy the money while it was there and use it to buy the next income stream. I have had to rebuild several times from scratch as markets shifted drastically underneath my feet. And I've changed directions as new opportunities revealed themselves.

In all this I'm like every other small-business entrepreneur out there. It is never easy. But that is what we do. We get up in the morning and figure it out. Some 80% of startups die within ten years. But we pick ourselves up and start over.

I know unemployment is 10%. But that means almost 90% are employed. Consumers are saving more. So adjust. Figure out what your New Normal looks like.

The '70s were a bitch. I woke up many times in the middle of the night with real pains in my stomach wondering whether to pay the rent or make payroll. So did a lot of people. But look at all the new companies that came out of that era and changed everything: Microsoft, Apple, Intel, etc. Cell phones. The internet. The list is long.

Yes, we have to make our way in this Muddle Through World. It will be challenging, but I can almost guarantee you that when we do get through there will be other challenges. If it was easy everybody could do it and there would be no money in it. Embrace the challenge!

I asked one of my really close (36 years) friends and business associates last year how his business was doing. "We are doing great!" he said. That was not the answer I was expecting. "Why? How?" I asked.

"Well, most of our competitors have folded. We survived and got the business."

Ultimately, that is how we get out of this. A hundred million families and millions of businesses figuring it out, learning how to adapt to the New Normal. Sadly, some of them won't make it. But most of us will!

As I said, I am a serial entrepreneur. I have a friend who designs and oversees large teams of programmers of really robust analytic software, very cutting-edge stuff. She is a winner, and I am backing her (I know nothing about software but the rule is, invest in people!). We'll see how it goes, but my bet is that in a few years there will be a lot of people getting jobs because we take on some risk now.

We are adapting our own business here. We will soon have new websites. I will be doing (at first) an audio podcast called the Mauldin Minute and then (hopefully) by the end of the year morphing into video. That's the wave of the future and I need to keep up.

I am addicted to information and reading . We are going to try and make some money from my addiction. What would you pay to look over my shoulder and read the 5-10 most important things I find in a week? I will become your personal reader. Will that be a life-style changer? No, but it will provide some income diversification.

When Tiffani made her presentation to her Vistage group about our business, she had a lot of charts and graphs. I was surprised how our sources of income have varied over time. Some previously large (at least on my scale) sources literally dried up within a few years, completely askew from our original optimistic expectations. It was very apparent that we cannot sit and assume things will be the same year to year. So we adapt.

I have been presented with a very different opportunity in a non-finance field that is right in my wheelhouse, as they say. Tiffani and Ryan and I are going to pursue it. Will it thrive? Be a real business in five years? We will see, but I have the ability to take that risk and I am going to do so.

And so will hundreds of thousands of other visionaries and dreamers. That is how we get through this. We work through the ugly and then we get to the 2020s, and I think we will once again be talking about the Roaring 20s! Whole new industries will come into existence. Pay attention to the advancements in robotics. Biotech will be HUGE this decade, but we need to change the rules so we don't lose the intellectual property and the jobs. Electric cars will boom as we replace our fleet all over the world. Nanotech later in the '20s. Green energy and nuclear. Artificial intelligence (finally!). Really cheap (I mean really cheap!) wireless high-speed broadband all over the world will open the door to all kinds of possibilities. I met last night with very credible scientists who have developed a way to filter water very cheaply. A desalinization module that fits in a cargo container. Yes, they need a lot of money to finish, but they will figure it out. And on and on. The opportunities are going to be huge. Trillions will be made.

So, we get through this. We Muddle Through. We figure it out, one business and family at a time. And as a culture, a world, we get to a better place. My bet is that in 2020 no one is going to want to go back to the good old days of 2010. We will be excited about the future and all the cool stuff that is happening.

Recessions and tough times are God's way of telling you that you need to adjust a few things, both on a personal and business level – also nationally and globally. I am an optimist. I believe we will adjust and grow, not just in the US but as an emerging world. There are just so many opportunities.

So, don't let the problems I write about in this letter make you crawl into a cave. Just be realistic and figure out where your opportunities are. And then go make them happen! You are responsible for creating your own future. And I hope it is a good one. I plan on making mine one.

LA and Europe

I am in San Francisco at the MoneyShow. There is a good crowd and I have dropped in on a few presentations. There seems to be some talk about a bond bubble, whatever that is. I just see Boomers realizing they need to be more conservative, and a deflationary environment.

The bubble is in sovereign debt. That is not going to end easily. For many countries it will end in tears.

It looks like I am going to have to shoot to LA week after next for some meetings and a check-in with the design/imaging/branding group that is developing our new web presence strategies. Within a few months you will be able to comment on my writing, communicate with fellow readers (civilly, of course!), and ask questions which Ryan will try to corral me into answering. Lots of new and cool things coming.

Oh yes, the book. Sigh. A personal situation has delayed me a week, but I swear I'll get the final chapter written next week and then out to some friends for comments and off to the publisher.

My schedule for Europe is shaping up. I will be in Amsterdam September 11-14, then Malta, Zurich, Mallorca for some fun with my London partner Niels Jensen and team for the weekend, then to Copenhagen for a day (at least one session will be open to the public), and then on to London and back home. Drop me a note if you want to meet, and I will get it to the keeper of the schedule.

And thanks to Charles Githler for being such a great host at the MoneyShow! Amazing, this is their 32nd year of doing the show here. Where does the time go? He was a 21-year-old kid when he started this, and he has created a really significant business, with conferences all over the world. And he started in 1978 and lived through two recessions. It can be done!

It is time to hit the send button. I have yet another presentation in 37 minutes and need a few minutes to prepare. Have a great week and enjoy the moment! I am, although sitting in a hotel room in San Francisco is not my preferred environment. I do love this city. But that, gentle reader, is the small price of the privilege of writing to you each week.

Your ready to get out of this room analyst,

John Mauldin

Click here for the original post... ]]> Thoughts from the Frontline RssFeed http://www.gold-speculator.com/thoughts-frontline/36449-how-we-get-through-mess.html The Gulf Oil Spill Disaster http://www.gold-speculator.com/thoughts-frontline/35931-gulf-oil-spill-disaster.html Sat, 14 Aug 2010 13:17:13 GMT The Gulf Oil Spill Disaster
From Unmitigated Disaster to Merely Disaster
The Corexit Decision
Some More Takeaways
Time to Lift the Moratorium
Getting the Balance Just Right
Omaha, Carbondale, and San Francisco

As I mentioned last Monday night in my Outside the Box, I did not make it to Turks and Caicos, but did end up in Baton Rouge for a special seminar on the Deepwater Horizon Gulf oil spill. I have both good news (or maybe more like less-bad news) and bad news. Today's letter is a report on what I learned.

The conference was sponsored by the Global Interdependence Center (GIC - http://www.interdependence.org/). David Kotok of Cumberland Advisors organized the event with help from people from Louisiana State University. The quality of the speakers was outstanding. They were extremely knowledgeable and well-connected. The meeting was conducted under the Chatham House Rule, which means all the speakers spoke off the record, unless they indicated otherwise. This allows for a more frank discussion. So, much of what you will read from me is my impressions of what I heard, which I cannot attribute to specific speakers. Indeed, some would be at some occupational risk if I did so.

Some of what I write today will be controversial to some readers. That is a risk I will take, as the large majority will find this interesting, or at least I hope so.

From Unmitigated Disaster to Merely Disaster

First, let's begin with the "good" news. The ecological destruction that was first feared is not going to be as bad as once thought, for a variety of reasons. It is not good, but it is not the unmitigated disaster it could have been.

Edward Overton, PhD, Professor Emeritus, Dept. of Environmental Sciences, LSU, is an expert on oil spills. He was at the Exxon Valdez. The Exxon Valdez (EV) was a big, black, thick tide of oil. The Deepwater Horizon is a much bigger spill: every ten days the amount of the EV spill spewed into the Gulf, from April 20 to July 15. Professor Overton spoke mostly for the record. He is very much a concerned environmentalist, and he is also a very serious scientist.

He reminded us that the Louisiana wetlands are a very important part of the ecological system of the Gulf of Mexico. Oversimplifying, they are the nutrient source for the small animal world which feeds the larger. Without the wetlands much of the Gulf ecosystem dies. If they were destroyed, they would not come back very easily, as without their very root system the land would erode away. Bluntly, oil kills wetlands if it gets into it.

There are only three ways to get rid of an oil spill. You can mechanically remove it, chemically remove it, or burn it. They used all three methods. But not fast enough. The Obama administration dithered while Rome burned. (This is not from Overton.)

As The Christian Science Monitor reported in "The Top Five Bottlenecks":

"Three days after the accident, the Dutch government offered advanced skimming equipment capable of sucking up oiled water, separating out most of the oil, and returning the cleaner water to the Gulf. But citing discharge regulations that demand that 99.9985 percent of the returned water be oil-free, the EPA initially turned down the offer. A month into the crisis, the EPA backed off those regulations, and the Dutch equipment was airlifted to the Gulf."

Really? For 0.0015 percent clean water from badly contaminated, toxic water? It takes a month to get that decision? I can guarantee you that there were people arguing for such a decision early on, and some rookie environmentalist at the EPA who never had responsibility in the real world made things a lot worse. Moving on:

"A giant Taiwanese oil skimming ship, The A Whale, is only now working on the spill. It can process 500,000 barrels of oily seawater per day, but it also needed the same waiver from the EPA which, expressed in another way, limits discharged water to trace amounts of less than 15 parts-per-million of oil residue. It also needed a waiver from the Jones Act, which prevents the use of specialized foreign ships from the North Sea oil fields because they use non-American crews. Previously, the skimmers had to return to port to offload almost pure seawater each time they filled up with water." (http://reason.com/archives/2010/07/0...catastrophic-r)

Ok, Let's get this straight. The oil industry screwed up by not having enough disaster equipment and ships available. That's bad beyond words. But for the government to compound that by not allowing needed ships to do the work, just because they did not have US union workers is just as bad. You expect better from government in a disaster, or we should.

(Overton said we never really did learn whether The A Whale would have been as useful as advertised, as it did not get into the Gulf soon enough.)

What should have been a no-brainer decision to use the Dutch ships was delayed for whatever reason. What should have been a no-brainer decision to waive the water purity rules was delayed beyond reason. My personal opinion. Whoever participated in that decision should be allowed to return to the private sector. They only made the problem of the spill worse. They should not be allowed near the decision-making process again.

Please note, this is no defense of British Petroleum. As noted below, they were extremely negligent, and deserve the costs and more. We just don't need to compound stupid, incompetent, irresponsible (choose several more adjectives, some with color) corporate acts with dumb government ones.

The Corexit Decision

There is a chemical called Corexit that is a product line of solvents primarily used as dispersants for breaking up oil slicks. It is produced by Nalco Holding Company. Corexit was the most-used dispersant in the Deepwater Horizon oil spill in the Gulf of Mexico, with COREXIT 9527 having been replaced by COREXIT 9500 after the former was deemed too toxic. Oil that would normally rise to the surface of the water is broken up by the dispersant into small globules that can then remain suspended in the water.

In hindsight, Overton thinks the use of Corexit was the correct thing to do. It probably saved the wetlands. But it is not without its own bad effects.

When you put Corexit on an oil slick, the surface oil disperses but also drops into the ocean about 15 feet. While Corexit (basically a type of soap) itself is not toxic (an admittedly controversial claim), the resulting dispersed oil is quite toxic. Fish swimming through it can be and are harmed. Marine mammals like porpoises are seriously harmed when they rise to breathe through an oil slick.

But here is the good news. It turns out that there are about the equivalent of two Exxon Valdezes a year from natural oil seepage from the floor of the oceans. The Gulf has an ecosystem of bacteria that eat that oil, which are then eaten again by plankton. To those bacteria, dispersed oil is filet mignon. They thrive and grow rapidly, turning that toxic waste into nutrients, which are absorbed by the plankton. The bacteria keep on growing until they lose their source of nutrition (the toxic oil) and then die out over time. Note: once absorbed by the bacteria, the oil is no longer toxic. There are no toxic minerals like mercury introduced into the ecosystem.

Scientists are somewhat baffled. There are tens of millions of gallons of oil that seem to be missing. It seems that the Gulf is providing its own (albeit chemically assisted) defense mechanism. Overton thinks that within less than five years, and maybe only a few years, the ecosystem will largely be back. And fishing may even be better, since the fish and shrimp are not currently being harvested (he called it human predation). At least for a while.

We traded onshore damage for offshore damage. But the calculation is that much of the ocean is empty of fish. Every go deep sea fishing? Did they just jump into the boat? Did you fish all day and catch little or nothing? There are large parts of the ocean and Gulf with very few fish. It is not good to create those toxic pools of oil, even if they eventually go away. Some fish will be harmed. But better than on the marshes.

For that we should all be grateful. It was a very difficult choice to make to use the dispersants. But it was the right choice. Somewhat like the choices we have to make in our current economic environment, concerning deficits and stimulus. There are no good or easy choices in these crucial situations. It was tragic that the choice had to be made, but I am glad it was. Losing the Louisiana wetlands would have been an ecological disaster of biblical proportions.

Again, we should never have had to make that choice. Better that BP management had observed the warning signals.

Some More Takeaways

It was clear talking from experienced oil professionals that the blowout was human error, and probably compounded human error, ignoring multiple warning signs and safety procedures. We went to Shell's Robert Training Center, where they train people to work on oil rigs. It is a very rigorous facility and the people running it are very professional. They take safety seriously. They train most of the oil rig workers in the Gulf, including British Petroleum's. They showed us the simulated control rooms. There are lots of safety features and redundancy; and it is *my* take that complacency had set in at BP, as things had gone just fine for so many years, and then some corners were cut. Over time, this will all come out.

There are two types of Corexit. The newer version is considered less toxic. But for whatever reason (ahem), they used supplies of the older version first. As it turns out, they needed just about everything they had, using over 1 million gallons. But it would seem that someone made an economic decision to empty the shelves of a less desirable dispersant.

Before we start to drill again (and we must!), we need to build two very large containment devices (to provide for redundancy). The process of building them from scratch this time was too time consuming and was trial and error.

There is a coalition of large oil companies building a response system at a cost of over a billion dollars. A little late for this disaster, but good for the future. There need to be enough booms to gather oil, skimming vessels, and other equipment at the ready, just as we assume there will be fire trucks if we need them. And that should not be at taxpayer expense, of course.

Time to Lift the Moratorium

The Obama administration imposed a moratorium on drilling, which in effect has shut down even shallow-water drilling, even though Obama himself said it would not affect such shallow wells. A judge has overturned that ruling. The administration then issued another moratorium, with indications it will issue yet another when this one is overturned.

Enough already.

On Thursday night, we had dinner in the Louisiana Governor's mansion, hosted by the Lt. Governor Scott Angelle. (I was privileged to sit at his table, and he is both gracious and quite sharp.) Before being appointed Lt. Governor, Angelle was Secretary for the Department of Natural Resources, overseeing the very large oil industry of Louisiana. He is very familiar with the issues.

Angelle, a Democrat, has agreed not to run for the Lieutenant Governor's office in the next election, which the Governor said was a requirement for anyone he nominated for the post. Angelle plans to return to the agency once his tenure as Lieutenant Governor has finished.

Angelle was very passionate about the need to begin safely drilling again. Over 30,000 wells have been drilled without major incident until now. He is clear about the need to address safety, but there are 300,000 well-paid jobs at risk, and Louisiana (and the US) are losing ship rigs to Africa and Brazil, which won't come back for a long time. And those 300,000 jobs have a large multiplier effect.

But it is more than that. If the US cannot become energy independent, we will not be able to balance our federal deficit without the private sector going into even greater debt. To deal with that somewhat rather startling statement, let's review a few paragraphs from a letter of mine from a few months ago.

Getting the Balance Just Right

Now, gentle reader, we are going to spare you a few pages of algebra and cut to the chase. Let's divide a country's economy into three sections: private, government, and exports. If you play with the variables a little bit you find that you get the following equation.

Domestic Private Sector Financial Balance + Governmental Fiscal Balance - Current Account Balance (or Trade Deficit/Surplus) = 0

We will review this briefly, as it is VERY important. As Rob Parenteau noted, "... keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong."

By Domestic Private Sector Financial Balance we mean the net balance of business and consumers. Are they borrowing money or paying down debt? Government Fiscal Balance is the same: is the government borrowing or paying down debt? And the Current Account Balance is the trade deficit or surplus.

The implications are simple. The three items have to add up to zero. That means you cannot have both surpluses in the private and government sectors and run a trade deficit. You have to have a trade surplus.

Let's make this simple. Let's say that the private sector runs a $100 surplus (they pay down debt), as does the government. Now, we subtract the trade balance. To make the equation come to zero means that there must be a $200 trade surplus.

$100 (private debt reduction) + $100 (government debt reduction) - $200 (trade surplus) = 0.

But what if the country wanted to run a $100 trade deficit? That means either private or public debt would have to increase by $100. The numbers have to add up to zero. One way for that to happen would be:

$50 (private debt reduction) + (-$150) (government deficit) - (-$100) (trade deficit) = 0. Remember that we are adding a negative number and subtracting a negative number.

Bottom line: you can run a trade deficit, reduce government debt, and reduce private debt, but not all three at the same time. Choose two. Choose carefully.

I know some of my friends say trade deficits don't matter (that would be you, Dennis!) But tell that to Greece. They are running large trade deficits. To get their government back into balance, they are going to have to go through very serious wage deflation and other pain. Accounting identities will extract their due. There is no getting around them.

Now, it would be better to rapidly build nuclear plants and turn our car fleet electric. But that will not happen for some time. Take our truck fleet and have it run natural gas. That takes time as well. In the meantime, we need to be drilling domestic oil or we will all be the poorer for it.

I consider myself an environmentalist. Not radical, but serious. I want clean air and water for myself as well as my kids. I would be willing to consider a gradual annual increase in gasoline taxes to encourage alternatives (with the taxes going directly to rebuilding our badly maintained roads and bridges). I know we need to make the shift to electric cars and nuclear power, as well as renewables. But I also want my kids to have an economic environment where they can find jobs and prosper. Just a thought.

Omaha, Carbondale, and San Francisco

This is my week for input overkill. Tuesday I had the pleasure of being part of a small group that was consulting for the Office of Net Assessment of the Defense Department. Our task was to come up with several different economic scenarios so that a later group could decide what type of Defense Department response would be needed. I have rarely been in such a group. Robert Shiller of Yale, Jim Chanos, David Smick, Avinash Dixit from Princeton, Rozlyn England from West Point, and a few other analysts were there. It was perhaps the most stimulating six hours I have ever had the privilege of participating in. Quite intense and a lot of give and take. I am still digesting what I learned, as your humble analyst gets invited to these things as comic relief. There were real minds in the room. (And to just sit in the same room with Andy Marshall, a true legend at 81 - wow!) I will try and figure out what happened and report back to you!.

Ok, I have not been on enough planes of late, so my youngest son Trey and I are going to go visit a few schools Monday and Tuesday in Nebraska and Indiana, and then Thursday I go to San Francisco where I will speaking for The Money Show at the Marriott Marquis. You'll have the opportunity to meet with 50+ leading experts, who will cover everything from the global economy and markets to biotech, greentech, nanotech, and much more. Register for free by calling 800/970-4355 and mentioning priority code 018914, or register online at The MoneyShow San Francisco!

Even for me, this schedule is brutal. But it must be done. In the meantime, all my kids are gathered for the weekend. It seems Amanda married a very nice young man with one considerable character flaw: he is a Red Sox fan, and is down to watch the Red Sox do battle with the Rangers. At least they are here, and the score is 9-9 in the top of the 9th, so I am going to hit the send button and go watch with them and some of the other kids downstairs.

Have a great week. This has been a fun August, but it is going by so fast. Tomorrow my mother is 93. She is on top of her game. We will celebrate tomorrow morning.

Your trying to absorb it all analyst,

John Mauldin

Click here for the original post... ]]> Thoughts from the Frontline RssFeed http://www.gold-speculator.com/thoughts-frontline/35931-gulf-oil-spill-disaster.html