My inaugural post on Wealth.net was a brief notice that John Mauldin’s forthcoming book “Eavesdropping on Millionaires: Secrets of the World’s Wealthiest Investors” had been postponed. As an afterthought I asked him via email for details and he responded personally that it had been pushed out. In my reply I gave a brief pitch for the newly-launched rebootingcapitalism.com and mentioned that if he was ever interested in an interview, we’d be happy to.
Half a year later I was suddenly cc-ed in an email to his assistant “Please schedule an interview with Mr. Jeftovic for April”. His latest book “Endgame: The End of the Debt Supercycle and how it changes Everything” had been released recently, and as it turned out I was halfway through reading it.
What follows is a transcript of a telephone interview I conducted with Mr. Mauldin on April 19, 2011.
Mark Jeftovic (MJ): I guess the big news yesterday, if they were truly big news, the S&P debt outlook shifts. How does this tie in with what you were saying in Endgame?
John Mauldin (JM): Honestly, I think that the S&P thing was kind of what everybody has been expecting and waiting. No big deal. I really don’t see it an issue at all. The markets didn’t react to the S&P, they were reacting to the European issues.
And the S&P happened to come out about the same time the markets open, so everybody said they anchored on the last thing that happened and said this is what made the markets upset. And that’s what we do as human beings. We want simple explanation. We want somebody to tell us something happened, why did it happen. And we actually get kind of a psychic rush and endorphins kicking in when we find the simple explanation for it. It’s almost humorous! The last things that happened was the S&P trouble, that’s what everybody said it must be it.
MJ: We can come back to Europe in a second, but I’m sticking on this side of the Atlantic, we’re nudging up against the debt ceiling once again and we had a couple of big proposals on both aisles of the government on how we’re supposed to start getting serious about these debt situations. What do you make of either of those initiatives?
JM: Good down payments. The Obama thing is less of a down payment because it’s more smoke and mirrors and the reality is we’re really gonna have to do something here. But it’s a start.
MJ: What populations do you think are more willing to voluntarily accept austerity and voluntarily go into a recession or even depression if it means ‘short term pain’ but ‘long term gain’? And is one population more likely to do it than another?
JM: Well, what happens is people accept change in the face of necessity, and they see necessity in the middle of a crisis. And we’re getting ready to have a crisis, and so we’re getting ready to have people warm up for the fact that we’re gonna have to make some changes. So it’s not something that everybody is going to be excited about and say ‘Oh, wonderful! They are gonna reduce the tax benefit I get!’ NO. It is going to be a problem for a lot of people, and the amount of, if you wanna call it, austerity that we are have to have is gonna be much bigger than most people really think about today.
MJ: Do you think recent events are just noise or a real signal of something to come? I’m talking about PIMCO, announced that they’ve gone to zero for US treasuries? Is this the beginning of a bond revolt?
JM: I think that’s more of a noise than anything else. It does make a difference when somebody as important as PIMCO says ‘yeah, we’re out of here, this isn’t working for us anymore. You (the US government) are not really acting serious about this whole debt thing. It looks like you’re gonna print money as a way to get out of your problem’. That’s not a serious solution. That’s not what people do when there’s a crisis going on. But this is what our government is getting ready to do.
MJ: Do you think there will be a QE3, 4 and 5?
JM: At some point. But I don’t think that the Fed will give us QE3 till the US government has shown that they are capable of dealing with this in a responsible matter. They don’t want to be seen as enablers.
MJ: I was going to ask you about that , because in your book you say ‘hyperinflation is a political choice not an economic outcome’. And you said you couldn’t picture the Fed, you know, sort of playing ball with the government making those political kind of choices.
JM: I don’t see that, I think that the government is going to have to act responsibly first. And then when they do, then I think you will see the Fed come in.
MJ: But doesn’t that cancel it out in a sense? I mean depending on what the different programs look like, but if the government suddenly tightens up and says ‘ok, we’re gonna get serious about this problem’ and then the Fed turns around and prints a bunch of money…
JM: It depends on how much they took off the table in the mean time. I mean I don’t think we’re gonna see a real debt resolution till 2013. So if the Fed wants to start raising rates between now and then, they are going to have to pull money off the table (their balance sheet) at the same time. If they don’t, they are going to bring back inflation. So the real inflation risk that we’re not comfortable with is if they start raising rates and don’t reduce their sheets. So they have pull stuff off their balance sheet and reduce it they’ll get some room for QE3 in the future. Bernanke’s signal today shows that they wanna do QE2.5 which is gonna keep rolling those bonds rather than loading them off the book. I think that’s a big mistake, they need to start getting these things roll off.
MJ: You talked about inflation and we’re hearing of talk right now that inflation is starting to show up.
JM: We’re in a cycle where inflation is showing up. These things run in cycles.
MJ: This is a ‘big elephant in a room’ kind of question, what do you think about the current monetary regime in the US dollar as reserve currency? Is that going to last?
JM: Oh yes, what have you got as a substitute for it?
MJ: I don’t know, I’m not one of these guys who says ‘we have to go back to a gold standard’, but .. some sort of currency basket.
JM: I don’t think so, you’re going back to the Yen, the Pound, the Euro? You’re going to do a basket for Brazil, Russia, China and India? Those are the countries that you trust to be your reserve currency? I just don’t see it happening. Maybe in 15 or 20 years.
MJ: I guess it’s an open-ended question. But in the near term it’s sort of ‘what else are we going to do?’
JM: We just don’t change reserve currencies that fast.