What
Should Trump Do?
By John Mauldin
“The
problems of victory are more agreeable than those of defeat, but they are no
less difficult.”
– Winston Churchill
“Crying
is all right in its way while it lasts. But you have to stop sooner or later,
and then you still have to decide what to do.”
– C.S. Lewis, The Silver Chair
“I
must have a prodigious amount of mind; it takes me as much as a week,
sometimes, to make it up!”
– Mark Twain
No
matter who won the presidency, the economic way forward was not going to be
easy. The Republican team understands they must “stand and deliver.” But as
we will see in today’s letter, that is not going to be easy. I’m going to
depart from the normal format of my letters, where I talk about the economic
realities we face and how we should invest, and instead offer my view of what
I think the Trump administration and the GOP-led Congress should do.
Please
note, this is not necessarily what they will
do. In complete candor, what I’m proposing will be remarkably difficult for
certain members of the Republican and Democratic Congress to countenance. It
requires accepting some significant philosophical heresies that are anathema
to all politicians (different heresies/anathemas for different politicians,
according to their philosophical bent), but I see it as the only way forward
if we want to dodge a deep recession and/or a greater crisis in the future.
I
know for a fact that many of the people you have seen listed on the Trump
economic transition team will be reading this. That is one reason I’ve been
taking so long to put these thoughts to paper. And some of the ideas I’ll
share are quite frankly things I have come around to in just the last week. I
will readily admit to having already mentally written my post-election letter
based on the assumption that Hillary Clinton was going to win; and on
Wednesday morning I had to throw out everything I had thought about and start
all over. And it’s not just you and I who had to shift gears quickly: I know
that quite a few people on the transition team had speaking engagements and
other projects arranged for later that week, and they had to scramble to redo
their schedules.
I’ve
done a lot of talking with a lot of people and listening and reading in the
last 10 days.
This letter is where I currently come out. What I’m going to
propose is something that I think is politically possible (in terms of
gaining bipartisan support, which will be necessary for certain portions of
what I’m suggesting). I also think it has the potential to solve the
deficit/debt problem and provide the funding needed for healthcare, Social
Security, and the other necessary categories of government spending. It would
also be a massive stimulus to the economy – boosting jobs, new business
creation, and entrepreneurial activity.
Up
front we must face the fact that the American people want several
incompatible things at once: They want lots of expensive healthcare
provisions for everyone; they want tax cuts; and they want a balanced budget.
As we will see below, we can have relatively universal healthcare (no matter
how it’s funded and delivered), tax cuts, or
a balanced budget; but we can have only two of the three. Most Americans want
all three and don’t see why they shouldn’t have them. There are some
exceptions – there are, for example, some economists who don’t care about tax
cuts or a balanced budget. They are working from an economic theory that says
deficits and debt don’t matter; but in practice, in the observable, empirical
world, they do matter. Greatly. Maybe not this year, but sooner or later the
piper has to be paid.
Let’s
look briefly at where we are now – at the constraining facts that any
economic proposal must take into consideration.
The
US federal
government debt will be slightly north of $20 trillion before Obama
leaves office in January. Add in local and state debt of another $3 trillion
(plus), for a total of more than $23 trillion of government debt. The US
economy will be a few hundred billion dollars under $19 trillion at the end
of this year. That is a debt-to-GDP ratio of somewhat over 121%. For the
record, when you are trying to determine the effects of total government debt
on the economy, not to include state and local debt is disingenuous. The debt
must all be paid by the same general taxpayers at one level or another.
(Please note: I am rounding out the numbers in this letter because when
you’re talking about trillions and hundreds of billions, anything to the
right of the decimal point is kind of meaningless.)
That
debt has risen roughly $10 trillion under Obama, in just eight years. Last
year the debt rose $1.3 trillion, even though we were told that the budget
deficit was only around $600 billion. Lots of off-budget debt gets added
every year. It greatly annoys me when spin doctors don’t include total debt
when they are talking about the deficit (and they do it on both sides of the
aisle). I wish I could get my banker to adopt the same enlightened view.
I
know that Krugman and others call me a debt scold (scornfully, as if I am
some kind of troglodyte coming out of my cave to issue unnecessary warnings),
but there are 160 historical instances of major countries having to
renegotiate their bonds because they had too much debt, and in the recent
century some countries that did so ended up in serious financial crises. I
don’t for a minute think that the US will not pay every dollar of its debt;
but getting those dollars, whether through taxation or printing, will impact
the economy significantly. And if we wait too long, the ensuing crisis could
be ruinous to many.
I
start with the premise that to get the deficit and debt under control is an a
priori condition for avoiding a future crisis. Avoiding that crisis – even if
it is 10 years out – is important. The solution doesn’t have to be
implemented all at once, but there has to be a clear trajectory along the
lines of the Clinton/Gingrich budget compromises that gave us balanced
budgets and even deficit reduction.
Standard
Republican thought is that we have to engender enough growth to overcome the
deficit. The Reagan tax cuts certainly increased the deficit, but when they
were combined with the Clinton/Gingrich budget controls, we were soon paying
down the debt and growing much faster. The debt became far less of a problem,
at least in terms of GDP. It was when Bush II and the aggressively enabling
Republican Congress basically abandoned budgetary controls (we could have used
a deficit hawk like Gingrich as Speaker of the House to control the spending
urges), combining tax cuts with large spending programs, that the deficit and
debt once again began to get out of hand. Then along came the recession,
triggered by the housing bubble brought on by interest rates held too low for
too long by the Federal Reserve; and seemingly all of a sudden the deficit
exploded – $10 billion in just eight years.
Sidebar:
Everyone focuses on the size of the federal budget as if that is the government.
The US federal spending budget is $3.88 trillion as of this year. State and
local outlays are $3.3 trillion, bringing us close to $7 trillion of total
government spending. Very few people realize that state and local spending is
almost the same size as total federal spending.
Total
US debt, including private and business debt, is $67 trillion, or just under
400% of GDP. We have 95 million people not in the labor force, 15 million of
whom are not employed (twice the number officially unemployed). We have
almost 2 million prison inmates, 43 million living in poverty, 43 million
receiving food stamps, 57 million Medicare enrollees, and 73 million Medicaid
recipients. And 31 million still remain without health insurance.
(You’ll find a treasure trove of information like this at the US
Debt Clock.
This
US debt total does not even take into account the over $100 trillion of
unfunded liabilities at local, state, and federal levels, which are going to
have to be paid for out of current revenues at some point (see more below).
I
bring up the size of the debt because unproductive debt is a limiting factor
on growth. 10 years ago it wasn’t that big a deal. Today it is. The more we
increase our debt, the more difficult it is going to be to grow our way out
of our problem with the debt. That’s just an empirical fact. Both Europe and
Japan have much larger debt ratios than we do, and both have much slower
growth rates. Note also that the velocity of money in both those regions is
much lower than ours, and the velocity of money in every developing portion
of the world continues to drop. (More about that below.)
Something
like $5.5 trillion is “intergovernmental debt.” The theoretical Social
Security trust fund is an example. We “owe it to ourselves,” and so many
economists simply deduct that money when they talk about the size of the
total debt. And technically it is true that we pay interest on that debt,
which comes back to the government. But that doesn’t mean those debts aren’t
going have to be paid.
The
Social Security trust fund assumes as part of its future budgeting process that
the interest will be paid. So do most other intergovernmental debtors. Think
of it like borrowing against the cash value of your life insurance. You
technically owe the money to yourself, and you are (typically) paying
interest on the amount you borrowed, but if you die your outstanding debt
reduces the amount of your life insurance. If you want the life insurance,
you’re going have to pay that borrowed debt. For economists to talk about
this portion of the debt as irrelevant is economic malpractice. It is smoke
and mirrors economics of the worst kind. But even if we did dismiss $5.5
trillion dollars of internal debt, the government’s debt-to-GDP ratio would
still be almost 100% when you include state and local debt. And that is
definitely in the range where all the data and economic analysis suggests
that debt is a detriment and a drag on growth.
Vice
President Dick Cheney once remarked that “Deficits don’t matter” as he
defended his spending on the Iraq and Afghanistan wars. And when he said it,
he was more or less correct. Then, the deficit as a percentage of GDP was
less than nominal GDP growth, which meant that the country was growing faster
than the debt was. (Later, it turned out that deficits did matter, when the
spending on everything else plus defense spun out of control.) And for those
people who say that tax cuts create growth, I would suggest that 2% growth
for 16 years is not exactly what we were expecting. And much of the growth we
did get during the housing bubble years was clearly spurious.
Yes,
the US economy has grown at something like an average 2% for the last 16
years. Inflation was higher in the early years, but now it is about 1.5%,
which gives us nominal GDP growth of about 3.5%. Total debt this year rose by
6.8%, or almost double our growth rate. Not the right direction. After eight
years of the slowest economic recovery in history, we are growing our debt
dramatically faster than we are growing our country – even when we include
inflation.
Remember
that seemingly innocuous “velocity of money” bit of detail that I threw in
earlier? You need the velocity of money to begin to increase so that you can
actually get inflation. Ask Japan about how much money you can print without
getting inflation. That also suggests it is going to be harder to create
inflation than many economists would like. I know that many establishment
economists would like to see inflation closer to 4%, with GDP growth of 3%,
so that we could begin to quote “grow our way” out of the debt. That’s not
impossible, but it’s highly unlikely. Frankly, we will be lucky to get 2%
growth and 1.5% total inflation for the next four years.
Republicans
want to cut corporate and individual taxes to help stimulate growth. That is
a necessary but not sufficient condition to stimulate growth. Significant
regulatory rollback will help. It is also necessary but not sufficient.
Fixing the Affordable Care Act and bringing costs and benefits into alignment
is another necessary but not sufficient condition for growth.
There
is a major lag time for any economic programs that are enacted. Even if they
are enacted in the first 100 days of the Trump administration, it will be
months if not years before we see actual results. A $19 trillion economy does
not turn on a dime.
My
friend Raoul Pal, in his latest Global
Macro Investor, talks about the potential for a recession in
2017:
I
recently noted that since 1910, the US economy is either in recession or
enters a recession within twelve months in every single instance at the end
of a two-term presidency… effecting a 100% chance of recession for the new
President.
The
following chart shows every NBER recession since 1910 (in yellow) with the
new President after a two-term election marked in white and the new
presidents after a single-term presidency in red. Wilson and Eisenhower
appear as both. Only Coolidge saw more than a year (sixteen months) from his
second-term election and the onset of the subsequent recession at the end of
WWI...
Every single US recession bar one
(with explainable circumstances) occurred around an election. Only two Presidents
in history did not see a recession, and they were inaugurated after
single-term Presidents.
You
can see the whole piece here. There are a
few caveats and some slight curve fitting, but his general observation of
recessions after a two-term presidency pretty much holds as far as I can see.
A
proper objection many will have to this finding is that there are not enough
data points to make it a really accurate predictor. There is nothing that I
can think of economically about a two-term presidency that requires a
recession to follow it.
And if the economy were now growing at 3% to 4%, if
unemployment were truly under 4%, and if we had the deficit under control, I
wouldn’t be worried at all. But Raoul has pointed out a statistic that
appears on my radar just as I’m also watching the country grow rather slowly
(at very close to stall speed) and seeing corporate profits come under
pressure while the post-election US dollar rises seemingly relentlessly
(doing damage to US corporation profits, not to mention emerging markets) and
interest rates climb all over the world. And then there’s Europe, which
could potentially deliver a massive shock to the global economy in the
not-too-distant future…
Patrick
Watson had our team at Mauldin Economics create the following chart, which
shows what would happen to the federal budget if there were a recession in
2018. (If the recession were to move up to 2017 or if it were to hold off
till 2019, the result would be much the same.) Revenues go down, and expenses
go up. Note that taxes actually received under the current system would pay
only for mandatory spending like healthcare and welfare and Social Security
plus interest costs. Money for defense spending and everything else would
have to be borrowed. The on-budget deficit would rise to over $1 trillion –
closer to $1.3 trillion. Add in the off-budget debt that always seems to
increase and you could quickly grow total US debt to $30 trillion before the
end of Trump’s first term.
Obviously,
that doesn’t take into account any of the measures the new administration
will put in place to try to hold off the effects of a recession or to resolve
any of the problems I’ve described. This is just using CBO data for our
current trends. By the way, the chart also shows that we can expect
trillion-dollar budget deficits as far as the eye can see.
I
should point out that federal income tax revenues are basically flat, even
though the jobs numbers are up. That means a lot of people are getting
lower-paying jobs.
The underlying economy is weaker than it appears.
Just
to demonstrate that we can’t balance the budget by cutting out waste and
fraud (which of course we should do), let me offer the following pie chart.
Even if you cut out every single non-defense discretionary item, the budget
still would not have been balanced last year, at the tail end of a recovery.
For
some detail, take a look at this bar graph, which shows the growth of
spending in the various branches and departments of government. Which areas
are you going to cut to make any meaningful difference?
For
the purposes of my argument, I am going to assume that the Republican
Congress and administration somehow wrestle with the Affordable Care Act and
bring actual individual healthcare costs down. But the demographic reality of
the Baby Boomer Bulge is that no matter what we do, overall costs are still
going to rise again within a few years unless we ration healthcare, which is
not a viable political option. As Baby Boomers retire in droves, not only
will they need more healthcare, they will also need more Social Security. There
are things we can do to get the whole healthcare process under control and to
improve the general health of the country, but that’s not going to have a
significant effect in the next two or three years.
So
bluntly, if you cut
income and corporate taxes (which is something I think we
should do) without any
offsetting revenue increases, you’re going to make the
deficit and debt problems worse. As one of my readers wrote me last week:
Hi
John,
Very briefly: If Trump “does a Reagan” and makes his voter base happy with unfunded tax cuts that triple the national debt by the time he ends his second term, won’t that just put off tough choices and make everything worse in the long term? Regards, Douglas
Douglas,
while I don’t think the debt will triple, it is easy to imagine that it rises
by 50%, which would, in and of itself, be problematical. It does put off the
hard choices – and make them a lot harder still when we hit the wall.
So
let me offer a program that I think might actually solve the deficit and debt
problems, jumpstart the economy, pay for healthcare and other costs, and do
so with the least damage to the body politic and economy.
Let
me again restate for the record that any one of these suggestions taken apart
from the rest of the body of actions might be useful but would not be
sufficient to ensure recovery and a balanced economy. It is with a somewhat
heavy heart that I offer these proposals, knowing that there will probably
not be one person who doesn’t find some of them extremely distasteful. And that
includes me. But the simple reality is that this is where we find ourselves
today: we are left with distasteful choices. When you’re left with nothing
but difficult choices and bad choices, and you avoid the difficult ones, then
you end up with only bad choices (cf. Greece).
1.
Cut the corporate tax rate to 15% on all income over $100,000. No deductions
for anything. Period. A 10% tax rate on all net foreign income (with
allowances for taxes paid against total income.) That will make us the most
tax-friendly business nation in the world, competitive with Ireland, and
stops all the financial shenanigans that try to avoid taxes. International
companies will not only move their headquarters here, they will bring their
manufacturing and jobs with them. Ask Ireland how that worked out for them. I
can imagine a horde of global companies moving from Europe and elsewhere to
take advantage of the competitive taxes. Frankly, it will put them at a
disadvantage if they don’t.
The
simple fact is we will collect more total corporate taxes under this plan
than we do under the current system with all its deductions and loopholes.
This tax plan will have the side benefit of putting out of work an army of
lobbyists whose sole role is to try to get tax benefits for their clients.
2.
Cut the individual tax rate to 20% (and later I’m going to demonstrate how it
could even be 15%) for all income over $100,000. No deductions for anything.
Period. No mortgage deduction, no charitable deductions. No nothing. Anybody
who makes less than $100,000 will not pay income taxes and will not file.
This will dramatically promote entrepreneurial activity and help small
businesses.
So
far, the above is standard Republican doctrine. Now we’re going to venture
into left field.
3.
I’m working under the assumption that we must make a serious effort to have a
balanced budget and to fund healthcare and Social Security. That requires
money, which is another way of saying that we will need to find taxes from
another source.
I would propose some form of a value-added tax (VAT) that
would specifically pay for Social Security and healthcare. All the other
parts of government are paid for from income and corporate taxes. Given the
monster size of the healthcare budget, we would need somewhere close to a 15%
VAT. That could change somewhat depending on various workarounds.
For
instance, if you drop the income tax to 15% but keep the 3.9% Medicare tax,
that would leave the total tax rate under 20% but would offer a portion of
payment for healthcare, which might mean a lower VAT.
I
personally presented this plan to Senators Rand Paul and Ted Cruz, who later
adopted a version of it that they characterize as a business tax; but I don’t
care what you call it. There are multiple variations on the theme, and I only
mention Paul and Cruz to point out that you can actually get serious
conservatives to consider such a tax. Now, to be fair, they were against
increasing the total amount of taxes taken. And that is not what I am
advocating here. To pay for healthcare and balance the budget, we are going
to need to generate more revenue. Not a whole lot in terms of percentage of
GDP, but some.
Let
me reiterate that whatever you call the VAT-like tax, it would be
specifically targeted at paying for healthcare and Social Security. If you
want to hold down the amount of the VAT, then Congress needs to aggressively
figure out how to hold down the cost of Social Security and healthcare. This
does not eliminate the need for aggressive restructuring of both of them. In
fact, it would require it.
4.
Policy wonks are going to note that you would not need a 15% VAT just for
healthcare. I would propose that we eliminate Social Security funding from
both the individual and business side of the equation and take those costs
from the VAT.
Progressive
and liberals will complain that a VAT is a “regressive” tax – it falls more
heavily on lower-income people since they spend much of their income on items
subject to such taxes. For the truly lower-income, you could offer a rebate
to even out the load, but if you get rid of Social Security taxes you give
everybody a 6.2% raise and a 6.2% reduction of employment costs to
businesses.
Getting
rid of individual and business Social Security payments is the opposite of
regressive and so balances out the cost to the working poor rather well.
Those with incomes between $40,000-100,000, who had been making Social
Security payments, would not be paying income taxes, so a VAT would still be
a cost reduction for them.
This
would be a huge stimulus to the economy. Plus, VAT taxes can be deducted by
businesses at the border when they export products. This would make us
competitive with every other country in the world whose companies also deduct
VATs at the border.
As
a general rule, most economists (even guys from Harvard and Princeton) will
tell you that a consumption tax such as a VAT is better than an income tax in
terms of its overall impact on the economy.
5.
We need to jumpstart the economy, and both sides of the partisan divide are
talking about some kind of infrastructure program. The problem with
infrastructure spending is that it still adds to the national debt, which is
already outsized. I do think we need infrastructure spending, as
infrastructure is typically productive as opposed to nonproductive, and the
program would help to jumpstart growth. But I would do infrastructure a
little bit differently. I would create an Infrastructure Commission that
would authorize federally guaranteed bonds for cities, counties, and states.
That’s not significantly different from the guarantee we extend to the $1.7
trillion in Ginnie Mae bond funds.
The
guarantee would let these entities borrow at 30-year Treasury rates, which
right now is around 3%. The program would allow the authorization of up to, say,
$1 trillion in infrastructure bonds for projects initiated within the
succeeding three years. The various political entities that issued the bonds
would have to legally agree to cover the payments to retire the bonds over 30
years. I would prefer that they couch this agreement in the form of a public
vote so that the citizens can see what they’re agreeing to.
Further,
we could subsidize the bonds at 2% for the first 5 years and 1% for the next
five years, which would mean a $20 billion per year expenditure for those
first five years. But also recognize that it would be highly unlikely that $1
trillion would be put to work by the end of the next four years. In the
meantime, millions of jobs would be created by the process, which would
generate GDP growth and tax revenue and would be very likely to produce more
in terms of revenue than the program costs. Plus, our kids get something for
the future – water systems, new ports and airports, roads, bridges, etc.
There
could be some exceptions to the focus on state or local funding for projects
that are truly national in scope. A Smart Grid (that would also hopefully be
EMP-hardened to counter a potentially civilization-ending threat that few
people are talking about) is a good candidate; and frankly, we could save
enough in electrical costs that we could probably work the payments for the
bonds into power bills as a very small-percentage add-on that comes out of
the savings.
The
commission itself should be composed of savvy businessmen and women who are
hopefully not politicians (or who have been retired from politics for at
least six years). Members from a particular state or polity would have to
recuse themselves on any vote that affected that jurisdiction.
The commission
would be responsible not only for determining that there is local buy-in to
the process, but also that the political entity issuing the bonds is capable
of making the payments.
6.
Roll back as many rules and regulations as possible. I would instruct every
cabinet member to find, every year for four years, 5% of the rules and
regulations within their purview and eliminate them. If they want to write a
new rule, they have to find an old one to eliminate. Bureaucrats are like
your crazy old aunt who still has every magazine she has gotten for the last
30 years just in case she might need to go back to some article and read it
again. Time to clean out the attic.
In
particular, I don’t want to reform the FDA; I want to replace it lock, stock,
and barrel with a 21st-century drug regulatory authority that
promotes innovation and allows individuals, in consultation with their
doctors, to opt for potential life-changing and even death-preventing
treatments if they so choose. I’m tired of having friends die of diseases for
which there are cures in the pipeline, but the companies with the treatments
are prevented from even making medications available to dying citizens. To
withhold such aid is, to my mind, a criminal act.
That
would not be a bad approach for every regulatory authority to take:
Forget
about the legacy rules and think about the world as it is today and how it
will change, and design a regulatory system that not only enables and
encourages change but that makes sure everyone benefits.
7.
Trump will have two immediate appointments to the Board of Governors of the
Federal Reserve. He will have another two in another year, giving him four
out of the seven governors. I would also imagine that, given the ambitions of
some of the other current governors, they will opt for the much higher income
available in private practice. Having a Federal Reserve that is more neutral
in its policy making and that realizes that the role of the Fed should be to
provide liquidity in times of major crisis and not to fine tune the economy,
will do much to balance out the future. I have several names in mind that I
would like to submit, but one in particular is Dr. Lacy Hunt, a former
Federal Reserve economist and one of the finest economic minds in the world.
Kevin Warsh or Richard Fisher might come back to the Fed if either were
nominated as chairman (although it would be a large pay cut for them). Janet
Yellen’s term as chairman expires in January of 2018, though s he could
remain on the board if she opted to. I can’t imagine anybody would want to
hang around on the board after they’ve been chair.
8.
Getting trade right will be tricky. It is one thing to talk about unfair
trade agreements – and we have certainly signed a few. But we also need to
recognize that some 11.5
million jobs in the US are dependent upon exports (about 40% of which are
services). Frankly, if we drop our corporate tax to 15% and work on reducing
the regulatory burden, I think we will be pleasantly surprised by how many
jobs are created just by those steps alone.
9.
In connection with trade, as I look around the world I see other countries
experiencing or getting ready to experience economic stress that is going to
force them to allow their currencies to weaken against the dollar. The euro
is already down by over 30%. The potential crisis in Italy (not out of the
question and a topic for a future letter) could easily push the euro below
parity. The value of the dollar relative to the currencies of other countries
comes under the purview of the Treasury Dept., not the Fed. And I can imagine
a time when we will see some strange new policies being suggested because of
the competitive pressures exerted by a strengthening dollar.
A Few Final Thoughts
The
central advantage of the entirety of my proposals is that they offer a path
to a finance the needs of the country and at the same time allow a balanced
budget. The actual increase in the total tax revenue needed will be a
function of the degree to which Congress can get the various budgetary items
under control, especially healthcare and Social Security. I know a lot of
conservatives would like to see no increase in total tax revenue to the
federal government, and if we can do that and balance the budget, I am all
for it. I am decidedly in the camp that government is too large and would be
more than happy to eliminate a few departments here and there.
But
voters clearly want healthcare and Social Security benefits to be paid for,
along with other government services that are actually necessary (especially
defense).
Therefore, we must figure out how to pay for those services. Simply
holding government expenditures flat for four years would go a long way to
solving the problem, but it won’t get us all the way there.
Boosting
growth is going to be difficult. This is not the 1980s and the environment
that Reagan encountered. Stock markets are at highs, not lows, as they were
in his term. Today, the market capitalization is 196% of GDP, versus 40%
when Reagan took office (hat tip Stephanie Pomboy). Reagan also had a falling-interest-rate
environment.
Plus he had a huge demographic shift to work with, from Baby
Boomers coming of age.
Reagan also had his recession at the beginning of his
term, so the economy was coming off its lows. There was a great deal of
pent-up demand, which is not presently the case. All of these factors were a
great help in spurring the economy when combined with tax cuts. Those
conditions all tended to boost growth, yet they don’t exist today.
We
can have growth and create good jobs, but it’s not going to look like the
’80s and ’90s.
Our rebuilding of the economy will have to take a different
path, and a more challenging one in many respects.
Let
me be very clear. If we don’t get the debt and deficit under control – and by
that I mean that at a minimum we bring the annual increase in the national
debt to below the level of nominal GDP growth – we will simply postpone an
inevitable crisis. We have $100 trillion of unfunded liabilities that are
going to come due in the next few decades. We have to get the entitlement
problem figured out. And we have to do it without blowing out the debt. If we
don’t, we will have a financial crisis that will rival the Great Depression.
Not this year or next year, and probably not in Trump’s first term, but
within 10 years? Very possibly, if we stay on our present trajectory.
For
investors, navigating the next few years is going to be tricky. We already
have multiple markets with valuations at the upper end of their historical
trading ranges.
Interest rates are likely to rise, although by less than most
people now assume.
OK,
I’m going to close now, and perhaps in the future letter I can answer
questions and criticisms I’ve provoked here. As always, I look forward to
your comments.
It
is with a heavy heart that I pen a few thoughts about the passing of a man
known to many of my readers and one came to be one of my best friends, Jack
Rivkin. He was a Wall Street legend who ran one major investment group after
another, ending up as head of investment for Neuberger Berman. He was lured
out of “retirement” by friends of his who had made a major investment in a
firm that I work with, Altegris Investments. Jack came in and eventually
became CEO, with the intention of doing what he did so well: creating new
investment practices and themes that end up becoming industry standards.
I
first met Jack in a plane coming back from somewhere overseas (I really can’t
remember where) and then again at various conferences. We both had an abiding
interest in the future and technology and their implications for investments.
I could spend, and often did, hours talking with him on an extraordinarily
wide range of topics. His investment analysis was brilliant, and it was
always delivered with good grace and a lot of humor. He was involved in dozens
of technology startups with no seeming connections among them other than that
they were fun and interesting projects. I can’t remember many occasions when
he wasn’t smiling. He was just generally happy and a fun friend to be around.
With
his involvement at Altegris, we became much closer, as we both believed that
the future of the investment business is going to be much different than its
past, and we were trying to figure out not only what it would look like but
how to be part of it. He began to participate in the annual “Camp Kotok”
fishing trips in Maine. In the summer of 2015 I remember visiting him at his
home in the Hamptons, where we talked earnesting about working together for
the next 10 years and how to make that happen.
And
then, it seems suddenly, he was diagnosed with pancreatic cancer; and after a
typically optimistic struggle, he succumbed to one of the nastiest diseases
known to humanity. Honestly, the outcome is still shocking. We had talked
about how he had great inherited genes and had more energy and was in better
shape than I am.
Our
mutual friend Barry Ritholtz wrote a very good tribute to Jack in his Bloomberg
column, calling him a Wall Street research giant. And he was. But to
those of us who knew him well, he was much more. He was a giant of a friend.
He will be missed.
And
with that, let me wish you a great week. I look forward to reading your
comments on this letter. Last week my staff sent me a Word document that was
23 pages long with your emailed comments. Plus, there were many online
comments.
There is a great deal of passion on every side about the outcome of
this election.
This election was not my first rodeo; but that being said, I
don’t recall there ever being this amount of emotional upheaval and national
drama. The next four years are going to be interesting, and I plan to be
right here with you, trying to figure out and create the way forward.
Your
wondering how the transition will come about analyst,
John Mauldin
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WHAT SHOULD TRUMP DO? 7 JOHN MAULDIN´S WEEKLY NEWSLETTER
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