Build Your Economic Storm Shelter Now
John Mauldin
If you’re idly conversing with someone you don’t know well, the
weather is usually a safe topic. It affects everyone in some way, so it’s a
shared experience – but there’s something else, too. The weather is no one’s
fault. It is what it is, so you need not worry that the other person will blame
you for it. None of us can control the weather.
And lately, the weather has
been interesting, unless you had to live through its more extreme
manifestations. Then it’s been hell. Before this week, I would’ve said that
Harvey and Irma wrought devastation in Texas and Florida. But then Maria
thrashed Puerto Rico and took devastation to a whole new level. I have a lot of
friends who live in Puerto Rico, and I’m not sure how things are going to go
for them over the next few months.
We can prepare for storms when we know they’re coming, but we
can’t stop them in their tracks or change their path. That’s true for both
hurricanes and the public
pension problem I wrote about last week. Where pensions are concerned, we
have the financial equivalents of weather satellites and hurricane hunter
aircraft feeding us detailed data. We know the barometer is dropping fast. The
eyewall is forming. But we can’t do much about the growing storm, except get
out of the way.
Problem is, the coming pension and unfunded government liabilities
storm is so big that many of us simply can’t
get out of the way, at least not without great difficulty.
This holds true not
just for the US but for almost all of the developed world.
Financially, we’re all trapped on small, vulnerable islands.
Multiple storms are coming, and evacuation is not an option. All we can do is
prepare and then ride them out. But as with recent hurricanes, the brewing
financial storms will have different effects from country to country and region
to region.
I did a lot of thinking after we published last week’s letter –
especially as I was reading your comments – and I wished I had made my warning
even more alarming.
Being a Prophet of Doom doesn’t come easily for me; I’m
known far and wide as “the Muddle Through Guy.” I think the world economy can
handle most anything and bounce back, and I still believe it will handle what’s
coming over the horizon. But some parts of the economy won’t bounce at all.
Quite a few people will see their life savings and ability to support
themselves utterly disappear, or will be otherwise badly hurt, and through no
particular fault of their own.
I mentioned last week that the next few issues of Thoughts from the Frontline
would outline my vision for the next two decades. We’ll get back to that next
week. But today I want to continue with the hard-hitting analysis of our public
pension problems and say more about personal storm preparation. We all have
some very important choices to make.
As I’ve said, the state and local pension crisis is one that we
can’t just muddle through. It’s a solid wall that we’re going to run smack
into.
Police officers, firefighters, teachers, and other public workers
who rightly expect to receive the retirement benefits that their elected
officials promised them are going to be bitterly disappointed. And the
taxpayers of those jurisdictions are going to complain vigorously if their
taxes are raised beyond all reason.
Pleasing both those groups is not going to be possible in this
universe. Maybe in some alternate quantum alternate universe where fuzzy math
works differently and lets you get away with stuff, but not here in our very
real world. It just can’t happen.
So what will
happen? It’s impossible to say, exactly, just as we don’t know in advance where
a hurricane will make landfall: We just know enough to say the storm will be
bad for whoever is caught in its path. But here’s the twist: This financial
storm won’t just strike those who live on the economic margins; all of us
supposedly well-protected “inland” folk are vulnerable, too.
The damage won’t be random, but neither will it be orderly or
logical or just. It will be a mess. Some who made terrible decisions will come
out fine. Others who did everything right will sustain severe hits. The people
we ought to blame will be long out of office. Lacking scapegoats, people will
invent some.
Worse, it will be a local
mess. Unlike the last financial crisis where one could direct anger at faraway
politicians and bankers seen only on TV, this one will play out close to home.
We’ll see families forced out of homes while neighbors collect six-figure
pensions. Imagine local elections that pit police officers and teachers against
once-wealthy homeowners whose property values are plummeting. All will want
maximum protection for themselves, at minimum risk and cost.
They can’t all win. Compromises will be the only solution – but
reaching those unhappy compromises will be unbelievably ugly.
In the next few paragraphs I will illustrate the enormity of the
situation with a few more details, some of which were supplied this week by
readers.
I keep using the fabulous William Gibson line that “The future is
already here. It’s just unevenly distributed.” Well, paraphrasing, “The state
and local pension crisis is already here; it’s just unevenly distributed.”
One reader noted that he has no sympathy for Houston when right
next door, Katy, Texas, is building a $72 million football stadium for its high school.
That’s an aberration, and I might just mention that a few years
back Allen, Texas, built a high school stadium for $60 million – 18,000 seats,
which they fill every weekend they play. And the Eagles play really well, with
several state championships in the 5A division (the biggest schools) in the
last five years. There are other such examples. Sadly. I am not a fan of
extravagant high school football stadiumsprograms. But then again, I am a
former high school nerd turned curmudgeon.)
(Sidebar: Texas, and especially smaller towns and cities, takes
its high school football and “Friday Night Lights” seriously. There is a reason
that Texas high school football players are among the most highly recruited in
the nation.) Though I will say that it is personally offensive that the only
reason Oklahoma University can field a decent football team is because of the
large number of Texas players on their team. And they have the ill grace to
come in and kick UT derriere from time to time at the annual Cotton Bowl game
during the Texas State Fair in October. But I’d better get back to the letter.)
Allen and Katy, coupled within contrast to Dallas and Houston,
illustrate what I mean by the uneven distribution of state and local pension
problems. Allen had 8,000 residents in 1980 and only 18,000 in 1990. The police
department in this peaceful rural town was small in those days, and the pension
benefits that built up were insignificant for a town that numbers over 100,000
today. But that’s 100,000 and
growing. Allen lies in the path of massive growth spilling over
from North Dallas into Plano, Frisco, McKinney, and then Allen. The city could
easily double in the next 15 years. Estimates are that 10 million people will
move to the North Texas area within the next 30 years, which will double or
triple suburban-city and public school revenues from taxes. At times, Frisco has
been the fastest growing city in America. This year, Money magazine proclaimed
Allen the second-best place to live in America. Residents of Allen don’t have
to worry about legacy pension issues, because
the town is growing
faster than whatever pension issues they have.
Ditto for Katy.
So when my reader says he doesn’t feel sorry for Houston because
Katy built a $70 million high school football stadium, he needs to realize that
Katy doesn’t have Houston’s legacy pension problem. Nor its high crime rate, nor
all its other big-city problems. And this urban vs. suburban situation is
mirrored across all the United States. The big inner cities have these
monstrous legacy pension problems; and the suburbs, which have prospered on the
back of the growth that has come from the big cities, feel no obligation to
pitch in and help.
Residents of Houston and Dallas (and Chicago and New York and LA
and on and on), on the other hand, are going to feel pain. Their taxes will
keep going up, while their populations will continue to flee to the surrounding
suburban areas to escape those crippling taxes and high real estate costs.
Let’s look at a few more hard facts. Pension costs already consume
more than 15% of some big-city budgets, and they will be a much larger
percentage in the future. That liability crowds out development and
infrastructure improvement, not to mention basic services. It forces city
leaders to raise taxes and impose “fees.” Let me quote from the always
informative 13d
letter (their emphasis):
Consider the City of Los Angeles, which Paul Hatfield,
writing for City Watch L.A., recently characterized as being in a
state of “virtual bankruptcy.” After a period of stability going back to
2010, violent crime grew 38% over the two-year period ending in December 2016.
Citywide robberies have increased 14% since 2015. One possible reason for this uptick: the
city’s population has grown while its police department has shrunk. As
Hatfield explains:
The LAPD ranks have fallen below the 10,000
achieved in 2013. But the city requires a force of 12,500 to perform
effectively… A key factor which limits how much can be budgeted for police
services is the city’s share of pensions costs. They consume 20% of
the general fund budget, up from 5% in 2002… It is difficult to increase the
level of service while lugging that much baggage.
What about subway service in New York City? The system is fraying under record
ridership, and trains are breaking down more frequently.
There are now more than 70,000 delays every month, up from about 28,000 per
month five years ago. The city’s soaring pension costs are a big factor here as
well. According to a Manhattan Institute report by E.J. McMahon and Josh McGee
issued in July, the city is spending over 11% of its budget on
pensions. This means
that since 2014, New York City has spent more on pensions that it has building and
repairing schools, parks, bridges and subways, combined.
There are many large, older cities where there are more police and
teachers on the pension payroll than are now working for the city. That problem
is compounding, as those workers will live longer, and the pensioners typically
have inflation and other escalation clauses to keep their benefits going up.
Further, most cities do not account for increases in healthcare
costs (unfunded liabilities) that they will face in addition to the pensions.
Candidly, this is just another “a trillion here, a trillion there” problem.
Except for the fact that the trillion dollars must be dug out of state and
local budgets that total only $2.5 trillion in aggregate.
Now, add in the near certainty of a recession within the next five
years (and I really think sooner) and the ongoing gridlock in national
politics, plus the assorted other challenges and crises we face. I won’t run
down the full list – you know it well.
I’ll abbreviate since this is a family e-letter, but I just have
to wonder, WTF
are we going to do?
You know I don’t light my hair on fire every time someone says
“Crisis!” I believe that most of the time, most of us will be fine. Together we
have enough spare resources to help the people who really need it.
However, as I look out into the future I see an extraordinarily
wide gap between the crisis I’ve been describing and the golden age that I
truly think is coming, post-crisis. No one will find that gap easy to cross.
Some of us won’t make it. Others won’t even try because they won’t see the
need. They think the future will look like the past. It won’t.
Personally, I intend to make it across the gap, and I want you to
get there, too. The rewards will be magnificent, but attaining them will take
extensive preparation. What should you do?
I’d like to give you a 10-step checklist of all the steps you
should take… but I can’t. Your situation isn’t like mine, nor is your
neighbor’s situation like yours. We each have our own unique combination of
talents, experience, resources, family structures, location, and more.
The best I can do is to help you see the world as I see it. And then give
you some of the resources you need. Once you have them, your answers will
develop naturally. You’ll be able to prepare as I would if I were in your
shoes.
So how do we do that?
You’re taking step one right now by reading this letter. I hope
you’re a regular reader. (I know the letter’s length got a little out of
control the last couple of years. My partners and editorial team have impressed
upon me the need for brevity.) So, keep reading Thoughts from the Frontline for my latest
thoughts. And consider subscribing to the great analysis from the rest of my
Mauldin Economics team – Patrick Watson, Jared Dillian, Patrick Cox, Robert
Ross – we’ve got a deep bench!
Reading our analysis and recommendations helps, but it’s not
enough. You have to act
on it, which means you have to be confident at a deep, personal level. How do
you get there?
A few months ago, my Mauldin Economics colleague Patrick Watson
cited Harvard research on travel’s cognitive benefits. It seems that leaving
your normal environment actually makes your brain work differently. Because you
don’t know what to expect, every little act becomes a problem-solving exercise.
This promotes creativity and cognitive flexibility.
With that research in mind, Patrick speculated that my extensive
travel might be what sparks my energy and creativity. I don’t know for sure,
but it makes a certain sort of sense. Some of my best ideas come to me while
I’m on the road. Maybe seeing new places and meeting new people activates
neurons I don’t normally use at home.
Getting together with people who are trying to think through the
coming crisis is one of the most important things you can do. Being in a place
with like-minded people who are all seeking solutions is extraordinarily
productive. There is a reason the most successful investors and “family offices”
regularly get together at conferences and share ideas. The open sharing and
debate helps focus our critical thinking.
And understand, SIC is not just about understanding the coming
crisis. It’s about looking at new opportunities. The world has a fabulous
abundance of opportunities for investment and diversification that are outside
of the traditional money management space. If you are using a buy-and-hold,
60/40 typical portfolio as your basic investment approach, it is my personal
opinion that you are not going to be happy a few years down the road. You
really, really need to understand that past performance of the markets (for the
last 70 years) will not be indicative of future results. The world is going to
change in fundamental ways that we can’t predict but can prepare for. We are
going to need to make course corrections and adapt on the fly. If you or your
investment advisor can’t do that today, you need to rethink how you’re
approaching your future.
Having a secure shelter doesn’t make storms any less dangerous,
but it does make them less dangerous to
you. Every week you put off preparing, you are running out of time
to build and stock that shelter.
When I was a kid, there was a tornado shelter next door, where the
local neighborhood came together when the siren sounded. We lived in Tornado
Alley. I distinctly remember looking up at the sky in Bridgeport, Texas, and
seeing two tornadoes, not just one. At nine years old, I wanted to stay and
watch. I was completely fascinated! My mother wisely hauled me off to the
shelter.
What I’m telling you is that the Great Reset is going to make the
recent Great Recession look like a volatility picnic. Add in massive
technological and demographic shifts. And the future of work? There’s another
vast, turbulent, murky cloud right up ahead.
But let me make this emphatic point: The world is not coming to an end. It is simply changing
faster and in a more extreme fashion than we have seen in the past. For those
who take the proper precautions, the future is going to be exhilarating and
highly rewarding. My personal mission is to help you earn that fabulous future
for yourself.
Don’t be a nine-year-old kid, immobilized, gawking at tornadoes.
Figure out how to build your own storm shelter, not just to withstand the
coming crisis but to take
advantage of the opportunities that the crisis (and ultimately the
Age of Transformation) will present.
The Strategic
Investment Conference will help you with the knowledge and the motivation
to take the next critical steps. I look forward to seeing you there.
I will be in Chicago the afternoon of September 26, meeting with
clients and friends, and then I’ll speak at the Wisconsin Real Estate Alumni
conference the morning of the 28th, before returning to Dallas that
afternoon and flying with Shane to Lisbon the next day. My hosts are graciously
giving us a few extra days to explore Lisbon, and Portugal is one of the last
two Western European countries I have never been to. After this, only
Luxembourg is left, so the next time I’m in Brussels or Amsterdam on a Sunday,
I’m going to hop on a train and go have lunch in Luxembourg.
On Wednesday morning the 27th I will be on CNBC
with my friend Rick Santelli. As usual, we’ll talk about whatever’s on the top
of Rick’s mind at the moment. It makes for a hellaciously fun discussion.
I return to Dallas to speak at the Dallas
Money Show on October 5–6. I will speak at an alternative investments
conference in Denver on October 23–24 and return to Denver on November 6 and 7,
speaking for the CFA Society and holding meetings. After a lot of small
back-and-forth flights in November, I’ll end up in Lugano, Switzerland, right
before Thanksgiving. Busy month! Then there will be a (currently) lightly
scheduled December, followed by an early trip to Hong Kong in January. It looks
like Lacy Hunt and his wife, JK, will join Shane and me there. Lacy and I will
come back home exhausted from trying to keep up with the bundles of
indefatigable energy that JK and Shane are.
Shane is in New Jersey with her son, so I am home alone “batching
it” for a few days. Food preparation has been a little less extensive, shall we
say, but the schedule is no less busy.
It’s hard to believe, but in less than two weeks I turn 68. I
don’t feel the way my 30-year-old self thought I would at 68. I still think and
breathe the future optimistically, if perhaps with a more cautious outlook; but
I really do think that the world in general will Muddle Through and that you
and I can thrive.
OK, it’s time to hit the send button. Have a great week. And maybe
sit down with friends and talk about how they see the future and what they are
doing to plan for it. Share your own ideas. Who knows, maybe you’ll end up
helping each other in a big way.
Your planning to do more than Muddle Through analyst,
John Mauldin
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