The End Game

Posted by John Mauldin - Frontline Thoughts

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This Time is Different

“But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.” – Carmen M. Reinhart and Kenneth Rogoff from their new book, This Time is Different. Thoughts on the End Game
This Time is Different
Quarterly Review and Outlook
Home Again

When I was at Rice University, so many decades ago, I played a lot of bridge. I was only mediocre, but enjoyed it. We had a professor, Dr. Culbertson, who was a bridge Life Master at an early age. He was single and lived in our college, playing bridge with us almost every night. He was a master of the “end game.” He had an uncanny ability to seemingly force his opponents into no-win situations, understanding where the cards had to lie and taking advantage.

Traveling to London and on into Europe, I have some time to think away from the tyranny of the computer. Over the last year, and especially the last few months, I have written in depth about the problems we face all across the developed world. We have no good choices left, so making the correct unpleasant choice is now our most hopeful option.

As I wrote in my 2010 forecast, this year is a waiting game. There are so many choices we must make, and the paths we will take from those choices vary wildly. But make no mistake, we are coming close to the end game. Some countries and economies are closer to that point than others, but the entire developed world is lurching, in almost drunken fashion, towards our economic denouement.

Over the next several months, we are going to start to explore various aspects of the end game. Whither Japan? Are they actually, as I think, a bug in search of a windshield? What does that mean for the world? How safe is the euro? Everyone over here seems to think Germany will bail out Greece. A breakup seems unthinkable to the people I’ve been talking to (so far). But what about Spain? Italy? Can you spell moral hazard?

The Fed has said it will exit quantitative easing (QE) at the end of March. But what if mortgage rates rise? Where do we find $1 trillion (plus!!!) in US savings to fund the deficit, assuming foreigners buy about $400 billion? By definition, savings and foreign investment and the federal deficit must add up to zero. (We will go into that later – just take it as gospel for now.) How can we run 10% of GDP deficits if the Fed does not print money (as they did by buying Fannie and Freddie paper, which became treasuries, as I outlined last week)? That would require almost a 10% savings rate – with it all ending up in treasuries. How can that happen? Really?

But before we get into that, a few housekeeping items. First, more than a few of you have written to say you are not getting the letter as usual. There are some problems when your distribution list is 1.5 million closest friends. We try to fix them, working with the various ISPs to stay “white-listed.” It is actually a lot of work for Doug and my publisher. If for whatever reason your letter does not get into your inbox, just go to and find the letter there. And we are working on other mechanisms as well to insure you get this letter. And thanks for letting us know of problems. Rest assured, we do not randomly drop any of my closest friends from this list.

Second, the invitations are starting to go out for our annual Strategic Investment Conference (co-sponsored by my partners Altegris Investments) which will be April 22-24 in La Jolla. In addition to David Rosenberg, Dr. Lacy Hunt, your humble analyst, Niall Ferguson, and George Friedman, my good friend Dr. Gary Shilling has agreed to come. There are several more rather exciting announcements I will be making in a few weeks. This conference will sell out. Unfortunately, for regulatory reasons, it is limited to accredited investors. If you have not already received an invitation, contact your Altegris Investments professional, drop a note to me, or register at and you will get a call and an invitation.

This year we are going to focus on “The End Game.” I can guarantee you lively debate, fun times, and over-the-top wines – plus, you will be with people who are simply the coolest ever. The speakers are all friends who “get it.” They called the crisis well in advance. These are the guys who sit and think every day about how this will all end up. The panels are going to be fun. Do not procrastinate. Register now.

This Time is Different

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