market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of John Mauldin of Millennium Wave Advisors.  His talk was entitled 'How Will the Elections Affect the Endgame?  Finding Value in an Upside Down World.'

He's not a stock picker, but a macroeconomic thinker and writer (author  of "Thoughts from the frontline" a newsletter.

Differences between uncertainty and risk: Uncertainty is the "unknown unknowns" the term used by Rumsfield.  The things we don't even know we don't know.   Investors are obsessed with risk.  We can model it, it makes us feel like scientists.  We have more ways to quantify risk, yet me walked into 2008 missing the obvious.  We think we can model risk. Surprises aren't only the bad things, but the good things (like the invention of the iPhone? or the steam engine)

In 1850 the number one job in the USA was a farm worker, in 1900, it was personal servant.  The cheapest thing was to hire a laborer to do the hand labor.  Uncertainty comes in all forms.  The problem with uncertainty is you can't model it.

For example, the island dispute between Japan and China. It's tough to model because it's based on human nature, and we are irrational.

Lenin: "There are decades when nothing happens and there are weeks when decades happen."  "It's not the lion that you can see that's the problem.  It's the lion in the grass..."

Frederic Bastiat:  A law produces not only one immediate, seen effect, but the other effects which emerge only subsequently, they are not seen. It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous and vice versa.


Mauldin's Macro Thoughts

Europe:  the trade imbalances will force a wage readjustment SOMEHOW.  The wages in Germany must go up, or the wages in Spain, Greece must drop.  "Europe is a disaster!!! there is no way they can get out of their present malaise, they are going to have a depression, the adjustment will be painful."  The problem is the policy mistake of forming the Eurozone 14 years ago.  It's just basic accounting, Spain can't balance it's budget until it balances its trade.

"Japan is a bug in search of a windshield.  They will have their issue in the next couple of years."

China: Can't keep investing 50% of GDP at 8% growth.    Pay attention to the macro but also look at secular trends, and still expect some positive surprises.  

America: In the US, we have to solve the deficit.  You have to raise taxes and cut spending.  No matter who's elected, it will take a compromise.  You can't run on this policy, yet they will do it after the election.

You can't model this economy.  But you can say, you can't spend more than you collect forever. He claims bond market will take over. (But now we have the worst budget situation, with record low interest rates- so everything economists say isn't happening)

He believes in the march of technology.  Biotech, robotics, telecommunications will all make progress.

He likes Monsanto (MON), says they have an edge, people will be eating in 20 years.    The value you can find is when you look "over" the current situation.   Europe mess will not change the march of technology, Asia growing, etc.


Long Term Trends

A few long term trends:

1.  End of the debt super cycle
2.  End of the secular bear market
3.  The millennium wave
4.  Demographic destiny.  Boomers will live a lot longer than expected.
5.  The rise of Asia and Decline of Europe (not just a China story). 


Question & Answer:

Since money velocity is dropping rapidly like it has been, you can increase the quantity without inflation.  Fed is trying to cause some inflation.  We can do this today, because we're deleveraging.  It's working today, only because the velocity hasn't turned yet, but it will.

What is the catalyst for Japan to unwind?  It's when japanese savings goes negative.  It's come down from 16% to 1%.  He says short the Yen, and long the japanese technology companies.  He says they'll print a massive amount of yen.

He's still bearish, thinks we will see new stock market lows, the secular bear market isn't over yet.  We WILL have another recession.


Embedded below is Mauldin's slideshow presentation from the Value Investing Congress:




Be sure to check out the rest of the presentations from the Value Investing Congress.