Change will be today’s topic. Below I’m reproducing part of a letter I originally wrote in December 2007 and have referred to several times. It is the single most-read letter I have written and the most commented-on, too. I consider it, in some ways, my most important letter. If you’ve read it before, you should read it again. I have updated it a little bit, but the principles are just as timeless as ever. And for the time conscious, we have shortened it a bit and at the end, I try to apply those principles to present economic times.
Let’s consider two seemingly conflicting ideas.
Can both of those be right? I think so.
I see some major problems coming in the 2020s (and perhaps a bit sooner), but I also see a lot of good things happening right now. The economic recovery, while still weak by historic standards, is gaining some momentum that ought to carry it forward for another year or two, assuming (as I perhaps naïvely do) that we can put this trade war thing to rest. That’s good news because it buys us time to prepare for worse times, but it’s also just plain good news.
This year at "Camp Kotok," I quickly sensed a more upbeat mood. Not that many that were wildly bullish, but most were positive or at least neutral. There weren’t nearly as many bears as I expected. “Cautious optimism” seemed to be the theme. That led me to refine my own views with a wide variety of participants. Today, I’ll do the same for you.
This week I have something special for you: an update of “The Distribution of Pain,” one of 2017’s most popular letters. I say “popular” just in terms of feedback and reprint requests. It was thought-provoking but also sobering. I started with the original version, re-edited to clarify a few points, and added some new comments. It is still a timely, important topic.
Last week I gave you some rules to follow with your investments. They were necessarily general because I’m writing to a broad audience. Today, I will get more specific by discussing some possible strategies for high-net-worth “accredited investors.”
An active manager worth his or her salt will manage risk as part of the deal, and risk management is exactly what you need when you live on a railroad track. It doesn’t have to be perfect, just good enough to mitigate the major drawdowns. If everybody else loses 40% and you only lose 25%, you’ll be way ahead of the crowd. And the right manager should avoid even that scenario and keep you near break-even.
There’s going to be a train wreck here. Which train will go off which track is unclear, but something will. And we’re all going to feel it.
This week, in the spirit of July 4 and Independence Day, I’m going to share the inspirational story of a friend who “Came to America.” But it’s also a teaching moment. I think the story is timely as we reflect on what this country means, to both its residents and the broader world. I hope you enjoy it.
Uncle Sam has made too many promises to too many people, with little regard for its future ability to fulfill them. These are debt. Worse, some of them are additional debt on top of the obligations we already see on the national balance sheet. Even worse, entire generations have planned their retirement lives around the government fulfilling those promises. If those promises aren’t met, their lifestyles will indeed become a potential train wreck.
Modern Europe’s (and Canada and Australia and…) vaunted social welfare programs have helped many people, but they haven’t eliminated poverty, nor let everyone retire in comfort. Could they simply have shifted spending forward, leaving future generations with the bill? Today, we’ll explore that question as part of my continuing Train Wreck series.
The entire world went into debt for the equivalent of tropical vacations and, having now enjoyed them, realizes it must pay the bill. The resources to do so do not yet exist. So, in the time-honored tradition of lenders everywhere, we extend and pretend. But with our ability to pretend almost gone, we’re heading to the Great Reset.
Over the next decade, we will endure increasingly damaging debt crises that culminate in a coordinated global default—“The Great Reset,” as I call it. There are limits in how much leverage the world can handle, and I think we are already beyond them. And that is before we have a global recession. The only question now is how we will manage the collapse.
The first defaults will occur at the lowest end of the problematic market: high yield or “junk” bonds. They will play a role comparable to subprime mortgages in the last crisis. We’ll see mortgage problems as well, but I think overleveraged companies will be the core problem.
Today we will summarize something I’ve been thinking about for a long time. Exactly how will we get from the credit crisis, which I think is coming in the next 12–18 months, to what I call the Great Reset, when the global debt will be “rationalized” via some form of nonpayment. Whatever you want to call it, I think a worldwide debt default is likely in the next 10–12 years.
I’ve been saying for some time that the next financial crisis will bring a major debt crisis. But as you’ll see today, it is a small part, maybe the opening event, of a rapidly-approaching train wreck. We’ll need several weeks to tease out all the causes and consequences, so this letter will be the first in a series.
In short, there is not enough data to have me predict a recession and the consequent bear market. But there’s enough data bubbling up all around me that it makes me very nervous, and I am paying close attention. You should be, too.
This year, China is in the headlines because President Trump wants better trade terms. That’s important, but it’s only one piece of a much larger Chinese story that has been unfolding slowly for decades. Periodically, I check in on the latest developments. Today, we’ll see where we are, with the help of my trusted sources.
Today we’re going to look at who wins and who loses under the new tax law. I think many of you will be surprised.
Today we will look back at what economists thought the federal budget and tax policy would be in 2001 and thereafter. Let’s just say the government projections were a tad optimistic.
Just like the weather, the world economy and financial markets go through cycles. Most years, they don’t change suddenly. We get some transition time between the colder and warmer seasons. I fear we may be in an economic transition right now, and it may not be in the direction of the springtime or summer we would prefer. But let’s look at these charts and see what they tell us.
We heard a lot about valuations at my Strategic Investment Conference, and particularly about the “FAANG” stocks that drove much of the recent bull run. Now, only two weeks later, the “F” in that acronym (Facebook) is tumbling, with the others maybe not far behind. That’s a problem for every stock investor, FAANG or otherwise. So today we’ll look at valuations more broadly and then zero in on the social networking issues that are turning more problematic.
It’s been a week and I’m starting to recover from my post-SIC high. It’s a weird feeling. I love SIC, yet processing it all takes time. Imagine one of those brain maps that shows the neurons opening new pathways. That’s what SIC does. It opens connections that I didn’t previously have.
Today, I’m going to recap one of this year’s new speakers, Karen Harris from the Macro Trends Group at Bain & Company. She has done some ground-breaking research on job automation and the future of work. Much like geopolitics, these factors define the parameters in which other trends develop, so I made Karen one of our day 1 lead-off speakers. As you’ll see below, her presentation was even more enlightening than I expected.
I’m going to wrap up our series on the problems of collecting and analyzing data in the first half of this letter, and then I’ll quickly comment on the Trump tariffs.
Today we’ll extend last week’s discussion by considering how twisted inflation data leads to less-than-ideal policies.
Federal Reserve officials like to say their policy course is “data-dependent.” That sounds very cautious and intelligent, but what does it actually mean? Which data and who’s interpreting it? Let’s ask a few questions.
Last week’s turbulence shined a harsh spotlight on the stock market. Appropriately so, if that’s where your investments are. But in the hubbub many investors are missing the deeper and far more urgent bond market issues.
Rarely do we move directly from boom to bust; but when the shift comes, it can develop quite quickly, even though the transition isn’t usually obvious in real time. As I look at the data and talk to my contacts, I’m beginning to conclude that we’re approaching one of those transitional phases. I think we’ll look back at 2018 as an in-between year… from good times to something eventually not so good.
We must next decide what, specifically, a newly formulated GDP should measure and how – and that’s a thornier question than you might think. Today we’ll wrestle with that question and with some of the implications of changing how we measure growth.
Imagine this: Rising interest rates and reduced foreign capital flows combine to push housing prices down in places like Vancouver. Leveraged players who own speculative homes start to liquidate their properties, pushing prices down further. Banks find themselves holding properties they neither need nor want. The dominoes begin to topple.
Only two weeks in and 2018 is already breaking records – mostly in a good way. But that leaves 50 potentially less enjoyable weeks to go. So rather than focus on promising current events, I think I’d better dip back into my annual forecast bag and share a few more highlights with you.
This week and next we’ll look at forecasts from some of my most trusted friends and colleagues.
In addition to popping champagne corks and black-eyed peas (at least in the South) on New Year’s Day, year-end brings something else for economists and portfolio managers: annual forecasts. People want to know what the coming year will bring. I would like to know, too. But since I’m on the other side of your monitor, I must give you my own forecast. Caveat emptor applies.
The holidays always prompt us to look both forward and back. Soon you’ll start seeing 2018 forecasts. I’ll review some of them for you and give you my own in the coming weeks. But first, I want to take a look back at 2017 – and do it a little differently.
Today I’ll give you some quick thoughts on the just-issued November jobs report, then take a deeper look at the automation problem/opportunity.
In talking with some of my Fed-watching friends, it appears the world’s most important central bank is about to experience some potentially profound changes – not just in personnel but more importantly in the kind of people who lead it. Those changes could, in turn, have some serious economic impacts; so it’s worth taking a deeper look.
The volume of daily economic lunacy that lights up my various devices is truly stunning, and it seems to be increasing. I shared a little of it with you in last week’s “Bonfire of the Absurdities.” Since it’s a holiday weekend and I was traveling all week, today I’ll just give you a few more absurdities to ponder. And this shorter letter will lighten your weekend reading load.
This week’s letter will take a look at the growing number of ridiculous, inane, and otherwise nonsensical absurdities that fill the daily economic headlines. I have gone from the occasional smile to scratching my head now and then to “WTF” moments several times a week.
When you write about economics, you learn very quickly that the economy doesn’t care what you say about it. The forces that drive it are beyond any one person’s comprehension, much less control. But at the same time, the economy doesn’t work like a law of nature. Unlike gravity, for instance, the economy responds to human choices and preferences. We influence it, even if we don’t understand exactly how.
Lately, my life has been completely packed with speeches, meetings, and in-depth, often lengthy, conversations. Plus ongoing research and writing, of course. It all culminated Thursday afternoon at the beginning of a business meeting with the leadership team from a firm that will become a significant new business partner.
I don’t want to be glib, but our educational system is largely a failure in producing children and young adults ready for the future. Why we would think that more of that would be useful? What we need to do is completely rethink the whole concept of what we call education.
It is extremely difficult for an active manager to buy the best companies and/or short the worst companies and show much outperformance relative to the passive index funds. No matter how much research you do, no matter how well you know those companies, your research is not giving you an edge over the massive movement to passive investing.
This week we are going to take a hard look at the unfunded liabilities and debt of the US government. And even though the federal unfunded pension liabilities dwarf those of state and local pensions, I want to make it clear that I believe the state and local problems will be far more intractable.
Readers outside the US might have felt smug and safe reading those stories. There go those Americans again, spending wildly beyond their means. You are correct that, generally speaking, we are not exactly the thriftiest people on Earth. However, if you live outside the US, your country may be more like ours than you think. Today we’ll look at some data that will show you what I mean. This week the spotlight will be on Europe.
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.
Elected officials at all levels have promised workers they will receive pension benefits without taking the hard steps necessary to deliver on those promises. This situation will end badly and hurt many people. Unfortunately, massive snafus like this rarely hurt the politicians who made those overly optimistic promises, often years ago.
This letter will be the first of a series in which I outline my vision for the next 5–10–15–20 years of global economics. I understand that there is a substantial amount of hubris involved in such an undertaking, so I will approach the topic gingerly.
Instead of delving deep into one subject, I’ll give you my quick thoughts on several different items. They aren’t connected to each other, nor do they build up to any sort of conclusion. They’re just what is on my mind as we wrap up summer 2017.
Today we’ll look at reasons to be bullish on the equity markets, but I’ll also teach you a thing or two about trading.
