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Market Seer John Mauldin Says a 40% Plunge in the Stock Market is Coming
Son of Texas and financial seer, John Mauldin, believes the stock market could shed 40% in the near future (SPX). John is the president of Millennium Wave Advisors, LLC, a Dallas, Texas based investment advisor, with $600 million in assets under management.
John worries that the velocity of money, an indicator of how many times a dollar is reused in the economy, is collapsing. This ratio, which is defined by the GDP divided by the money supply, bottomed at 1.15 in 1946. It then reached a mean of 1.65 in the fifties, sixties, and seventies, and peaked at a breathtaking 2.2 times in 1997, near the top of the Dotcom bubble. It has been retreating ever since, has recently accelerated down to the 100 year mean, but still has much farther to fall to get to the bottom of the 100 year range.
The collapse of velocity signals the end of a 50 year super cycle in lending. For you and I, this means lower economic growth for perhaps another decade. It is partly the result of banks getting generous funding from the Treasury, and then sitting on it. The bucks simply stop there. It suggests that no matter how much money the government pumps into the economy, it might as well be pushing on a wet noodle.
The gold bugs have got it all wrong, simply focusing on money supply growth and expecting hyperinflation. A lot of money can sit and go nowhere. The inflation will come back with a vengeance when the economy revives and banks finally resume lending. With so much new money being created in the last two years, the chances of the Fed being able to head this off are close to nil.
Similarly, the bond vigilantes may have to wait a couple of years for their big move down in the 30 year Treasury bond (TBT). When the bond markets call “times up,” the US will be forced to embark on some highly deflationary spending cuts. If this happens during a recession, it could be a disaster.
John thinks there will be a substantial slowdown in growth in Q3 and Q4. With anticipated federal tax increases of 2% of GDP in 2011 added to a further 1% in state tax hikes, the recovery will be strangled in its crib. That’s when the risk of a double dip recession explodes. Over 3-4 years higher taxes could add up to a burdensome 9% drag on GDP.
John says that emerging markets (EEM) will decouple from the US and keep powering up, as this is where the real economic growth is (EEM). Japan is “a bug in search of a windshield.” With savings rates falling and deficit spending soaring, it may only have a couple of years left.
John has been a gold bull since 2002 (GLD), when it was below $300/ounce, and isn’t backing off from that position, but prefers to own it against Euros at this point. He thinks the entire premise for the existence of the European currency (XEU) is questionable, and sees it eventually moving to parity against the dollar.
John doesn’t manage money directly himself, but outsources assets with market timers employing a number of different models. One firm he has particular success with is CMG in Philadelphia (CMGTX). He really only selects individual stocks in the biotech area, which he thinks have the potential to develop into a bubble, and has a variety of small cap and microcap holdings.
Not pulling any punches, John said that the Republican leadership of the last congress was “criminally incompetent” in the way they unnecessarily squandered surpluses and spent their way into oblivion, leaving us without dry powder to fight the current crisis.
John has an incredibly diverse past, which includes a degree from Rice University, a stint at divinity school, and time spent running a check printing company which led him into newsletters. John then rose to the top of the American Bureau of Economic Research, and entered the fund management business in the late eighties. Today, his two letters, Outside the Box and Thoughts From the Frontline, go out on the Internet to 1.5 million readers a week. John is the publisher of three investment books, The Millennium Wave, Just One Thing, and Bulls Eye Investing. To learn more about John’s many activities in the markets, please visit his website at http://johnmauldin.com/ .
To catch my entire insightful interview with John Mauldin on Hedge Fund Radio, please go to www.madhedgefundtrader.com/ and click on the “Today’s Radio Show” menu tab on the left. To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com . There you will find the conventional wisdom mercilessly flailed and tortured daily.
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consult the tax code and you will see the light.
+1
Amen brother!
"Absoulutely, money that does not flow into the purchase of goods and services simply cannot increase inflation."
- Just a point, note the velocity equation, back it out and solve for money supply required for a given level of GDP at a given velocity. If the supply of money is increased enough to overcome a given decrease in velocity, you will get inflation.
I'm not saying that people focused purely on money supply have it right - they don't, velocity is tanking as old credit is destroyed for faster than new credit is created and the increase of money supply has only served to keep the banks/system from collapsing as opposed to generating much in the way of real demand. Figure it has never been more profitable for a bank to lend, the fact that they aren't and there isn't much demand says something about the real state of things regarding 1) bank balance sheets 2) demand for credit 3) real economic growth prospects.
The trouble with the view that banks should lend is that banks already have a full basket of repoed assets of about every type. Need a hotel, office building, pizza oven, car lot, house? Call a couple of bankers and help them out. Why would they lend money to some nut who wanted to create more of what is already in surplus? Buy a factory and move it offshore. Beats the wage, benefit, and all the tax problems here. Lots of people are going to learn to enjoy eating Spam again, if they can pay for it.
There can not be a NWO with a super power in it.
Soviet union is gone and now it is America's turn.
The collapse is orchestrated and America's demise is immenent.
The washington puppets are doing what they are told to do.
Look at this rediculous health care bill being passed when Americas debt is at all time highs and the majority of the public are against it.
If I made $100K last year and I owe $850K - what do I do?
One thing you would'nt tell me, is to spend more!
This is the predicament the America finds itself.
It's TOTAL debt to GDP ratio is 850%. (National Debt, Agency Debt, Unfunded Liabilities)
Yet Washington continues to spend.
This can only end badly!
Dude, you're the problem. My debt to income is <2x. Start by managing your own balance sheet.
so uncle sam's debt (ie UST) is that of Obama? joe sixpack won't need to pay higher taxes in future to pay for the issuance of treasuries? yuppy! I just learnt something new today, my children won't need to assume responsibility of higher taxes for the mountain-trillions of US treasuries. Ooof!
The debt to income ratio example is the federal government's not his own. Re-read the post.
Agreed, but that simply means we now have two possibilities: deflation right now and inflation later.
Hence my personal strategy: cash for the deflation, gold and silver for everything else.
Also, food for thought: periods of great uncertainty (like the one we are going through right now) are good for precious metals. Hence the steady rise in price we have seen for the past years.
Agree with your sequence of events and timeline...but that simply means that gold and silver, BEFORE heading for the skies, will make a brief but vicious dip for the ground.
There will be a time to buy them cheaper...but you'll have to be fast.
Maybe if you are a dollar buyer but if you are a Euro Bunny then your optimal time for Gold recently was the summer of 2009 - then again I could be wrong about that as possibly the Euro could have more independence from the global dollar system then previously imagined.
Excellent interview - John Mauldin "we are in a exceptionally dicey period , it is what I call the end game"
It is going to be a interesting decade - in my view the central banks will finish this dance when the openly buy physical gold day after day with their paper money.
Spot on! Deflation first and gold sets up for the buy of a lifetime. Make sure you get some FRN's for the Bank of Sealy and the Bank of Whirlpool as there is no telling when the next "bank holiday" will be declared. Been reading JM for the last few years and he is a voice of reason in this wilderness of financial doom.
Precisely.
God bless John Mauldin. Met up with him in Montreal a couple of years ago and enjoyed a nice lunch. Love reading his insights, but his market calls need some work.
Who paid for the lunch?
John paid for lunch and we discussed one of the hedge funds he was involved with (not sure if he still is). Great guy, smart as hell, but I read him for economic analysis, not market timing calls.
ARE YOU SERIOUS??? I've been reading John Mauldin for years and he nailed the housing correction perfectly. He is one of the very FEW market prognosticators that I have found to be honest and accurate. He is totally opposite to YOUR idiotic rants on here. You are like a parasite that leeches off Robotrader's interesting market commentaries. Please keep your opinions to yourself.
Agreed. There is no chance for a 40% market drop, that would only happen after a Lehman kind of event. I still wonder that there are people calling for a crash about to happen, as long as Dubai, Greece and maybe Portugal in the near future get their bailouts, the wall of liquidity is standing firm.
Believe me, Portugal is not an issue. If the government were right wing (or center-right) this whole issue would have been avoided. Elections held last year in September has the main opposition candidate warning of where we were headed and how to avoid them. The Socialist candidate managed a minority government with lies and bogus promises during election time and has had to swallow them up with the new budget cuts. I don't know what the things are like in Greece; but in Portugal I feel that with a new government and less socialist "state wellfare" politics and more "market and meritocracy" values, people will shape up and get things moving once again. Currently there is a shadow economy of about >33% of the GDP which accounts whu the GDP per capita is so low here.
Leo what is your market call? Stocks will go up indefinitely because the fed "wants them to"?
Great article. Can we just keep going up on "the results were better than expected?" When natural gas begins to show some demand, we will begin to come to life. 'Til then, just blow into the balloon, please.
It's spring now, the end of the heating season for most. So you mean next November?
More like December 2012...