John Mauldin, is the President of Millennium Wave Advisors. Mauldin is a frequent media guest, and famous for his popular musings on the economy and ‘debt super-cycle.’ Mauldin is the author of a famous book, Endgame: The End of the Debt Supercycle and How It Changes Everything. John Mauldin is currently presenting at the Value Investing Congress in New York.
Below are the notes from the Value Investing congress 2012:
Mauldin is different from most of the bottom up stockpickers at the VIC. He instead travels the world extensively and pieces together a comprehensive macro outlook. His weekly publication is free for investors and read by over one million followers.
Mauldin begins by talking about uncertainty in general. In the investment world we focus really hard on risk, because it is something we can model in an equation. Investors like to certainty of the excel model, and we tend to get obsessed with it. But he argues we have so many more ways to quantify risk and often miss the obvious.
Leading in to the crisis, he remembers writing in late 2006 that subprimes are a fraud. Readers would write that “he just didn’t understand” and that he was being too “doom and gloom”. Everyone thinks they can model risk, but it turns out all the Moody’s and S&P models were worthless.
It’s the uncertainty and surprises that ultimately drive the portfolio. Surprises aren’t always a bad thing, its just depends on the company. In 1850 the #1 job in the U.S. was farming, but by 1900 the #1 job was personal servants. This is because the workers left the farm, and middle class American could afford to pay them the mere $1 to $2 a week that they were looking for. But then the labor shifted to the factory over time. His point is that while those shifts were dramatic and disruptive, they were ultimately a step forward for the U.S.
To continue his thought, Mauldin argues that at some point a company will come along with a cure for cancer. That uncertainty is a positive, but you can’t model the risk for your pharmaceutical portfolio holding. A great deal of uncertainty is tied simply to human nature and psychology. But it still cannot go into a spreadsheet.
All the uncertainty makes a difference, and often its not what you can see. Many uncertainties trickle down and over time become huge events that shape the world and your portfolio
He thinks Europe is a mess, and will be in a depression for some time. The mistake was forming the Eurozone 14 years ago and now its a total mess due to internal trade differences. Really it was a policy mistake. Spain can keep adjusting its budget, but until its get the trade balance back its won’t help.
The only way to solve anything is to raise taxes and cut spending. No matter who gets elected in the U.S., its going to take compromise. Either party’s plans on their own is not enough, its going to require the two sides working together or else we will look just like Europe too. All the senators he talks to recognize this issue, but they admit they can’t take that approach during an election year.
However you look at it, its impossible to model the economy on anything but a rough scale. All he knows is you can’t spend more than you bring in over time. If nothing changes, the world won’t end but interest rates will have to go up. That is how the bond market operates historically.
He is very optimistic about the future, hence his many private equity and technology investments in his own portfolio. He looks for companies that have an edge in the businesses that will be around in 2025 – 203o. Monsanto is an example of this.
These are the five long term trends Mauldin sees:
-End of the debt supercycle: running out of ability for governments to raise money
-End of the secular bear market in the next 4-5 years
-The Millenium Wave will boost technology over the next 4-5 years
-Boomers are going to live much longer that anyone expects, which includes working later in life and collecting more social security. The boomers as a group have the most entre
-The Rise of Asia and the diminishment of Europe: he doesn’t have the conviction like Chanos to short China, but doesn’t understand how 50% of their GDP growth comes from investments at 8% interest every year
4:45pm EST: Closing Remarks
Overall there is a lot of uncertainty in the world, but it can be a positive force for investors. Value investors looking out long-term need to pay attention to these trends and react accordingly.