Forecast 2013: Unsustainability and Transition

  • Written by David
  • January 15, 2013 at 7:23 pm
  • 0
  • Greetings to all in the New Year.

    As a regular reader of John Mauldin, author of  Endgame, The End of the Debt Supercycle and How It Changes Everything, I find his ‘Forecast 2013′ paper a ‘must read’. This paper is as close to a 2013 ‘prediction’ that I could offer, and much much more!

    Topics covered by Mauldin in this paper, Forecast 2013: Unsustainability and Transition, include:

    • Unsustainability and Transition
    • One Bubble to Rule Them All
    • The Year of the Windshield
    • Godzilla Redux: Disaster A or Disaster B
    • France Is the New Greece
    • US: The Crisis Games
    • Entitlement Unsustainability

    Go here to download the entire report-11 pages

    I have selected portions of the report for your review below. Bolding and underlining is mine.

    “There are decades when nothing happens and there are weeks when decades happen.” – Vladimir Ilyich Lenin

    “People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.” – Jean Monnet

    “If something cannot go on forever, it will stop.” –Herbert Stein

    As we begin a new year, we again indulge ourselves in the annual (if somewhat futile) rite of forecasting the year ahead. This year I want to look out a little further than just one year in order to think about the changes that are soon going to be forced on the developed world. We are all going to have to make a very agile adaptation to a new economic environment (and it is one that I will welcome). The transition will offer both crisis and loss for those mired in the current system, which must evolve or perish, and opportunity for those who can see the necessity for change and take advantage of the evolution.

    Unsustainability and Transition

    Think back to 2001. It was the opening of a new millennium. While that was auspicious enough, several events then ensued that shaped the future for decades to come. China was admitted to the World Trade Organization, leading to a revolution in its production and global trade. The euro was launched with much fanfare – and a minor chorus of criticism.  We are now in a midst of a great trial that will determine whether the euro will be a brief experiment or a durable currency. This has dramatic implications not only for Europe but for the world. And, of course, the tragic events of 9/11 shaped a new global perception of what constitutes threats to democracy and security.
    Also as the century opened, a secular bear market had just begun, which diminished returns for retirees. Economic activity in the developed world has yet to recover to the pace of the previous century; and many analysts, as we saw in the last letter for 2012, predict an even slower pace of global growth for the rest of this decade. A fear of deflation prompted Alan Greenspan to lower interest rates to levels that eventually created a housing bubble and encouraged Congress, through lower debt costs, to run up huge deficits prior to the economic collapse of 2008. Since then, our deficit and debt have only gotten worse since.

    You can read all sorts of economic predictions for this year. Some expect a return to the growth rate of last century and a new bull market. Some see a recession, a major downturn. But no matter what your view of the next 12 months, there is a pervasive sense that the current system of swelling government debt and entitlement promises cannot be sustained. Politicians may persist in kicking the can further down the road, but anyone with third-grade math can see that the system is unsustainable. The US cannot pay an estimated $200 trillion (and growing) in entitlement obligations (Burns and Kotlikoff, The Clash of Generations), although others say that we owe a “mere” $80-plus trillion. Japan cannot continue to borrow 45% of its government budget at 1% when debt is at 230 % of GDP and rising over 10% a year. Europe cannot postpone the consequences of an unequal currency union forever.

    We live in an unsustainable world. To extend the thought of Herb Stein, we must change the world to one that will be more sustainable.  That has been an implicit theme in this letter for years, but this year it will be an explicit theme that we will visit often. That transition to a more sustainable world is going to involve uncomfortable changes for many, if they do not prepare for it.

    One Bubble to Rule Them All

    The unsustainability I refer to is that of the largest bubble in human history: government debt in tandem with government promises that cannot be fulfilled. And unlike 1993 when only the developed countries of Canada and Sweden had to deal with unsustainable debt, bloated budgets, and unrealistic promises, this time the bubble countries comprise the largest economies and the majority of global GDP.

    This is not a short-term matter. There are three distinct economic ecologies that will have to change and will do so on their own timetables. And owing to their size and the significant abilities of a committed establishment to resist change, no matter how inevitable, we are talking years of transition, not months.

    The economic ecologies I refer to are of course Europe, Japan, and the United States

     US: The Crisis Games

    In my opinion 2013 is a make or break year for the US. If we are going to get the deficit on a glide path to balance, then it needs to happen this year. (I should note I have been saying 2013 since 2010.) 2014 is an election year, and it will be muy difícil to get anything of substance done then. Will Obama be any more willing to compromise in 2015? At that point I think it is too late and the bond market, having watched Japan and France and much of Europe descend into chaos, will simply begin to demand higher rates, no matter what the Fed does. If it doesn’t happen even sooner.

    Entitlement Unsustainability

    One of the things foremost in my mind is the unsustainability of entitlements, especially healthcare. We all know that Social Security can be resolved rather quickly, but healthcare is going to be difficult. Not the least of the problems is that Americans live manifestly unhealthy lifestyles. Data suggests we are actually 40% sicker than our European counterparts, which explains why healthcare costs so much more here in terms of GDP. Further, healthcare policy was formed in an era of big business and labor unions, and that time is passing.

    As I was discussing this with Pat Cox tonight, he mentioned that Michael Barone used nearly those exact words in his op-ed today. I stopped and read it and found myself nodding in agreement. He noted a repeating 76-year cycle in American politics (only modestly forced) that suggests a new era is upon us. Not too far off from Neil Howe’s Generations cyclical thesis. You can read the whole column here. Let me quote from the ending:

    The original arrangements in each 76-year period became unworkable and unraveled toward its end. Eighteenth-century Americans rejected the Colonial status quo and launched a revolution, then established a constitutional republic.

    The current 76-year period is nearing its end. What will come next?

    I can see multiple paths, but all must inevitably lead to some form of sustainability. Avoid the rush. Go ahead and begin adapting now!

    By the end of this decade and probably much sooner we will have transformed the unsustainable current system into something more manageable. The secular bear market will have ended. Healthcare and medicine are due for a radical upgrade, and science-fiction-like technologies await.

    The new era (I am searching for a name to call it) will be most welcome if you make plans to transition from where we are to where we are going. And this letter will chronicle the journey. Stay with me.

     

    Summary: Comments on investment themes from David Gratke

    Where and how to invest now in this global environment?

    We CAN HELP!  of course one’s own goals, objectives and circumstances may over ride these general themes below.

    • Absolute Return Strategies: Minimize downside risk, Wealth Preservation
    • Alternative Investment Strategies: Managed Futures, trend following (both up and down) in equity and bond indices, commodities and currencies.
    • Tactical Investment Strategies: Yes, must hire managers, however, with strong historical downside risk management.
    • Strategic Investment Strategies: i.e. Stock or bond Index funds, not at this time unless you can stomach -30% to -50% fluctuations in your portfolio.

     

    I look forward to discussing the paper and how your current investment strategies are suited to meet today’s global environment.

    All the Best!

    David Gratke Jan. 15, 2013.

 

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