Exclusive Interview with John Mauldin: We're No Longer in a World of Real Numbers

John Mauldin |

The global markets have entered an unprecedented period. With the major central banks around the world aggressively pursuing monetary easing policies to preserve their own economies, overall stability of the global financial infrastructure has started to wane. Collectively, the probability for major unintentional consequences with significant ramifications exponentially increases as these shifts continue to diverge. Understanding these prevalent directional trends of the market will be critical for investors, whether their goals are to profit or just to avoid massive losses.

That’s exactly the goal for the 2015 Strategic Investment Conference, which will take place at the Manchester Grand Hyatt in San Diego, CA on April 29 to May 2. As it does each year, Mauldin Economics and Altegris Advisors, LLC brings together some of the most prominent experts in a meeting of the minds on the most significant trends in the market in hopes of coming away with actionable ideas. This year’s theme is Navigating a Divergent World, and features an impressive lineup of speaks and panelists that includes: John Mauldin of Mauldin Economics, Jeffrey Gundlach of DoubleLine, Kyle Bass of Hayman Capital Management, LP, Ian Bremmer of Eurasia Group, and many more.

Equities.com had the opportunity to speak with John Mauldin to get a preview of this year’s event. His weekly newsletter, Thoughts from the Frontline, is one of the most referenced and recommended readings in the investment community with over one million subscribers. He’s also a New York Times best-selling author with books such as Code Red: How to Protect Your Savings From the Coming Crisis and Endgame: The End of the Debt Supercycle and How It Changes Everything.

EQ: SIC 2015 is right around the corner, and once again, it’s a lineup of speakers that include some of brightest minds in the world of finance and economics. What excites you most about SIC each year?

Mauldin: Well, the theme of the conference this year is “Investing in a Divergent World.” We’ve really brought in a lineup of speakers to help us really understand just how much the world is diverging between Europe, Japan, Great Britain, and China. Those central banks are all essentially in a currency war. They’re all worried about creating inflation, printing money, and keeping the relative value of their currencies low. Of course, no major central banker will ever admit that he’s worried about the value of his currency. I think that divergence creates the biggest opportunities over the next coming years.


EQ: Each year, SIC brings together a lot of these thought leaders from their respective spaces to come away with actionable ideas and key takeaways. What were some memorable takeaways and ideas that you came away with from past conferences?

Mauldin: I became more convinced about the things that I had been talking about in my book last year Code Red.We weren’t seeing much of it when we launched the book, but it became readily apparent by the middle of last year. So I was really convinced about that.

So it was that, plus other divergent events between US rates and European rates. We’ve now gotten into what I call Economic Singularity. Debt has become such a black hole, and as we get sucked deeper into it—especially in Europe—we’re beginning to see negative rates. As you pass the event horizon of a black hole, physicists tell us that the mathematics actually change, because you’re truly no longer in a world of real numbers. For investors, we hit that event horizon in Europe and we’re no longer in a world of real numbers. You can’t really look at the past for situations where we can get some idea of our future because we’ve never had a situation like the one we’re in today.

We’ve got such non-real numbers—and I say that in a mathematical sense. When Switzerland sells 10-year bonds with negative interest rates, when Germany’s and France’s bonds are trading at negative interest rates out five to seven years, that doesn’t make a lot of sense if you’re an institution, a pension fund, an insurance company, etc. What it means is that a pension fund or other types of institutions that have mandated future returns like annuities, it’s mathematically impossible for them to meet their mandates under this current regime. We’re in an arena where things are so non-anticipated that we’re all having to make changes that if we would’ve talked about two years ago, people would’ve laughed. That’s the world we’re in today.

We’re not even dealing with the debt, we’re not restructuring. I don’t know if it’s going to get any better for a while, it’s just going to be kind of a non-real set of circumstances.

EQ: This year’s conference is different than those in the past in that it’s now opened to everyone, not just accredited investors. As you said, we’re in uncharted territories and a lot of these themes will be highlighted at the conference. What was the reason to open it up to all types of attendees?

Mauldin: We changed the nature of some of the presentations. In past years, we would have hedge fund speakers talk about their funds to the general audience. We’re not doing that as much this year. We are having some hedge funds making presentations, but they’re only to specific audiences. So that’s allowed us to open up and not have to be so restrictive, which was something that I was never really happy with in the past. So we’ve now been able to open it up for this and the future events.

EQ: This year’s theme is, “Navigating a Divergent World.” Can you tell us more about what that term really means? What are some examples of these divergences we’re seeing around the world?

Mauldin: I think what you’re seeing is we have the European central bank pursuing quantitative easing to the extent that they can. They were supposed to buy €60 billion but they could only find some €40 billion to buy. It’s interesting in that they’re really going to have to be far more creative in order to buy their QE mandate. The US central bank is threatening to raise rates before the end of the year, which I think they will. They’re going to do it very slowly, but that will continue to strengthen the dollar. If you’re the central bank of China, your currency has risen 14% against the euro and you’re watching your trade balance get creamed—exports and imports are down—and are part of that is your currency is strengthening along with the dollar because you have a dollar-equivalent policy. No other currency is trying to do that. So what will China do? Will they decide to go ahead and maintain the RMB where it is, or will they begin to let the currency weaken? These are the questions that we’ll be asking at the conference. There are a number of Chinese experts that are invited this year.

EQ: Coming out of the financial crisis, central banks around the world were on some level synchronized in their efforts. However, one of your previous letters was titled, “Every Central Bank for Itself”. Do you feel that they’re a bit fractured now in terms of what they’re doing individually?

Mauldin: Definitely. Every central banker has their own constituency and their own country to answer to. So you’re not going to see the European central bank worried about China or Singapore. You’re not going to see the Federal Reserve worried about Japan or Europe. They’re doing what’s right for the United States or their own central bank.

This is big complaint from the emerging markets central banks because they feel everybody’s getting hit hard, but that’s just the way things are. There’s nothing that they can do.

EQ: Has this year so far played out the way you expected or were there any surprises?

Mauldin: I expected to see the relative returns of the US market and European markets begin to diverge. The US markets are still rising as is the European markets. The European markets are probably going to rise a lot more, and I think we could see a softening or correction sometime in the US market.

EQ: There’s going to be much more in-depth discussions at SIC 2015 on these trends and their potential implications on the economy and financial markets. What are you looking forward to the most?

Mauldin: I’m just looking forward to sitting down with a number of thought leaders and spending almost four full days really trying to get a gauge on the market and see where the world is going. I’m really looking forward to that.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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