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Exclusive Interview with John Mauldin: What is the New Normal, and How Should Investors Approach It?

As stocks continue to move into all-time highs, investors may be getting complacent with their positions, forgetting the lessons from the past  downturn. While the next bear market may not be

As stocks continue to move into all-time highs, investors may be getting complacent with their positions, forgetting the lessons from the past  downturn. While the next bear market may not be as bad, investors still need to pay attention to what’s going on in the global economy to better protect themselves once this bull run completes its course. recently spoke with John Mauldin of Mauldin Economics and Millennium Wave Advisors, to discuss his thoughts on the U.S. stock market’s continued run to record heights, and investing in this “New Normal”.

EQ: Earlier this month you discussed the sand pile effect in the context of central banks propping up the markets and the economy. With stocks pushing to new highs at such an aggressive rate, how big of an avalanche are we facing when that grain of sand hits that pile the wrong way?

Mauldin: Well, we have to look at it in the broader context and what I see as the longer-term secular bear. I was writing about this in 1998—so about 15 years ago. Markets go from high valuations to low valuations back to high. In 2000, we hit the top of that sand pile and we had a major market correction. We had the same market correction in 2007 to 2008. Typically in a secular bear market, which is one of these long-term cycles that averages about 17 years, you have about three serious market corrections.

So, how high can it go? I don’t know if there’s any historic way to look at it, because we’ve never had a Federal Reserve and central banks around the world pushing as much money into the system as we do now. By a number of metrics, we’re getting to areas that are high. Whether you want to measure it against yields or whatever, there are just lots of ways to suggest that the market is high, but there’s no reason to suggest that it can’t get any higher.

This is something that you play as a trade, and not as a longer-term secular move. Could it go on for a year? Sure, easily. Could it stop this summer? Yes. These things take on lives of their own, but I would expect there to be one more major pullback in this market before we get to valuations that are low double-digits. Then, when we see that, we can start to see if it’s the beginning of a true longer-term bull run that will be another 17-plus years.

EQ: Has the global economy reached a state where the next collapse could literally be triggered in any direction, making it essentially impossible to predict?

Mauldin: Well, you can see a lot of fault lines. You can look at China and their bank-indebtedness, their overextension of credit, and extreme reliance upon debt-funding and on infrastructure funding to boost their economy. I mean, we’ve never seen an economy that continues to rely in the 40 to 50 percent range on simple direct investment, both private and public. We’ve just never seen it, and it just compounds and grows every year. Investment in infrastructure and businesses is a good thing to have, but it’s tough to rely on that as your growth model.

It’s the same thing for Europe. Europe is running up against the end of its ability to finance its own entitlement programs. France is increasingly becoming a problem. The polls you look at are fractious. Can they hold it together? Well, there’s reason to think that that could be a problem, but then they’ve been holding it together for a long time now. That sand pile becomes too much when you realize that the ’98 crisis was caused by, basically, Thailand and the credit issues there. I mean, why does a relatively small country trigger an event that went around the world? It’s because of the interconnection, and we’re even more interconnected today, so lots of things could happen and we just have to be more nimble today than we have been in the past.

EQ: Have we reached a point of no return? Or can this collapse still be prevented?

Mauldin: It’s a country-by-country assessment. There is value in different places, but if I was in Japan, then I think they’re on the way to a collapse. There are countries in Europe that you certainly have to be concerned about. Can we muddle through here in the U.S. and England? Well, we can. Do I expect a 2008-type collapse? No, because that requires a complete collapse in the credit markets as well.

Now with that said, they’ve got credit problems in Japan, and they’ve got credit problems in Europe. The U.S. doesn’t have the same type of credit problems, but we have problems that will make getting back to 3-percent growth and full employment at 5-percent difficult.

The thing is, we don’t know what kind of panic will ensue in the rest of the world. If there is a flight to safety, they could end up seeing U.S. equities as something good, or they might just try to pull out of everything. Every crisis is different and trying to predict exactly how it’s going to play out is really kind of problematic. You just have to be hedged and be nimble. To simply say, “I’m just going to invest and go away for six months,” I think that’s too risky.

EQ: Earlier this month, you were at the 10th Annual Strategic Investment Conference in California, with many of the brightest minds in the industry. Would you like to share any highlights in terms of discussion topics or lasting impressions?

Mauldin: I found it really interesting that David Rosenberg is no longer a bond bull. He’s starting to think that interest rates are beginning to go back up because he’s starting to worry about wage inflation. He made a strong case that we will see wage inflation. My discussion with him and trying to tease out what he’s really talking about, was really about wage inflation. The skilled sector of the economy—such as software designers, engineers, and people who are tool operators—the demand for those jobs is getting harder to fill, and that implies that wages may have to go up. This is different from the service sector where workers don’t really have a skill that can demand higher wages.

In terms of education, we need to start recognizing that random education isn’t what is needed. We need specific skills education.

EQ: Is there a disconnect with the way economic numbers track jobs data and unemployment versus what’s really going on in the jobs market right now?

Mauldin: There is, and I think Obamacare is actually making a difference because Obamacare is pushing people and employers to use more part-time workers. So we’re seeing an increase in the number of people with jobs, but the increase is happening in part-time workers, because they’re hiring people so that they won’t have to pay for their health care. We’re short-circuiting the entire incentive structure for how we create jobs and employment in this country, and I’m not certain that we’re going to be able to do so without consequences.

EQ: To your point about how you really just can’t buy and hold anymore. You are going to be hosting an upcoming online discussion called Investing in the New Normal with some of the industry’s heavy hitters. Can you talk about what investors can expect to learn from this video?

Mauldin: There are some participants that I’m looking forward to getting for the first time. John Hussman doesn’t do many webinars like this so I’m pretty excited about that. Among the things we’re going to be talking about is the very questions you were asking: What is happening in the equities world? How sustainable are the markets and how sustainable is the economy? We will have people who are arguing that it is, and people who are quite clearly worried. So it will be a lively debate.

As we say goodbye to 2023, there's a compelling argument to keep your portfolio anchored in growth stocks next year.