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Interview with John Mauldin on the Economic Sea Change in the Currency Markets

The rising U.S. dollar in the face of aggressive currency devaluation from other developed economies around the world is creating a transformative event for the global financial markets. John

The rising U.S. dollar in the face of aggressive currency devaluation from other developed economies around the world is creating a transformative event for the global financial markets. John Mauldin, reknowned author of the widely read Thoughts from the Frontline and Chairman of Mauldin Economics, believes we are at the precipice of a Sea Change and bull market for the dollar. had the opportunity to speak with Mauldin to get his thoughts on the major trends in the currency markets, the implication it has on global economic growth, and the use of quantitative easing. We also catch up on all the new things going on at Mauldin Economics.  

EQ: The current theme in the global markets is the rising strength of the dollar and the impact it is expected to have on the rest of the world. The dollar's strength is appealing to foreign investors, and could draw hot money inflows away from other markets. Could this potentially destabilize the current state of the global economy?

Mauldin: It has the potential. I think the real problem could be if the market has a crisis in a third world country. Then you could get a couple currency crises like we did in the late ‘90s because of the rising dollar. It starts that downward tumble, which could be a problem. It creates this cascading effect, and it changes how everybody views markets.

EQ: The crux of this phenomenon is what you've called a Sea Change in the economic climate. Can you elaborate on the kind of transformation you're beginning to see take place?

Mauldin: We’re not seeing anything that’s saying there’s a crisis out there today. I think we’re more vulnerable to a shock than we have been in a long time, and it’s that vulnerability that deserves our attention.

The debt buildup, for me, is the problem that we have. We just keep building debt up and we build it up around the world to a point that it’s slowing down growth. Europe isn’t dealing with its debt and the debt overhang that they do have is clearly reducing their growth potential. They can’t grow their way out of their current problem, and they’re not dealing with it. So you start having some sort of outside issue that creates some type of pressure on their currency. You could end up with one of the kinds of crises that comes out of nowhere. It’s not going to happen overnight, but it can happen faster than any of us expect.

EQ: With the Fed officially ending QE, the U.S. economy looks stable, but there are concerns in other developed markets such as Japan and Europe. They’re fighting desperately with their own stimulus programs. How concerned should U.S. investors be about these troubled economies?

Mauldin: Japan is a known quantity. We know exactly what they’re going to do. They’re going to continue to print, and continue to provide stimulus for many, many years. They’re monetizing on net about 9%-10% of their GDP in terms of their gross outstanding debt. They have to do that for a decade or more. I think they’re going to increase that rate of monetization, and it’s going to continue to drive their currency down.

Of course, they’re going to talk against it, which will cause the yen will back off some, but then it’ll continue to go higher. It’s not a one-way ride, but I think over time, you’re going to see the yen continually being able to [weaken], and the rest of the world is going to have to deal with a Japanese industry that is going to become ever more competitive in terms of their currency.

It’s the opposite of what the Japanese had to deal with in the past when their currency became stronger for a period of 30 years. Now we’re on the other side of that trade. From a Japanese industry standpoint, it’s probably very bullish for their businesses.

EQ: Is deflation still the major risk there?

Mauldin: Deflation has been the norm there. What they’re trying to do is export their deflation. I don’t think they’re going to stimulate a great deal of growth. They would like to. What they’re trying to do is get a little inflation and some nominal growth. But if they start having to deal with deflationary issues, then they’ll just increase their QE. They’re in for a dime, in for a dollar.

They’re already monetizing at levels that are relatively speaking twice the level of what the Fed was doing here in the U.S., and there’s nothing to keep them from saying that they can go further.

EQ: Interest rates in the U.S. were largely expected to rise in 2014. Thus far, that certainly has not happened. What are some of the causes for that?

Mauldin: We have our own deflationary pressures in the US. The earliest the Fed will try to begin raising rates is next summer. I don’t think they’re going to raise rates if inflation isn’t north of at least 1.5%. We’re bounded in that 1.5% range right now. We need to see inflation pick up before we can start talking about a regime of rising rates.

EQ: You mentioned in your newsletter that the Sea Change theme is something that you’ll be tracking and forming an outline for a potential book. What can your subscribers expect?

Mauldin: You’ll see me writing about projects in that vein. You may seem some new ideas show up, but it’s hard to tell people what to expect right now because the more you sit and think about an issue, sometimes you do come up with new insights.

EQ: There’s been a lot of exciting new developments at Mauldin Economics since we last spoke. What are some things that our readers should know about?

Mauldin: We’ve got several new newsletters. We’ve got the one from Jared Dillian, who I think is one of the smartest young guys out there. He does a free letter once a week called The 10th Man, which is really fascinating. It’s really good stuff. I’m very happy to have him part of the team.

We’ve got a pretty exciting team at Mauldin Economics. We have other writers that we’ll be rolling out later this year. We’re just trying to put a good team of writers around us and for our subscribers.

Copper, base metals, and industrial commodities face bearish technical trends, but the fundamentals remain bullish.