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John Mauldin: Investors Need to Prepare for the Age of Transformation

Over the course of the next decade, the future course of human history could see a new period of revolution on par with that of the first and second industrial revolutions in terms of scope and

Over the course of the next decade, the future course of human history could see a new period of revolution on par with that of the first and second industrial revolutions in terms of scope and magnitude of how it will alter the long-term trajectory. Identifying these trends and finding opportunities to investment in them is the focal point of the 2014 Strategic Investment Conference in San Diego on May 13-16 at the Manchester Grand Hyatt San Diego, CA. had the opportunity to speak with John Mauldin of Mauldin Economics and a best-selling author of books such as End Game and Code Red, to discuss what he's looking forward to at this year's conference. John will be joining other influential speaks including Newt Gingrich, Former Speaker of the U.S. House of Rep.; Gary Shilling of A. Gary Shilling & Co., Inc.; Jon Sundt of Altegris; Niall Ferguson, Harvard University; and many more.

EQ: John, you’re on your way to the 2014 Strategic Investment Conference in San Diego. This year’s theme is Investing in an Age of Transformation. What are some of the takeaways you’re hoping that we’ll see from this year’s event?

Mauldin: One of the things that I think we’re going to see is how rampant changes are occuring in both the macroeconomic sphere and technology sphere. What I’m trying to help people understand is the range and pace of those changes will be fairly dramatic. In fact, some of those changes are happening right now.

We’re going to be a significantly different macroeconomic world. Japan, the U.S., Europe and China are all going to have to make major adjustments to their investments, costs, and debt structures of their government budgets. The emerging markets will all of a sudden have to deal with massive capital inflows caused by quantitative easing because of all the debt that has developed over the last 15 years—going from $1 trillion to $10 trillion of money. So the emerging markets will be seeing heavy inflows of outside investments. It’s creating a positive impact because it creates growth for them, but at the same time, it becomes hot money. It creates problems further on the downside. So the world is in a massive structural change. We still haven't sorted out the debt problem. Generally, we’ve been kicking the can down the road and trying to do other things, but we haven’t solved the ultimate debt problem, which is we have too much sovereign debt around the world.

Then we have the technological transformations. We don’t have just one or two technologies that are accelerating and going in massive curves where we’re at the elbow of the curve. We have about 12 major trends that are all happening at once. They’re working together, but they’re also happening on their own. Each is enough to empower the world and create change, but taken together, it's going to make things happen much faster. We could see as much change in the next 10 to 15 years as we’ve seen in the last hundred years, and human beings aren’t ready for that.

In that sense, as investors, we have to evolve into what I call "homo rationalis" because "homo sapien" is going to become a dinosaur.

EQ: Looking at where we are today, there’s been a lot of debate about whether valuations in the stock market are too high, which is something you discussed in this week’s letter. Do you think we’re at the tail end of this current cycle?

Mauldin: Well, you need to have some sort of risk management system in place, because while you have to be in the game to win, you also need to have some way to know when it’s time to exit to the sidelines. That can be based on financial models or valuations or any of the other sorts of ways that people can do it, but you need to have the discipline. You can’t just use your gut or go on a hunch because if you’re relying on emotion, you’re almost guaranteed to be wrong.

EQ: Do we need to experience a more serious correction before a new boom cycle can occur?

Mauldin: We can see a stock market correction followed by the resumption of the current trend, but until we get a true recession—almost on a global scale—I don’t think we’re going to see the generational lows to finally end this secular bear market that we’ve been in.

EQ: The U.S. economy certainly has its problems, but when you compare it to how Europe, Japan, China and even the emerging markets, are we better positioned to handle these debt issues than the other economies?

Mauldin: I would say that we still have the opportunity to fix our problem. Japan, on the other hand, has lost their window to do so. So they’re going to have to massively monetize their debt. Europe has yet to solve their sovereign debt problems, and it’s just going to get worse. They need to restructure their entire system because the whole thing is underpinned by a flawed currency. They either have to become a fiscal union or the euro is going to blow apart. But that process could take three years or it can take 10 years. It depends on how serious they want to be about it.

EQ: If and when some of these bubbles do pop, we know the U.S. isn’t immune to the negative impact, but is it in a position to at least maintain economic stability?

Mauldin: Well, we’ll certainly be affected because we’re part of the global trade flows, but a lot of it just simply depends on how we’re able to deal with our own deficits. If we can deal with our own deficits, then we’ll be fine.

EQ: Every year, SIC compiles a truly impressive list of speakers. This year, in addition to yourself, Newt Gingrich, Gary Schilling, Kyle Bass, Niall Ferguson, and the list goes on…will be speaking at this event. Can you talk about the faculty of speakers this year and what it means to have such an amazing meeting of the minds?

Mauldin: One of the things that I try to do is bring people together and what this wide variety of speakers will do is challenge our way of thinking and make us get outside of our box. And frankly, what I want to do at this conference is get a new box entirely to think out of.

Also, if you look at the list of speakers, you can pretty much rest assure that you’re going to get a lot of investment ideas out of this conference.

EQ: For those that aren't able to attend, there is the opportunity to purchase the audio collection of the various presentations. What are some other ways that people can stay up to date on the conference?

Mauldin: We’re going to try to do some summaries of the speakers each day during the conference, and we’ll be on Twitter as well. So people who can’t attend can follow what’s going on at the conference on our Twitter (@Altegris and @JohnFMauldin).


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