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John Mauldin: Why 2013 Is Crucial For the Future of the U.S. Economy

For investors of any level, understanding the economic climate and directional trends of the market is critical to forming sound strategies. recently spoke with John Mauldin of

For investors of any level, understanding the economic climate and directional trends of the market is critical to forming sound strategies. recently spoke with John Mauldin of Mauldin Economics and Millennium Wave Advisors, to discuss his thoughts on how the government has dealt with the fiscal and economic headwinds facing Americans, and what investors need to do to protect themselves in 2013.

Investors can get more of his insight each week from his very fittingly titled newsletter, Thoughts from the Frontline, which is one of the most referenced and recommended readings in the investment community with over one million subscribers. It was one of the first publications to provide investors with free, unbiased information and guidance. He is also a New York Times best-selling author with books such as Endgame: The End of the Debt Supercycle and How It Changes Everything, as well as Just One Thing: Twelve of the World’s Best Investors Reveal the One Strategy You Can’t Overlook.

EQ: What are your thoughts on how Congress handled the fiscal cliff?

Mauldin: They really haven’t done anything. They just kicked the can down the road. Now this is a bit contrary to what some of my fellow Republicans believe, but rather than try to deal piecemeal with a continuing serious crisis, it seems like they’re trying to do is push them into one big lump so that it all gets solved at the same time instead of trying to fight one small battle at a time. There’s the fiscal cliff, the debt ceiling, the continuing budget resolution, and basically there’s like four of these major issues between now and the middle of April that they’d rather deal with in one large battle. You’re seeing that Paul Ryan is going to be submitting a plan to try to balance the budget without a tax increase. That’s certainly not going to be what comes out of the Senate, what the House should do is pass the budget and then require the Senate to come to the table with a budget so that you can negotiate. I don’t see them doing much different than that. Doing something on Feb. 15, as opposed to April 15, in the grand scheme of things, doesn’t make much difference. The point is to put the U.S. budget deficit on a sustainable path in order to balance it.

EQ: Have you seen the type of compromise that is required for lawmakers to balance the deficit and fix the U.S. economy for the long term?

Mauldin: The sentiment from Washington is as polarized as it has been for quite some time. I don’t see anything different. President Obama’s inauguration speech was a significantly polarizing event. You’re not seeing a partner in the White House that is as interested in reducing the debt. The plan coming out of the White House is that they want to reduce the deficit over 30 years and not 10 years, and they want to do it through tax increases, and not through entitlement reforms. That’s not a budget proposition.

We got a tax increase and no spending cuts, unless you want to call the sequester a spending cut, but that’s just a down payment. We’re not seeing the spending cuts and entitlement reform that we need. All we saw so far were tax increases. That’s not compromise.

EQ: You said in your latest letter that 2013 is the make or break year for the US. What did you mean by that?

Mauldin: This is a year that we have to come up with whatever reforms that we’re going to do in the next few years because 2014 is an election year. It’s difficult to be optimistic about any compromises in 2014 from political leaders who are facing an election. After that, if you can’t get it done now, I’m not certain why it gets done in 2015 except that maybe the markets will begin to create a crisis. If you go past 2013, the markets will start to react. Once the bond markets start to react, you move yourself toward a situation where you could quickly create a crisis in interest rates, not unlike what’s happened in Europe. At that point, you’re forced to make adjustments that are far more difficult than any that we could do today.

EQ: You’ve said that we’re in a secular bear market that will last for another several years. How can investors protect themselves or even profit during this time? Are alternative investments the key?

Mauldin: Alternative investments need to be a significant part of your planning. Stock market valuations in general aren’t bad today. We’re certainly not where we were in 2000 or 2006, so valuations are in fact better. We’re 13 years into a secular bear cycle, and these things average about 17 years, so this is getting some years on it. It’s not like in 1998 where we were getting into a secular bear market, and when I was writing at the time, it sounded terribly gloomy. In the grand scheme of things, we’re getting close to the end.

Today, you can find value, but you have to look at specific stocks and not at the indices. You have to look at longer-term plays and not momentum plays. That’s a more difficult investing environment for the average investor and it certainly requires a great deal of more work in studying analysis. It’s not just going to be sitting down at the end of the week and looking at which index you want, and then looking at it six months later. That’s not the environment that we’re in. Today, we’re still trying to make some reasonable return on our investment portfolios in the range of maybe 5 to 7 percent, rather than in a secular bull market where we’re targeting 10 to 12 percent. Our valuations just aren’t there where we can move out on the risk curve, even though that’s what the Federal Reserve wants us to do.

EQ: Europe’s financial crisis dominated headlines in 2012. Is Japan the troubled economy that will be the next focal point in 2013?

Mauldin: I think for Japan, this year is when they really start to roll over. We saw this month that their trade deficit widened to the largest ever in recent times. Their savings rate is getting very close to zero, if it’s not already passed through that already. The pressures on Japan from their demographics, along the rising yen, which is already creating more problems on their energy costs, all these things are going to come together to create some real problems. Their central bank will have to print a great deal more money than ever. About four years ago, I wrote that Japan is a bug in search of a windshield, and this year is when they actually begin to find it.

EQ: You’re a major buyer of gold but not necessarily bullish on it as play against inflation. What are your reasons for buying gold?

Mauldin: It’s central bank insurance. I have health insurance, I have life insurance, and I have central bank insurance. Gold is something central banks can’t print, and when we get through this interest rate cycle—and I don’t think we’re at the bottom yet, though we’re close—you want to invest in things that central banks can’t print such as real estate, hard assets, and even some equities. If a central bank can print it, you don’t want to own it in the not-too-distant future.

Treasuries, I think, are still probably a buy at this point, though it’s becoming more of a trade than a long-term play. Bond rates are going to have to go up, and that’s eminent. We may see another move down in rates, and that will be the final turn. That being said, investors have to start thinking about what the world will look like when they can no longer count on a benign interest rate environment.

If go back and look at 2007, everybody said, “don’t fight the Fed”, but that’s precisely what you should’ve been doing. Then in 2009, getting behind the Fed and their re-inflation was the appropriate thing to do. It’s going to be appropriate again to fight the Fed. Central banks aren’t omniscient; they’re not God. They make mistakes, and when they make mistakes, they tend to make rather large ones—2007 being an example.

I think the next mistake is going to be a large one as well. It’s just not apparent we’ve come to that point yet, but we will.

EQ: Do you have any additional advice for investors and our readers for 2013?

Mauldin: When you read optimistic projections of GDP for this year, you should ignore them. This is going to be a very tough year to get anything north of 2 percent, or frankly, anything north of 1 percent of total GDP growth. The tax increases that we had were significant. They are already hitting into consumer confidence, and are going to hit into consumer spending. We will have more cuts. I don’t think there’s any way we can get around that. All of that is going to be a negative headwind for GDP growth. It’s going to be a difficult year for GDP growth, and therefore, for earnings. So you have to be very company-specific.

The headline numbers are going to be more difficult. This is something I wrote last year—and I tend to be premature—but corporate earnings as a share of GDP are higher than they’ve been in decades. Well, one thing we know about corporate earnings is that they revert to the mean, so earnings as a share of GDP are likely to go down, and as a result, GDP is not going up. It’s going to be difficult for earnings to rise much more than the nominal growth rate. It’s a difficult environment across the board. You need to be much more targeted and focused and look at individual companies in their individual markets.

EQ: The past year was pretty big for Mauldin Economics. What can investors and our readers continue to expect in 2013?

Mauldin: Last year we introduced several newsletter: Yield Shark, which focuses on fixed income and dividends; Bulls Eye Investor, which is a global investing equities letter; and of course, Over My Shoulder and World Money Analyst, which is another total global investment play that looks at opportunities from around the globe written by editors from around the globe.

We’ll be introducing several more letters in 2013, and I expect this year we’re going to introduce a new division that’s going to focus on technology, transformational businesses, and things that will take us into the future. As negative as I am on government, I’m actually quite positive on technology in the future. So we’re going to be looking for ways to take advantage of that.

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