WBD397 Audio Transcription
The Financial Reset with John Mauldin
Interview date: Monday 13th September
Note: the following is a transcription of my interview with John Mauldin. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview I talk to author and economic analyst John Mauldin. We discuss current labor shortages, crises and antifragility, and the looming global debt problem.
“Right now everybody wants the government to be really big, and we don’t want to pay for it, and that’s not going to get resolved until we have a crisis.”
— John Mauldin
Interview Transcription
Peter McCormack: Good morning, John, how are you today?
John Mauldin: I'm doing awesome, and it's great to be with you, Peter.
Peter McCormack: Well, it's great to have you on and I appreciate you coming on. Somebody forwarded an article of yours to me, Ubiquity, Complexity and Sandpiles, which I ended up reading twice and thinking, "I need to talk to this guy", and actually, what a day to talk to you. I'm talking to you on the day that the first country in the world has made Bitcoin legal tender, and I'm in that country. So, it just feels nice to actually talk to somebody who isn't totally in the Bitcoin rabbit hole.
So, welcome to my show, it's going to be good to talk to you. So, what we should do is start off -- I usually have lots of Bitcoin people on the show and everyone knows who they are. Some people might not know who you are, so can you just give a bit of an introduction to who you are and your background.
John Mauldin: Well, I'm an investment advisor, money manager, but what I'm known for is I write a newsletter that goes to 1 million or so people a week. It's free, so the price is right, and I write about whatever interests me that week. Last week and this week, we're talking about labour shortages and how that's playing out into the economy, and why it actually has the potential to slow the economy down much faster than economists were projecting three or four months ago.
That's a problem if you get down to what I call "stall speed", which is 1% GDP or less, and anything that happens pushes you into a recession. The Federal Reserve has already got its foot on the gas pedal, they've got nothing more they can do. I think they've already made the policy mistake, and we can talk about this if you want to --
Peter McCormack: Yeah, I'd love to.
John Mauldin: -- but they should have been reducing the amount of money they're spending and raising rates starting earlier this year, when the economy was recovering. It hadn't recovered completely, and they seem to want the pursuit of perfection to be there before they start backing off. What that's going to mean is, given all of the problems that we've got now, I think perfection's going to be a very difficult thing to obtain in the short term, the short term being one or two years, which means they're going to continue with the QE, continue with low rates, and that has the potential, and we can get into this, to give us inflation. I mean, we're already seeing inflation, but the one thing the Fed has been good at, since Paul Volcker, was controlling inflation, and they're not doing so good now. And, they're getting ready to repeat, I think, some mistakes by former Fed chairs.
So, there's tons of areas that we can go to; I've got five bestsellers, seven books, and lots of TV and all of the normal stuff that people get with media. But as we talked earlier, I'm often wrong, seldom in doubt, but I do have opinions! So, you ask and I'm here.
Peter McCormack: Well, there's a lot to unpack there and I feel privileged to have you on the show, because after the article I read that was sent by a friend of mine, I have been diving into some of your work, and I've really enjoyed your work; because, as someone who likes things explained easily, your articles, which I will share in the show notes and I will get people to subscribe, you break things down in an easy way to understand, especially the metaphors you use.
John Mauldin: Well, it has been my gift. I'm not really an economist or a writer as much as I'm a storyteller.
Peter McCormack: Definitely.
John Mauldin: So, I tell the story about investments, I tell the story about economics, and we're much more comfortable as human beings with stories. When you can bring something in that's complex and make it relatable into a story, we tend to understand it easier, and that's just been my gift. My friends know that I have an Irish heritage; they say I kissed the Blarney Stone.
Peter McCormack: Well, I know the Blarney Stone. I'm half Irish; my father lives in Ireland, so I've been to Ireland nearly 100 times, so I like a bit of Irish heritage. Okay, well let's start with labour shortages, because this is something we are seeing in the UK. I'm not in the UK right now, but there's a number of different sectors that are seeing labour shortages. I know specifically in the HGV truck drivers, for example, they're seeing a massive shortage. But we keep seeing news stories of labour shortages, yet we still see figures of high unemployment, so can you explain to me what's going on there?
John Mauldin: Well, the answer is there's no simple answer; there are lots of things. COVID is a big part of that. People are not wanting to go out and get into the market; they're concerned about getting COVID, with some justification. There's a significant portion of your fellow UK and my US citizens that have chosen not to get a vaccine. I would suggest you get one, especially if you're like me; I'll be 72 here in another few weeks, and you have problems if you come down with COVID. I just don't see the risk of it, but a lot of people do, so they're more cautious about getting back into the workforce.
One of the things that's happened in the US, I haven't seen any data from the UK, but we've doubled the number of people doing home schooling from 2.5 million to 5 million in just the last year. That means, let's say that even 60% of those people had been in the workforce; well, that's now 1.5 million people that are now not in the workforce, mostly women, but that's 1% of the US labour force. And there's an equation, it's like 2+2=4, it's an identity equation, everybody agrees; it's GDP, that's the productivity of your economy, is equal to the number of workers times productivity, it's very simple. So, if you reduce the number of workers, you're going to have a challenge with your GDP.
Well, 1% of your workers are now staying at home and home schooling, we're losing another 1.5 million to what's known as long COVID; do I need to explain that?
Peter McCormack: No, we know what long COVID is.
John Mauldin: If you know what long COVID is, fine; but that's 1.5 million workers; that's another 1% of GDP. Now, will they get over it; will they find cures for it? I mean, it's such a random, varied problem that we can't put our finger on it, but it's still reducing the workforce.
There's skill mismatch. There's 2.5 million jobs out there that people are advertising saying, "Please come to work for us", and I was driving through rural Maine here a month ago and I did something that I don't normally do; I pulled into a McDonald's and got a McDonald's milkshake. I probably haven't done that for 10 or 15 years. I have a theory that calories don't count if they're in Maine! I go to an economic fishing camp there every year, so a bunch of economists and hedge fund managers get together and we fish and drink, and we use that as an excuse.
So, you go past the window to get your milkshake and it says, "$15 an hour, $13.50 part time"; that's in rural Maine, I mean it's not the city. And you're seeing those signs all over. And people, that's inflation, it's a wage spiral. I mean, there's just no other way we can put around it, and you're not going to be able to say, "Well, things are going back to normal. Now we're only going to pay you $12 an hour"; that's just not going to work.
But there's still not enough people. Some of it is clearly, they're getting income from government sources, but that's going away. From the states that have already done that, we're not seeing a big boost in their employment, so there's something happening in the underlying zeitgeist. 25 years older and younger are not coming back into the workforce for whatever reason, and that's millions of people. And those are the people that work in the hospitality, the hotels, the restaurants, the bars and so forth. We saw this last Friday when we had the unemployment report; 233,000. I mean, it stunk up the room, and there were zero jobs in the hospitality world.
Some people said, "Well, that means they're not hiring", and I'm not certain that's the case. It could be they're not working. It's just, "You haven't put the bid in front of me that says I'm willing to come hit your bid to take that job". And frankly, you've got customers that are upset, you're dealing with people that are not very nice to you, in conditions where you're working your tail off. I mean, I worked in a bar, worked in restaurants when I was at college; it's not a glamour job. So, there's lots of things pushing back, reducing the amount of labour, and that's going to end up affecting GDP.
Now, when you get to growth rates, we've run the debt up and there are so many macroeconomic studies that show that debt, after it gets to a certain portion, and we're way past that in the US, you're pushing against it in the UK, becomes a drag on growth. The government starts crowding out private investment and it crowds out capital expenses. Well, what you end up with is something like Japan where they've had zero growth now, in nominal growth, zero for 22 years.
Now, if you go to Japan, which I have, it's a wonderful place, everybody's happy, there's wonderful food, everybody's working, the trains run on time, there are great cars made, all of that stuff; but in terms of growing per capita, they're not doing that. And, we look at Europe. Europe hasn't had much growth, and yet they've got way more debt percentagewise than the US, but the US is doing our best to catch up! We're really working at it. We seem to want to be Italy and Greece.
Peter McCormack: Well, one of the things that sounds to me like, there is demand in the economy, but there isn't enough supply of people to support that demand, and that is what's reducing the GDP, because you're not seeing the productivity; I hadn't associated the two. One of the things that someone sent me early on, because like I say, I'm not an economist; my background's advertising. This podcast was a complete fluke. I started it as a hobby and it's now become my job, so I just study a little bit --
John Mauldin: By the way, I relate to that. My letter, I stuck on the internet as an afterthought.
Peter McCormack: Oh, right, okay!
John Mauldin: I had a print letter, just like every other respectable person, and you would sell your print letter. I stuck it on the internet as an afterthought, and it just blew up. All of a sudden, it goes from 2,000 to 3,000 to 6,000, to 12,000 to 15,000 to 100,000 and you go, "Wow!" and then I shut the print letter down, because the electronic free model was so much better, which is you've had something happen, you came on at the right time, you struck gold and the entrepreneur in you said, "This is where I want to go". And it is a lot of fun.
Peter McCormack: Well, it is a lot of fun. Well, I struck digital gold, as some of the listeners will say. Something someone said to me early on was, "Watch this video by Ray Dalio, How the Economic Machine Works.
John Mauldin: Right.
Peter McCormack: And, it explained to me in terms of how cycles work. When you talk about the build-up of debt, one of the things I keep saying is, "Why is the Fed in the US, and why is the Bank of England in the UK, why are they not allowing the machine to work anymore? Why do they keep kicking the can down the road?" and that makes me think of your article. It makes me think of credit cycles.
We no longer have business cycles, and you talked about credit cycles. So, why do you think they're not allowing the economic machine to work how it traditionally worked?
John Mauldin: They have theories they worked around; it's basically Keynesian. They believe that keeping rates low and making monetary policy easy, pushing money into the system, is going to increase unemployment and is going to increase growth. The Treasury, under the last year of Trump especially, and in the first year of Biden, have been particularly willing to go along with this and say, "Well, let's throw $6 trillion at it", and the Federal Reserve has bought almost two-thirds of that. The same thing is happening all over Europe.
They think that it's going to make things better, and in the short term, it does. I mean, was the government correct in pushing stimulus when the economy fell out of bed in February/March? The answer is absolutely yes. The car was in the ditch; you've got to pull it out. Now, as we start recovering, especially after we get vaccines, we needed to stop, I would have felt; my advice would have been to pull back. You've seen some Federal Reserve regional presidents saying, "We've got to start thinking about [what they call] tapering", which is pushing less money into the system.
But they really believe that they can influence unemployment with low rates and easy money, and they've got all of these models that tell them they can do it, and that's what they're working on. And you can sit and talk until you're blue in the face why you don't think that works; it doesn't make any difference. They're the Fed and you're not.
Peter McCormack: So, are the Keynesians the common enemy with the bitcoiners, because the bitcoiners aren't fans of the Keynesians? And as I understand from your writings, you don't mind the Fed stepping in, but it should only be at times of crisis?
John Mauldin: The Federal Reserve is there for when the ox is in the ditch, the wheels have come off. They're the lender of last resort. And, as one of your famous central bankers from the 18th Century said, from England, Bagehot; it's Bagehot's Rules that, "Central banks should be the lender of last resort at a high price against strong collateral". So, they can push money into the system, but it's money that's not cheap money. So, they're the lender of last resort, and that's not what's evolved.
Keynes came along and basically said, "When there's a recession, you should push money into the system, you should have stimulus from the Federal Government", and then that's eventually evolved into the central banks as well. And then you pay it back when the times are good. And as the US, we've just never been that good at paying it back!
We had one brief period when Clinton and Gingrich passed some laws that allowed us to start paying down the debt and reducing the deficit; but that was a very, very brief period, and as soon as Bush came in and the Republicans that controlled, they went right back to spending money as fast as they could and it's never slowed down since.
Peter McCormack: Yeah, that's super interesting. I did actually study economics at school for a short period of time, and one of the things we were taught about was running surpluses and deficits. We don't seem to run a surplus anymore; we constantly run a deficit. One of the things I was thinking about why this happens is, it's the political cycle gets in the way of the economics cycle, because there's no incentive for any political leader to deal with times of crisis in a different way. Okay, deal with times of crisis by injecting capital into the system; but in normal times, it seems like everyone wants to kick the can down the road and get them through the next election and pass it on.
John Mauldin: It's gotten beyond that now. In the US, we have social security; we're now spending more on social security than we're taking in. Certain with healthcare and Medicare, with all the other multiple benefits, many of which start dead as temporary programmes, and as Milton Friedman said, "The most permanent thing in the world is a temporary government programme". So, we just keep spending, and now we're spending $2.5 trillion to $3 trillion of what's called Entitlement Spending, and there is zero impetus on either side by anybody to go in and say, "Well, we're going to cut your social security; we're going to cut your healthcare; we're going to cut this tax credit; we're going to take this from you". There's just no.
What Biden this time, with trying to get his $3.5 trillion programme through, it's really more like a $6 trillion, because they're creating these temporary government programmes that only last for five years; and they're saying, "Were only spending $0.5 trillion on this one. If you counted it for ten years, it would be $1 trillion". There's not going to be any willingness to take away that government subsidy in five years; people have come to expect it.
We're now in a place where 55%, 60% of Americans don't pay taxes, other than social security, but certainly not income taxes. It's a smaller and smaller group and they keep wanting to raise taxes on the rich, but you could take 100% of what they've got and we wouldn't come close to balancing the budget.
I think, and I was having this discussion on another podcast with some very smart people; I was in the room for comic relief, but they were asking me, "John, how does this turn out; how do we fix this?" and I'm going, "Well, we don't fix it. We're going to have to have a crisis, it's going to have to be a major crisis, where things just fall apart. Then, when things have fallen apart, then you sit and figure out what you're going to do".
That's when you have to ask the fundamental questions, that nobody in government wants to ask now, which is, "How big should government be? I mean, really, how big do we want the government to be?" And then ask the question, "How do we want to pay for it?" just basics. Right now, everybody wants the government to be really big and we don't want to pay for it. That's not going to get resolved until we have a crisis.
Maybe we don't, maybe we become Japan, because the Bank of Japan has borrowed the equivalent of about $40 trillion, but we're on our way. They're up to $8 trillion; we owe $28 trillion, $29 trillion now, I think, plus state and local, it would be closer to $31 trillion, $32 trillion. Until we have a crisis, we're not going to solve it.
I have things I would like to do to restructure the tax programme, but nobody's going to pay any attention to it. I've talked with congressmen and they've said, "Well, yes, you could but we can't get that through", talking about using a VAT rather than income taxes, consumption taxes and so forth. It's what I call The Great Reset in my writings.
Peter McCormack: Yeah, you wrote about this way before --
John Mauldin: Well, I've been writing about it for a while, but you can see it building. By the way, I just want everybody to understand, I'm the biggest optimist in the room. I am really long humanity. Peter, you're going to live to be 150 years old.
Peter McCormack: I don't know, I've lived a troubled past!
John Mauldin: Well, yeah, but we're going to turn you back younger; so, when you're 150, you're going to be in a 25-year-old body with your mind still running sharp. And if you keep your assets, then there you go. I am telling you, that is a this decade reality; I was just in Palm Beach looking at some brand-new drugs that will be on the market in the next two, three, four years that it's already in seven different trials, but the research that I was looking at was showing the fantastic result it's having on aging in mice. We know it's doing the same thing in humans anecdotally, but it's working using it for MS and thyroid and a bunch of other stuff.
So, what's going to happen is, it's already in phase 2; they've already gone past the safety trials. It's going to get approved for some disease or something, make it approved for PTSD, I mean all sorts of stuff, and you're going to get it. You're going to go to your doctor and say, "Doc, I got this!" because you want that drug. It's not the Fountain of Youth, it's not going to turn you young, it's not going to reverse your age, but it will help maintain you where you are.
Peter McCormack: I'll take that!
John Mauldin: We'll all take that. There's half a dozen different programmes, major companies; Amazon just announced that Google's doing it, Sinclair, everybody's focussing on one particular pathway now, called Induced Tissue Regeneration, to reverse aging. I think that happens this decade. Now, how that gets distributed will be a story, but all the other technological progress we're making.
So, even though we're going to have this, I think, period of tumult economically, government-wise, there's going to be places you can invest, there are going to be ways you can position your portfolio to get yourself to the other side. You want to make sure you can get from here over to the other side with as much of your assets as you can intact, and then in a rifle shot, some of these new technologies that are…
I mean, we're going to completely change how we do seeds in the world. That is happening right as we speak, right now. Europe has just approved a new non-GMO alternative to a GMO that harbours that resistance, it's going to reduce the amount of chemicals we put into the land, reduce the amount of labour, water, everything else that's needed. That technology exists right now; it's going into the fields. It's going to be as big as the green revolution was. There are so many wonderful things happening, so I say this all the time: I'm long humanity; I'm short government!
Peter McCormack: Well, let's get into that, let's unpack some of that. My friend, Lyn Alden, who I speak to regularly, she's a great economic thinker, a great macroeconomic thinker, she talks about this and she believes we're going to have a currency devaluation; this is how we're going to pay for it. So, bondholders will be paid back a nominal amount, but the purchasing power of what they'll be paid back will be lost. Her belief is that's how we're going to pay for this, and through inflation. What are your thoughts on that?
John Mauldin: I have a very decisive "maybe". That's precisely what I thought was going to happen when I wrote a book, The Endgame, when I was talking about the Bank of Japan was going to buy all the government debt, because clearly they were going to have to do that. There was no other way for Japan to survive; the bond market couldn't do it. I said, "In every other case, all throughout history, without exception, currencies always went down".
Peter McCormack: That's what Lyn said to me. Sorry to interrupt; Lyn said to me, "Japan is the outlier". 52 of the last 53 countries where they've hit 130% debt-to-GDP have essentially defaulted. Japan is the outlier.
John Mauldin: Yeah, and my line that I used in the book was, "Japan is a bug in search of a windshield", and I predicted the yen to go to 200. I actually thought it would go worse than that; I put on a ten-year option short personally. I was going to pay for my house with that ten-year option, and I got the outlier.
The dollar is the world's reserve currency. Does everybody in the world say, "I want to be in the reserve currency", so the dollar doesn't go down relative to the euro or the pound? The answer is, I don't know, and nobody does either. It's speculation. This is just one of those things you're just going to have to go through. People ask me what I think about gold and I say, "Well, gold to me is not an investment. Gold to me is central bank insurance". I've got homeowners insurance, I've got life insurance, I have central bank insurance. I buy gold, it's sitting in a vault, and I hope that the value of my gold goes to zero, I really do; because, if my gold goes to zero, that means everything else worked and the world's in a wonderful place. I'm afraid that it won't.
Peter McCormack: That's why people buy Bitcoin. People think of Bitcoin as central bank insurance.
John Mauldin: And they do, and it's certainly been better in terms of performance than my gold; I don't doubt that at all. And I will say that I haven't personally bought Bitcoin, but I have managers that I give money to -- my basic business is, I refer people to managers, I refer people to other people who are smarter than I am, and I give my money to these managers. Some of them have made me a lot of money in Bitcoin, so I can't say that Bitcoin hasn't been good to me, because it has. It's been better than my gold sitting in the vault!
In the same way that I have managers that are very long cannabis and all sorts of cannabinoids, those funds have outperformed all the other funds that I'm in! So, I just kind of smile and laugh and go, "Oh, well, okay. I'd never thought of being a marijuana investor before", but I trusted the managers and the managers decided to get into it, and I focus a great deal more on the managers' methodologies and what they're doing and then how I fit them together, because I don't want to have four managers doing the same thing; that's not diversification. So, I diversify trading strategies and then I rifle-shot a few technologies and things that I do deep dives on personally.
But generally, I give my money to people who are doing the technology deep dives better than I do. But it's a style that works and it's worked for my clients.
Peter McCormack: So, let's talk about Sandpiles, because it is a great article and I will encourage anyone listening to this to go and read it. It feels like we have quite a few sandpiles at the moment and we're facing a few avalanches. Do you want to talk about this and explain what you were getting into in the article?
John Mauldin: Well, there was a group of scientists using computers in the mid-1980s and they were trying to study chaos theory, critical theory, critical junctures, so with the computer they would drop a piece of sand onto the sandpile electronically and then they would notice that occasionally, you would get an avalanche, just like you did when you go out to a beach when you're a kid and you play in the sandpiles. Those sandpiles conformed to what's called a Power Law.
Then they started colouring those pieces of sand red and green when the sand drops and it drops into a stable position. And if it drops into an unstable position, it would be red. And, what they would find out throughout the sand pile is, you would get these "red fingers of instability", they called them, that would connect. So, you would get a sandpile that was connected with lots of fingers of instability; but as long as the next piece of sand that went on it landed on a stable part, that was fine. If it landed on a small, unstable part, you'd have a little avalanche, but it wasn't connected. But then you hit one of those critical junctures, where the fingers of instability were connected with the whole thing, and the whole pile just collapses.
Going back to Minsky, who was a famous economist from the 1940s and 1950s, Minsky gave us the concept of, "Stability breeds instability". We think the more things are stable, the more we get used to things being stable, and the more we begin to invest and act in our lives. We think that today will be like yesterday and tomorrow will be like today. And so, we expect that the Fed's going to be able to handle inflation; we expect that productivity will come back; we expect that we're going to get through this COVID.
It's a good thing for humanity, by the way, because that makes us relative optimists and that gets us up in the morning and keeps us from living in caves and eating dried food. But Nassim Taleb is famous for the book, The Black Swan, but he wrote a book called Antifragility, and it's a great book. You should read the first half of it. The second half, he just keeps repeating himself.
Peter McCormack: Typical Nassim!
John Mauldin: Well, it is; he does that in a lot of his books, otherwise they'd be so short. He has this really brilliant idea that he feels that he's got to expand it into something big enough to be a book, as opposed to a monograph, because you're not going to pay $19.95 for a monograph, but you will pay $19.95 for a book. But the idea was brilliant.
If you continue to not allow things to have a problem, if you continue to try to maintain stability, which is what the Federal Reserve and central banks are trying to do; they're putting off recessions, they're putting off many prices, they're putting off a market downturn. They don't want anything to upset the applecart, and so the US Federal Reserve, it's first mandate was to maintain price stability. But in 1974, Congress in its wisdom said, "We want you to be responsible for full employment", like somehow or another, the Federal Reserve can magically improve full employment.
But they did it nonetheless, so now the Federal Reserve picked that up and said, "We're responsible for unemployment". And they have assumed a third mandate without explicitly saying so; they're now responsible for the stock markets. And so, any big hit to the stock market, they come in and throw more liquidity, they do something. I mean, when we had this bond crisis this last time, they said, "We're going to buy corporate bonds", and the prices of corporate bonds fell, because of course the Fed was coming in.
Now, the Fed only had to buy $20 billion or $30 billion, some small amount; but it was just the thought that the Fed was going to buy it. Forget for the moment whether it was actually legal that they could do it. They had some lawyers tell them it was legal; that's fine. But they feel they've got to keep everything smooth, and it's keeping everything smooth makes it more fragile, makes it more open to that Minsky moment, when things get out of control, and the antifragile thing is a way of restating Minsky's proposition, but I think it's a very elegant way to say it. It's really worth reading the first part, or there are probably some reviews out there where you get them. Just google, "Antifragility Taleb", and "Review" and you can get the basic idea.
Peter McCormack: I mean, I've read the book.
John Mauldin: Okay, did you read the whole book?
Peter McCormack: No, I think I read about the first four chapters! Me and Nassim aren't friends; he blocked me on Twitter because he's not a fan of Bitcoin! He used to be, but he changed his mind and he's, in turn, not a fan of bitcoiners. But I still think the book's brilliant.
But everything you say just takes me back to Ray Dalio's video on How the Economic Machine Works; you have to allow the economic machine to work, and if you interfere too much and delay the downturns and allow companies to fail, as they should fail when they need to fail, then it takes us into the position we're in now.
I keep thinking about this Great Reset, whether it's a rest which is forced by government, or whether it's a reset by the market; and I'm assuming your preference is a reset by the market?
John Mauldin: Well, I think the market will end up resetting and forcing the government to reset. Once you start down that path, once those fingers of stability, when you hit the real instabilities and they all come cratering down, when you get a crisis like that and those crises tend to be periods of high unemployment, yes, the government's going to continue to send those security cheques out and payroll and, no, we aren't going to enough money and we're going to be running massive deficits and the central bank will have to be buying massive amounts.
I think a $25 trillion to $30 trillion balance sheet by the Federal Reserve by the end of this decade is not out of the question. We'll certainly be over $50 trillion. I mean, I demonstrated that a year and a half ago before the COVID crisis. I'm waiting to update that research; we'll put it in a future letter. I want to see what Pelosi and Schumer and friends get past Manchin and the house rebels. I'm assuming they're going to get something, but Manchin, if you're paying attention to his article on the Wall Street Journal about a week and a half ago, he was pretty clear that $3.5 trillion, or even $2.5 trillion or $2 trillion was not on his list of things he was willing to go for.
So, he's also indicated that he'd be willing for corporate taxes to go up a little bit and for capital gains taxes to go up a little bit. So, there's a number out there, a certain number that certain government programmes that we're going to get. We don't know what that number is yet, because that's still being negotiated behind closed doors.
Peter McCormack: Well, in the UK, we're seeing attempts at tax rises. I don't know if you've seen, there's the announcement of a 1.25% rise in National Insurance to cover social care; but really, it all goes into one bucket. And there are talks of raising capital gains tax to bring it in line with income tax. So, we're starting to see the UK Government at least deal with these unpopular ideas of tax raises.
John Mauldin: And this is during a Tory Government!
Peter McCormack: Yeah, and that's why it's unpopular.
John Mauldin: And, if you actually had a Labour Government, dear God, what would they be looking at?
Peter McCormack: Well, if it was a Labour Government, they would be spending more on taxing the ultra-rich and not balancing the books. But a Tory Government, certainly one after a manifesto, said they wouldn't be raising taxes. It's going to prove very unpopular and I think this might be the end of this Tory Government.
John Mauldin: Be careful what you wish for!
Peter McCormack: I'm not wishing for a Labour Government.
John Mauldin: Jeremy, what's-his-name… I have no idea, I don't pay a lot of attention to UK politics, only around election times.
Peter McCormack: Yeah, it's a bit of a mess, similar to most global politics right now.
John Mauldin: Well, yeah, pretty much everywhere.
Peter McCormack: You feel like you're always picking the best of a bad bunch. So, yeah, interesting times. I think a lot of people will be thinking listening to this, "Okay, John, but how do I prepare for this; how do I get through this retaining as many of my assets as possible?" I'm sure you have a plan.
John Mauldin: I wouldn't diversify trading strategies. And for me, for instance, I have a lot of money in hedge funds and they're very boring hedge funds. They do boring things and they averaged, over the last nine years, because we've got them all in one bucket that we've been able to figure it out, and every now and then we'll switch out, or somebody will close their fund down and we have to put it somewhere else; but they've averaged something like 9% a year for me. It's more like a bond. Its worst year was down 0.2% and its best year was over 20%. But it's been in that 8%, 9% range.
If you don't qualify for hedge funds, there are other trading strategies out there in the ETF world, in the mutual fund world, that you can get. And by trading strategies, it means they're not long, they don't buy an index fund. They're trying to arbitrage something and you can see what they're doing and how they're doing it. I want to, if you can qualify, there are places where I do a lot of private credit, where rather than buying bonds at 2%, I can get private credit that's paying me 6%, 7%, 8%.
There's a lot of that out there. There's an entire world of what used to be small and regional banks would take care of, and the regulators have so clamped down on what they can do, they've now gone into the private market, and there's this rather large private market out there that's a little bit of a mystery, because you can't just go punch the button and say "private credit" and you get 40, 50 options, or actually closer to hundreds of options, but you have to find a manager that knows where to go and look and that does their homework on that.
So, we put our clients into private credit. And all of that's been what we call our "core bucket". This is stuff that I'm expecting to be there, and it's going to go up and down in value, but it's not going to make me rich; it's just going to get me there. I don't want to lose a lot. That's, say, roughly 80%, 90%. Then you have your explore bucket, where you break it up into targets for technologies and other things that you think have the opportunity to do a great deal more.
For people with a particular personality, real estate's a great option. I mean, you have to find things that fit your personality. I don't particularly want to own a lot of real estate, except maybe through another manager, but it's a fairly stable, boring asset. But I like boring.
Peter McCormack: As long as you beat inflation.
John Mauldin: That's been easy for the last 20, 30 years. Now, we have to pay attention to what Powell is going to do. I saw a funny picture the other day. It showed a Powell that looked like he was 98 years old, all wrinkled up, and it says, "Powell getting ready to announce his first hack rate hike increase", you know, 20 years from now!
There's a story, without trying to bore your listeners too much, about Chairman Burns, when he was the Fed Chair back in the 1970s. Somebody brought him some data and said, "This is going to be inflationary". He looked at it and he said, "No, it's not, it's going to be transitory; we're going to ignore that". And they'd bring him another thing, "It's going to be transitory; we ignore that". He went along for almost eight or nine years, it started actually in the 1960s.
By the time he got out in the late-1970s, inflation was at 10% and rising, because in his world, everything had been transitory, just like it is in Chairman Powell's world right now, "It's all transitory". And all of those wage increases, all of the rental income and housing increased prices, all of the food prices that are being increased, those are all transitory to him and I don't see those coming back. I think the Fed should be leaning into this and, yes, will that create a problem with the markets? Yes. I'm sorry, but I think price stability is far more important than making sure the market stays up at ever higher numbers.
Peter McCormack: What are the risks of inflation right now? We're seeing various figures quoted at 3%, 4%, 5%?
John Mauldin: We're at 5%, 6% right now over the last three or four months.
Peter McCormack: Well, certain things that aren't included within the basket, we're seeing much higher inflation numbers. I know, for example, people that work in trade sectors are talking about 10% to 15% rises in prices for raw materials.
John Mauldin: Oh, yeah. And you're seeing the same thing happening for rises in prices, especially for wages at the lower sector. You're seeing what is called Owners' Equivalent Rent here in the US, you have housing prices in the UK, rents going up, and it's going up by more than 2% or 3%; it's going up 5% and 10%. That's real inflation, and the same thing with food prices. We're having the same problem you mentioned earlier; we can't get enough truck drivers.
I mean, part of the problem is that China and their ports are having COVID issues, even though they're not calling it COVID issues, and their ports are shut down and stacked up. And all of this stuff that we're supposed to be getting in the United States and the rest of the world is stuck in the bowels of a port in China.
Peter McCormack: Are there risks that we see much higher inflation numbers from the Fed? It feels like the Fed tries to hide real inflation.
John Mauldin: It is a real risk; it shouldn't be a risk; that's the problem, that's my frustration. It should not be a risk. The Fed seems to think that they want to get unemployment down back to 3.5% in the US. We saw that once during the Vietnam War and once during the end of Trump's 2009 period, and those were fleeting moments. Unemployment in the 4.5% range, to me that's close enough for government work. We're at 5.2% now; we should be backing off.
There's 10 million jobs out there, it's not like there's not enough jobs for workers. We're going to have to reskill workers, people are going to have to be willing to move. I've got eight kids, five adopted, so my family's more colourful than yours. I have two Blacks, two Asians, a blonde, a brunette, a redhead and a Choctaw Indian.
Peter McCormack: You're like a Texas Madonna!
John Mauldin: Oh, God, I hope I look better than that! But she makes more money, but I shouldn't be sarcastic. One of them was saying that he's now working in Oklahoma and he's saying, "I'm getting ready to go to Florida, because there are more jobs and higher pay". He was thinking about Maine, because he can double his income going to Maine but he says, "I think I'll wait until after the winter's over before I go to Maine".
Peter McCormack: That's a fair decision.
John Mauldin: So, people are going to have to move to where the jobs are, they're going to have to learn new skills. There's a lot of things that are happening.
Peter McCormack: But you believe the Fed should lean into this, you believe they should raise rates?
John Mauldin: I believe they should start tapering first, and then begin to raise rates. I don't like to do too variable an experiment, but I would like to see them taper $20 billion a month for the next four meetings and then start telegraphing, "We're going to be raising rates", and just not worry about what the market does. If the market says, "Well, we're going to drop 20%", say, "Well, guys, the market's dropped 20%. We've got to control prices".
Peter McCormack: It's great to have you on and great to discuss this, and it's sometimes nice to not be focussing just on Bitcoin, to hear other opinions. A lot of bitcoiners listening will be, "Oh, but John, you should be buying Bitcoin!" but it sounds like you've got it right with your managers and your gold holdings. But I've really enjoyed this chat, so thank you for giving up your time.
John Mauldin: I have too, this has been fun. By the way, people can just go to Mauldin Economics or google John Mauldin, and my letter's free. Just stick your name, email address in, then you're one of my 1 million closest friends! Every Saturday morning, it will be in your inbox.
Peter McCormack: Well, I will stick that in the show notes and make sure people get to that as well. And when I'm next down in Texas having a steak --
John Mauldin: Well, you've got to come to Puerto Rico now.
Peter McCormack: I would love to come to Puerto Rico. There seems to be a growing list of people I know there. I would love to come to Puerto Rico, hang out with you and Peter Schiff. But I'm also a big fan of Nick and Sam's down in Dallas.
John Mauldin: Oh, you see, I used to live two blocks from Nick and Sam's.
Peter McCormack: Oh, wow!
John Mauldin: I knew the staff, the bartender. They knew what to serve me, what to put out the minute I walked in!
Peter McCormack: They do the greatest steak. I had the greatest steak I've ever eaten there. They can't make a whiskey sour, but damn they can make a steak. So, next time I'm there, I'll think of you. And when I get to Puerto Rico, you, me and Peter Schiff can go and hang out and talk about gold, Bitcoin and the economy.
John, listen, thank you. I will tell everybody about this. I think people are going to love listening to this and I hope to chat to you again sometime in the future.
John Mauldin: My pleasure, anytime. You just call up, we'll have fun.
Peter McCormack: All right, man, you take care.
John Mauldin: Bye bye.
