1635 Mauldin

The Muddle Through Economy : 

The Muddle Through Economy A Presentation by John Mauldin, Author of Bull’s Eye Investing And the Editor of Thoughts from the Frontline

Slide2: 

“I have a confession to make, a sinful predilection to divulge. Every week as I sweep through my emails, inadvertently zapping precious letters from my children… I find myself helplessly clicking through to the weekly commentary of John Mauldin… thus joining some million morbid folk avidly consuming his casual doom-laden prose.” - George Gilder -

Slide3: 

Inflation-adjusted consumer spending is up 3.6% Residential housing investment is up 13.2% Capital-goods investment by business is up 13.9% Spending on machine tools for heavy-industry manufacturing is up a whopping 54.2% Exports and imports are up nearly 11% Here’s the Good News…

Slide4: 

After-tax corporate profits are up 19% Industrial production is up 5.2% High-tech production is up 23.7% Productivity has reached an astonishing 4.6% rate Household wealth is up 11.1% hitting a record high of $45.9 trillion The GDP deflator is up only 2.2%

Slide5: 

The GDP deflator is up only 2.2% The core consumer-spending deflator (excluding food and energy) is up only 1.4% Interest rates are at 45-year lows, with short-term rates at less than 2% 15-year mortgage rates are just above 5% Home ownership stands at a record 69.2%

Slide6: 

R & D Spending is Booming

Slide7: 

While regularly incurring trade gaps and budgetary deficits, our economy has grown since the early 1980s from a level, depending on dollar valuation, between one-fifth and one-fourth of global GDP to close to one-third of global GDP last year. During this upsurge entirely unexpected by the same economists now advising Sen. Kerry, U.S. per capita GDP surged from 4.7 times per capita global GDP in 1980 to 6.5 times per capita global GDP in 2003.

Slide8: 

The U.S. created some 36 million net new jobs at even higher levels of productivity and earnings, while Europe and Japan created scant employment at all outside of government and entered a productivity slump that continues today. Meanwhile, the U.S. won the Cold War, and since 1990 its stock markets soared from less than one-third to roughly one-half of global market cap.

Slide9: 

The net wealth of U.S. households in real terms trebled to all-time records ($45.9 trillion at last report). Debt has been shrinking as a share of overall national assets, which now stand at a level near $80 trillion.

Why did we experience such an economic renaissance after the malaise of the 70’s? : 

Why did we experience such an economic renaissance after the malaise of the 70’s? Because we had the Perfect Economic Environment

Perfect Economic Environment: 

Perfect Economic Environment 1. Ronald Reagan’s Tax Cuts 2. Paul Volker’s war on inflation and a two decades long drop in interest rates 3. The Birth of the Next New Thing – The Information Age

Perfect Economic Environment: 

4. The lowest Stock Market valuations in decades – which rose five times in the next 20 years Perfect Economic Environment 5. The Evolution of the US Financial Markets

It also brought about significant imbalances in the markets resulting in the Stock Market Bubble. When coupled with 9/11, we should have seen one of the worst recessions in five decades.: 

It also brought about significant imbalances in the markets resulting in the Stock Market Bubble. When coupled with 9/11, we should have seen one of the worst recessions in five decades. Why didn’t we?

Because We had a Shock and Awe Arsenal of Recession Fighting Weapons: 

Because We had a Shock and Awe Arsenal of Recession Fighting Weapons a. George Bush’s Tax Cuts b. Alan Greenspan’s Aggressive Interest Rate Cuts c. The Stimulus of Deficit Spending d. Massive Mortgage Refinancing

The Muddle Through Economy: 

The Muddle Through Economy - A long period of Below Trend Growth caused by a series of economic headwinds and the potential return of Stagflation

When we come to the next recession, the Recession Fighting Arsenal is bare of Conventional Weapons: 

When we come to the next recession, the Recession Fighting Arsenal is bare of Conventional Weapons a. No more tax cuts b. Mortgage Refinancing is over c. No more deficit spending d. Only a few interest rate cut bullets left Headwind # 1

A Secular Bear Market: 

A Secular Bear Market Headwind # 2 A period when overall market valuation falls rather than rises. If valuations were at 1982 levels, the S&P 500 would be below 450 Over the Long Run, Value is King

They all start with period’s of high price to earnings (P/E) ratio’s: 

They all start with period’s of high price to earnings (P/E) ratio’s Secular Bear Markets

Consumer Spending Will Slow Down: 

Consumer Spending Will Slow Down Headwind # 3 A recession will mean a falling stock market and falling retirement accounts. Consumers, especially Boomers, will have to save more for retirement. b. Rising oil prices

Slide23: 

c. Little Room for Increased Debt Source: Hoisington Investment Management Company

Slide24: 

Source: Northern Trust

d. We have tapped the home equity lines: 

d. We have tapped the home equity lines

e. Income Growth is Slowing : 

e. Income Growth is Slowing Source: Bureau of Labor Statistics and Hoisington

Headwind # 4: 

Headwind # 4 We are Approaching Stall Speed on the Jobs Arena We need roughly 150,000 jobs per month to simply meet the growth in population a. Lack of corporate investment b. Low average hours c. International Labor Arbitrage d. Lack of job growth means lack of consumer spending growth

Headwind # 5: 

Headwind # 5 Interest Rate Will Rise Over the Longer Terms a. This will impact the housing market and home values b. Rising rates hurt consumers and corporate profits

Headwind # 6: 

Headwind # 6 The Federal Reserve The use of Unconventional Weapons Will bring us to a falling dollar and our old friend Stagflation

Headwinds # 7 & 8: 

Headwinds # 7 & 8 The Dollar and The Trade Deficit

Headwind # 9: 

Headwind # 9 The Shakeout from the Information Age

Why I am a Long Term Optimist: 

Why I am a Long Term Optimist