Brace for unprecedented volatility: Mauldin

The U.S. and most of the developed world are headed for a cliff, as massive debt loads leave little room for maneuver. In almost every case, debt is only part of the problem—aside from capital, these countries also lack political will, according to the inaugural address in the Horizons Speaker Series.

“Canada is my model that I hold up in the U.S. as a role model of what can happen when you get everything right,” said market commentator and author, John Mauldin.

What we’ve gotten right, he said, was that Canada showed the world what is possible when a heavily indebted industrial economy puts it collective will toward digging out of a hole.

Canada, he said, “voluntarily went through hell” to rein in its debt to GDP ratio, beginning in the late 1990s and through the early 2000s. Canada remains “one of the few countries to pull together and say ‘we can get it done’,” he said.

The bad news for Canada, however, is that virtually all of its industrialized trading partners are heading toward a wall with their debt levels, and it will not be long before the “great credit supercycle” comes to an end.

Soon, the market will simply stop lending to sovereign borrowers.

He called this a tectonic shift—the economic equivalent of a “12.0 magnitude” earthquake, which will strike the U.S., most of Europe and Japan simultaneously.

Financial crises occur whenever debt is excessive, relative to income, he said, and it doesn’t matter whether it is public debt or private debt. Either way, the money has to come from somewhere.

And it doesn’t matter to whom the debt is owed. Some say that Japan’s debt problems are not serious, because most of the debt is owed to its own people. This misapprehension will be dispelled soon enough, he said.

“Japan is a bug on the global windshield,” he said, of a car that is “heading for a wall.”

For all of the struggling industrialized economies, the most important step is to get deficits below the growth of nominal GDP. The problem is that simply reducing government spending would slow GDP growth, exacerbating the debt-to-GDP imbalance.

Far from calling for continued trillion-dollar-deficits, Mauldin called on U.S. legislators to have a mature discussion on how to achieve the monumental task. Ideally, he said, there would be one dollar of tax increase for every three dollars of spending cuts.

Failure to address the impending debt crisis would lead to tax hikes and spending cuts anyway, but at least addressing it now would allow for more control over implementation.

He says there is a 25% chance that Washington will fail, though, with political bickering prevailing over sound policy decisions. Even if policymakers can come to terms, he says the Great Moderation is over, and investors can expect increased volatility in both the markets and the economic cycle.

The U.S. will fall back into recession inside the next three years, he said, but by the end of the decade, the market will have begun a multi-year bull run. Investors will need to adapt quickly, as a century of change will be compressed into a decade.

Despite all his doom and gloom, Mauldin is very excited about the pace of innovation. Within the decade there will be innovation in both energy and biotechnology that will resemble the stuff of science fiction.

At least two companies are within reach of a “bullet for cancer” while four others are closing in on a cure for Alzheimer’s Disease. The problem for America and many other developed economies will be that tight regulation will see most of this research and testing sent offshore.

The Horizons Speaker Series is part of a gift to McMaster University made by Adam Felesky, CEO of Horizons Exchange Traded Funds, and the company.