A Review of Endgame by John Mauldin

January 7, 2012
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I was finally able to find some time to read a few books that had been sitting on my Kindle for a while. I made a promise not to buy another book until I finished the ones that I purchased earlier but hadn’t gotten around to reading. Endgame was high on my list and I’m writing a quick review of the book. Overall, I liked the book and think John Mauldin provides a succinct and accurate picture of the outlook for the developed world as the debt supercycle comes to an end.

The book is worth reading because it clearly lays out the fallacies with the Keynesian model of continuous deficit spending by the government. Deficits do matter and as we’ve seen throughout history there comes a time when bond investors will refuse to roll-over existing debt at low yields bringing about the debt endgame. Greece is a prime example of a country that has reached this point. The book is unique in that it not only makes its case using historical examples but also logically describes the likely outcomes for the US, Eurozone, Eastern Europe, Japan, Australia and the UK.

For those of you who don’t have the time to read the entire book, I’ve summarized the authors views for each region/country:

US – The US can’t continue running 10% budget deficits indefinitely. “At some point, the Fed will either have to monetize the debt, or the bond market will simply demand an ever-higher interest rate.” The authors believe that for the US in particular there are 3 main possibilities. 1) The Argentinean method of simply printing money to cover up any deficits. This eventually results in the devaluation of the dollar and possibly hyperinflation. 2) The Austrian solution of slashing government spending and allowing the too big to fail banks to be liquidated and returning to some form of a gold standard. 3) The glide path option which involves a combination of spending cuts and rising taxes. The result would be a very slow growth environment, European levels of unemployment and a weakened dollar. In my view the most likely outcome is the Argentinean method. I don’t think we’ll get hyperinflation because the Fed will eventually stop inflating. The only caveat would be if Congress decided to takeover the Fed. However, I think Bernanke will eventually monetize the debt resulting in increasing inflation and a collapsing dollar but will stop short of total currency debasement. In short, we’ll get inflation first followed by massive deflation.

Eurozone – A default by Greece is inevitable. The remaining PIIGS are not far behind. The most likely outcome will be Greece defaults and the largest banks in Europe will need to be recapitalized. The ECB will then step in and inflate to support the sovereign debt that will need to be issued to recapitalize the banks. Whether the Euro survives will be a political decision and will most likely reside with Northern core.

Japan – Has the highest debt to GDP ratio among the G-7 and its fiscal deficits show no sign of declining. Mauldin accurately describes Japan as a bug in search of a windshield. Essentially as the savings of Japan’s population continue to decline there will eventually come a point when yields on JGB’s begin to rise. This will be the point where the central bank will have to make the decision whether to monetize the large fiscal deficits or hold back. If they choose to monetize, hyperinflation will be the likely outcome. A number of famous macro traders have been waiting for this trade a long time, the most recent is Kyle Bass of Hayman advisors. In my view, the central bank will not monetize the deficit. Japan is unique in that it imports virtually all its energy. If the central bank were to allow hyperinflation and the currency to collapse the economy would be in tatters due to the inability to import energy. I think the central bank will refuse to inflate. Furthermore, the Japanese will bear the burden of austerity forced upon them by rising sovereign debt yields. Japan is a unique society that has borne the brunt of a 20-year deleveraging cycle without resorting to rioting (the Greeks in comparison are the polar opposites). I think the Japanese will ultimately choose deflation over inflation.

UK – A booming property market and large financial sector left the UK highly exposed to the vagaries of the 2008 crash. Mauldin states, “the mammoth QE program undertaken by the Bank of England make the United Kingdom one of the likeliest candidates for a hyperinflation. All hyperinflations in history have been preceded by large budget deficits, the reason being that, faced with enormous expenditures, governments with big financial holes end up printing money to pay for their costs.” Inflation in the UK is already facing the highest inflation levels in the developed world. I think the most likely outcome for the UK is stagflation. The government will essentially attempt to inflate away debt levels while cutting spending. The pound in my view will continue to weaken and the outlook for equities also remains poor given the low growth environment.

Australia – The “lucky” country escaped from the 2008 crisis relatively unscathed. However, the country is facing a massive property bubble that will eventually burst. The only remaining question will be what provides the catalyst. I agree with Mauldin that a slowdown in China will be sufficient . We are already seeing the first signs of a slowing in China based on PMI data. I think a short Aussie dollar trade will work out well in 2012.

The main weakness of the book in my opinion was that the authors provided a limited summary of investment vehicles that would allow investors to profit from the end of the debt supercycle. Mauldin alludes to another book that he’s publishing in 2012 which I assume will go into more detail about how to profit from the trends described in Endgame. I’m also going to provide my own outlook on how to position yourself in future posts. Overall, I would recommend any serious investor read the Endgame. John Mauldin is a well respected analyst and I always look forward to his weekly musings. The book is well worth its price. I think many of his predictions will turn out to be accurate in 2012 and beyond.

Written by Ankur Shah

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