Mauldin: This Time It Really Is Different (Sort Of)

In his latest “Thoughts from The Frontline” newsletter, John Mauldin makes a pretty bold proclamation that goes against a long-held principle of investing — this time, he says, things really are different.

“If memory serves me, I have written several e-letters disparaging various personages who have uttered those very words, and gone one to confirm later that it wasn’t different,” Mauldin writes. “It almost never is. … But my premise for uttering the heresy ‘This Time It’s Different*’ is that the fundamental nature of the economic landscape has so changed that comparisons with post-WWII recoveries is at best problematical and at worst misleading.”

Mauldin says talk of “green shoots” is off-base, and that most of the data the media has been focusing on is merely “less bad” — not good or showing real improvement. “We are on a track that looks far more like the Great Depression than the recessions of our lifetimes,” he says. “To expect a normal recovery cycle, whether it is corporate profits or lending or consumer spending or capital investment or (pick a category) is just not reasonable. This is a period that is fundamentally, in so many ways, different. And the recovery (and there will be one!) will also be of a different warp and woof throughout the entire world economy.”

Some reasons Mauldin is expecting a “different” recovery:

  • Businesses are performing at the lowest level of production relative to potential since the 1930s, meaning that business and factory closings will continue.
  • The savings rate has jumped from zero to 6% in a very short time. “It used to be 12%,” Mauldin says. “It would not be all that unusual historically for savings to go to 9% or more in a few years. That means that consumer spending will drop by 9%.”
  • With consumer spending down and the economy already dealing with excess capacity, unemployment “is going to stay stubbornly higher for longer than in any previous recovery”.
  • Less consumer spending means lower profits for corporations. “I think whatever profit recovery that is built into the market at today’s prices is generous,” Mauldin says. “It is going to be tough to get much of a return from traditional buy-and-hold equity index investing for some time.” China and Asia also must adjust to lower US consumer spending. “They have built too many factories to supply what seemed like an inexhaustible US consumer,” Mauldin says.

Mauldin does offer some signs of hope; his point seems to be that the recovery will be longer and rougher than past recoveries — but a recovery will come. That’s why he includes an asterisk on his “this time it’s different” heading. “Human nature hasn’t changed. We are still driven by fear and greed,” he explains. “The business cycle has not been repealed. Free-market capitalism will get us back (with a few new rules of engagement). What’s different will be the nature of this recovery. All the other eternal truths will remain.”

Mauldin also says he “truly believe[s]” the U.S. will get back to 3% GDP growth and 4% unemployment at some point in the future, “but it is going to be more than a few years, especially if taxes are raised as much as is talked about in some circles”.

But the recovery will come. “There are whole new technologies and industries that are going to be created in the next decade,” Mauldin says. “Entrepreneurs will respond with new innovations and businesses. Jobs that are not now on the horizon will spring up.”

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