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5.0 out of 5 stars Endgame: Road to Perdition or Rejuvenation?, March 7, 2011
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This review is from: Endgame: The End of the Debt Supercycle and How It Changes Everything (Hardcover)
John Mauldin and Jonathan Tepper clearly set the stage for how to invest and profit from what they call the "Endgame." The Endgame follows the "Debt Supercycle." The debt supercycle refers to the unsustainable rise of debt over a period of 60+ years mostly in the private sector of the developed world that culminated into the global financial crisis that erupted in 2007-08 (pp. 8; 12; 15; 25; 40; 108). The endgame points to a crisis in the public sector debt, which (will) occur when (Western) governments run into the limits of their ability to borrow money at today's low rates (p. 25).

The transition from the debt supercycle to the endgame is characterized, for the most part, by a transfer of debt, not an extinction of it, from the private sector to the public sector (pp. 24-25). Western governments and central banks have run large fiscal deficits and printed massive amounts of money to reduce the impact of the multiyear balance sheet recession in the private sector (pp. 8; 13; 24-25; 29; 58-63; 98-104; 136-141; 155; 158; 172-174; 227; 230; 252; 267-272). To their credit, Mauldin and Tepper clearly explain why deficits matter. Unfortunately, countries like the United States have mostly not run surplus and pay down debt in good times so that there is room for a policy response in bad times (pp. 54-57; 178-180; 188-196; 224; 235; 249). Unless central banks print money, the financing of large government debt runs the risk of crowding out business investment that relies on savings of consumers and businesses (pp. 53; 121-122).

Mauldin and Tepper are not surprised at all about this policy of kicking the proverbial can down the road that will result into greater systemic instability with more macroeconomic volatility and greater variability of inflation rates (pp. 29; 34-44; 73-89; 154; 240; 254; 271). Most politicians in the developed economies have a hard time to address any long-term problem because most voters prefer to opt out of a long-term gain if a short-term pain is required (pp. 3; 7; 118; 129; 182; 188; 218; 238). The authors warn public decision-makers and their respective electorate that the longer hard decisions are put off, the more pain their country, state, or city will have to ultimately endure (pp. 6; 89; 92; 100; 155-156; 219; 226; 239; 245; 253-259). Like the private sector, the public sector will be hold accountable for trying to borrow its way out of a debt crisis (pp. 41; 55-56; 100; 259).

Mauldin and Tepper recommend that:
1. Americans reduce their personal leverage and save more. Policy makers have relied on debt and income transfers to mask the fact that low-end wages have become too high under the relentless pressure of globalization;
2. The U.S. economy shift from consumption, real estate, and finance toward manufacturing to start addressing the structural decline in its civilian participation rate. Germany has been thriving because the world has been buying its goods;
3. The United States put in place more tax policies to encourage new businesses and therefore new jobs;
4. The United States restructure Medicare, Medicaid, and Social Security thoroughly. No reasonably foreseeable rate of economic growth will overcome the structural deficit associated with these three major programs. Otherwise, a substantial value added tax will be needed to cover the cost and result into even slower growth;
5. The United States, its states, and its cities revisit the total remuneration package of their respective workforce. The status quo is unsustainable;
6. The United States take a cue from Canada by giving a higher priority to legal immigrants with degrees and money for a few years;
7. The U.S. economy reduce its over-dependence on foreign oil through steep taxation on gasoline to make alternatives more competitive that they are today. The tax burden in the United States is low compared to other countries around the world;
8. The United States use some of the proceeds, of a significantly higher taxation, on gasoline to fix its infrastructure, which is badly in need of repair;
9. The United States get serious about the much-touted nuclear renaissance by approving the building of a large number of new reactors (pp. 67-69; 85-86; 88-89; 118-119; 124-125; 137; 160; 167-169; 181-214; 243-244).

Mauldin and Tepper point out that there is no way to know in advance when bondholders will suddenly lose confidence in the ability of a government to pay its debt, even if that debt is denominated in a currency that the government can print (pp. 13-14; 32; 54-55; 57; 94-98; 125-127; 186-188; 259; 263; 279-281). When countries have too much debt, they usually inflate away excessive debt. Devaluation and default on debt are the two other options available to over-indebted countries (pp. 25; 110; 122-125; 128-131; 158; 180; 200; 229). To compensate for this higher perceived risk, bondholders will press for a rise in interest rates, which will further debilitate the capacity of a country to refund its debt (pp. 55; 105; 123; 231). A program of austerity becomes a necessity to bring the debt back to acceptable levels and to reinvigorate the confidence of bondholders (pp. 12; 154). Without the precarious and fickle confidence of bondholders, the ability to roll over (large) debt, especially short-term one, or borrow new debt at affordable rates, crumbles concomitantly with the liquidity of the financial markets and the economy (pp. 94; 96; 278).

Although Mauldin and Tepper do not offer any practical investment advice, they give a non-exhaustive list of possible investments to consider if one believes in either deflation and/or inflation (pp. 284-292; 294-296). The authors believe that deflation will precede inflation (pp. 133; 295). Mauldin and Tepper have a low confidence in the ability of Western central banks, including the U.S. Federal Reserve, to appropriately transition their respective economies from a deflationary era to one of controlled inflation. Therefore, timing will be critical to capitalize on an era of increasing volatility (p. 296).
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Showing 1-10 of 20 posts in this discussion
Initial post: Mar 9, 2011 3:06:50 PM PST
When you say "a transfer of debt, not an extinction of it, from the private sector to the public sector" you make it sound like an equitable deal. Far from it. The friends of the Fed (or Goldman Sachs and friends) got to transfer the bad debt they created through unwise risk taking to the population at large. The middle class will have to pay higher taxes so that the Wall Street bankers, instead of going broke which is what should have happened, continue to pocket extraordinary bonuses for a job well messed up.

Unfunded Medicare, Medicaid and Social Security is another form of government theft that the middle class will have to pay for.

The plain fact is that anyone who trusts the good faith and credit of Uncle Sam is a fool and and idiot. Today more than ever, the average citizen is well advised to become self reliant because counting on Uncle Sam is about as unwise a move as one can make. Uncle Sam is broke. Listen to the haggling in Congress, the debt problem is not going to be solved, not even tempered. People have to realize that when everyone gets into the safety net there is no one left outside of it to hold it up. When everyone is inside the safety net, the net ceases to exist. Your only rational choice is to look out for Number One, to become self reliant. How that can be done is left as an exercise for the reader.

Posted on Mar 11, 2011 5:43:36 PM PST
Give me a break, if you had listened to Mauldin the last few years, you would of lost money. He makes his money 'risk free' by convincing gullible investors to invest with 'pricey' hedge funds, that keep underperforming ( ask Buffet ).

In reply to an earlier post on Mar 15, 2011 1:30:45 PM PDT
Last edited by the author on Mar 15, 2011 10:48:26 PM PDT
Individual Investor is absolutely correct. If the US government went out of business tomorrow or next week, it would affect me little, because I receive absolutely no government benefits or checks. I have lived frugally all of my life, invested aggressively, and provided for my own needs. Government will never give us anything, although they take generously through "progressive taxation," and more insidiously, through inflation.

People living on the margins or those depending on government assistance to survive are either already "out of business," or at least have the "for sale" sign out. Most of these people have created their own situation by failing to educate themselves with the skills to live in an information age economy, and chronically living well beyond their means. These people are deserving of little, if any sympathy. Of course there are also people who lived by the rules, did everything right, and through some misfortune not of their making are undergoing hardship, which is made worse by government programs. They can and should be aided by private individuals and charity.

For those of us who have practiced self-reliance all of our lives, the big question is whether to invest for inflation or deflation. I am betting on the inflationary scenario, but one should also hedge for a deflationary meltdown. I would be interested in what other self reliant people are doing to prepare for the upcoming Endgame.

In reply to an earlier post on Mar 17, 2011 12:09:29 AM PDT
I must preface my remarks by disclosing up front that I believe "you cannot save everyone." Nor should you try. HOWEVER, it has been my experience that those "living on the margins" you mentioned, did indeed create their own situation, not just by failing to educate themselves...
Aside>(I have my doubts about the current ROI of a college education, complete with government subsidies, crushing debt, worthless degrees, and social engineering) <Aside
...but by failing to "grab the bull by the horns" as it were, and DO something to advance. Whether it's an education (hard sciences, and marketable skills only...Please!), or entrepreneurship.

Though an untested hypothesis, I believe a predictive factor would be whether one has an internal or an external 'locus of control.'

Most choose [whether consciously, by default, or by behavioral propensity] entertainment, or child-rearing over education.

The people whom you mentioned who did live by the rules, and did everything right, yet came to misfortune... I have found, by and large, that these people had parents or guardians who taught them how to navigate the world (as best they knew how). Not only that, there is a higher likelihood that they have a family support network on which they can depend.

Of course, this is not true 100% of the time, but then no social assumption is. Otherwise, there would be no need for statistics.

You cannot save everyone. Life is not fair. Look after your own family first.

Posted on Apr 1, 2011 4:12:38 PM PDT
Peter Kobs says:
Just finished reading "Endgame." I think some of the posts here are a bit off target. Mauldin never implies anywhere that the transfer of debt from the private to the public sector is "an equitable deal." Nor does he somehow lure people into "trusting" the government. Those are typical partisan comments that have no basis in the text of the book itself.

MAIN MESSAGE: The credit crisis that began in 2007 had its roots in 60+ years of unsustainable and often dishonest lending practices -- both on the borrower side and the lender side. While the immediate "panic" period is over, we are just beginning to experience a paintful 10-15 year adjustment period. Large public deficits cannot continue much longer. Governments will be forced to address them by the bond markets, probably sooner than later. The response can be: 1) Utter chaos leading to default. 2) Purposeful devaluation of the underlying currency. 3) Significant price inflation. Or some combination of the above. The U.S. has some significant advantages over other countries (bonds in our own currency, large GDP, etc.) but we also have serious disadvantages (size of the national debt, history of political gridlock on the issue, etc.)

PROS: The book is written for an educated audience but you don't need a Ph.D. in economics to understand it. It's replete with supporting evidence, charts, trend graphs, etc. The writing is usually clear, with a few exceptions. Historical data going back to the 1820s is particularly helpful, as are the many country-by-country examples of what went wrong. Predictions of who "melts down" next are just that -- predictions.

CONS: The short chapter of investment advice for individuals near the end is miniscule and not particularly helpful. If you're the type of reader who enjoys these books, you already know the answers provided. What's more, there's little discussion of a fourth option: "Coordinated debt revaluation" instead of outright default. We know that many large corporations have taken this route rather than go into bankruptcy court. There's no INHERENT reason why the U.S. couldn't renegotiate its debt with bondholders -- if the bondholders see that the alternative is much worse.

Another missing piece of the book is the history of economic "resets" -- major revisions of the global financial system, such as happened at Bretton Woods following World War II. Yes, these rational resets are indeed possible, if rare.

The agenda of the far right often seems to be: "Make massive cuts OUR WAY or everything will implode leading to a complete breakdown of modern society." These are the folks who keep insisting you need "guns, canned food, gold, etc." What they forget is that 7 billion people on the planet have a strong vested interest in keeping society viable -- in "muddling through" a crisis rather than resorting to survivalism tactics. That's one of the great stabilizing forces of ownership: When you own your home, have investments, have kids and dreams and a minimum level of living quality, you have STRONG INCENTIVES to support non-chaotic solutions to big problems.

Thank God for the Middle Class! ;- )

In reply to an earlier post on Jun 20, 2011 7:25:12 AM PDT
Last edited by the author on Jun 20, 2011 7:26:10 AM PDT
Ronin says:
Point #9, "build more nukes", real rocket science there. The argument sounds very intelligent on the surface, but the reality is a demonstration of reckless ignorance. When you factor the cost of mining and refining uranium, transportation and security, R&D, lobby and permitting, construction, operating, then more transportation followed by thousands of years of "safely" storing a toxic/lethal substance, your cost per kilowatt hour is off the chart. The author makes a sound argument against short term policies/practices (debt, rates, etc) that produce catastrophic consequences, so advocating nuclear power is really hypocritical, or more pointedly, outright stupid.

In reply to an earlier post on Jul 27, 2011 10:55:54 PM PDT
Last edited by the author on Jul 27, 2011 10:57:23 PM PDT
J. C. WOODS says:
Excellent reply/analysis by Peter Kobs! Thanks for the balanced perspective. I like your last paragraph very much because it really makes me reconsider the "guns, canned food, gold (silver in my case)" thinking I've been leaning toward.
I appreciate the Cliff Notes review by Serge J. Van Steenkiste also :)

In reply to an earlier post on Aug 3, 2011 10:10:21 AM PDT
K. Moore says:
Your last paragraph makes sense however I can tell you firsthand the quality and make up of the character of a society will determine the individual and "group" reactions to critical events. The US is not a society of young critical thinkers and in many ways we have been brought up as consumers. I have seen first hand in other countries the dramatic and tragic effects of this confusion and chaos.

Americans are accustomed to a on demand society where new food and Ipads are delivered to them regularly so they can "consume" to their hearts content. Most homes are lacking in supplies or any hard assets. Hard skills have been lost and we are ill prepared to deal with what will come mentally or emotionally.

In reply to an earlier post on Sep 20, 2011 5:34:55 AM PDT
TerryD says:
Mr. Kobs,

Yes, the Middle Class is great for stability but it is apparently vanishing in the U.S. So what happens then?

In reply to an earlier post on Sep 20, 2011 2:54:28 PM PDT
Peter Kobs says:

You are absolutely correct. Rebuilding and reinforcing the U.S. middle class should be one of the highest priorities for this nation. It will certainly take many years to achieve.
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