Saturday, March 26, 2011

Endgame

John Mauldin and Jonathan Tepper recently teamed up to write Endgame: The End Of The Debt Supercycle And How It Changes Everything with John Wiley & Sons. The subtitle basically gives you the gist of the book, but that would give it short shrift for such a well researched and documented piece of work. They say right at the beginning of the book that: "When we mention endgame, you'll immediately want to know what is ending. What we think is ending for a significant number of countries in the 'developed' world is the debt supercycle...Essentially, the debt supercycle is the decades-long growth of debt from small and manageable levels, to a point where bond markets rebel and the debt has to be restructured or reduced. A program of austerity must be undertaken to bring the debt back to acceptable levels.".

This echos the sentiment of the Republican Party, its sub-set the Tea Party, and, some Democrats, but, I got the impression that the authors were agnostic in their political leanings and came to their conclusions by objectively interpreting the data. As stated: "Common sense tells you that your debt cannot grow faster than your income forever, and at a certain stage, the huge pile of debt becomes unsustainable. All responsible parents teach there children not to let their debt grow faster than their income. It is only the Fed and Congress that are too foolish to get it.".

They pound this theme throughout Endgame and the language they use ranges from academic speak to something a layman could understand: "If you had a neighbor who was always running up credit card bills and who constantly borrowed money from neighbors to help pay the credit card bills, would you conclude your neighbor was a high bankruptcy risk?".

Mauldin and Tepper appear to be greatly influenced by This Time Is Different written by Carmen Reinhart and Kenneth Rogoff, and, in fact, devote a whole chapter to not only deciphering the book, but interviewing the authors, too. I found this section distracting because I'd already read the book and they reprinted long excerpts from it. It couldn't hold my interest. However, if you are unfamiliar with the work, it would be a great place to start examining financial folly going back eight centuries.

In that chapter they quote Reinhart and Rogoff and I will too: "Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, leaders disappear, and a crisis hits." The authors of Endgame follow that up with some commentary of their own: "It is the nature of human beings to assume that the current trend will work out, that things can't really be that bad. The trend is your friend until it ends.".

They believe that the current trend is going to end, at least where massive government and private debts are concerned: "...for the most part, debts have not been extinguished, merely transferred. Debt is moving from consumer household balance sheets to the government. While the debt supercycle was about the unsustainable rise of debt in the private sector, endgame is the crisis we will see in the public sector debt.". How bad will the crisis get? They don't give a definitive answer, just some options, and, not all of them bleak. For instance, they don't feel the United States will experience hyperinflation nor do they surmise that the Tea Party will take over and take us back to the gold standard. However, the unwinding of all of the debt on a global basis will take time and the process will hurt.

Both Mauldin and Tepper are investment advisers and have plenty of experience in the field, so you're not getting an ivory tower analysis of the current economic landscape from the Academic Industrial Complex. They're pretty much straight shooters and I enjoyed the book. They give no timetable on when this endgame will occur but do say that higher volatility, lower trend growth and elevated levels of unemployment will be the norm. There are many books that have been published over the past couple of years that cover the same themes that are in Endgame. The authors just put a different spin on the data, and, it's the freshest one hot off the printing press, so you may find new material in here if you are well versed in the subject.