This is a guest contribution by Damien Hoffman, editor-in-chief of the very popular Wall St Cheat Sheet blog. Make sure to put this site on your must-read list.


John Mauldin coined the incredibly popular phrase, “Muddle Through Economy.” If the next few years continue to drag along as we rebuild from the greatest credit bubble in history, then John’s term may become the catch phrase used by every financial journalist and economist in the land.

John is a passionate traveler with business partners all over the world. He also puts out a free newsletter to over one million people world-wide. This reach of friends and travels gives John an excellent macro view of the world economy. Further, his multi-disciplinary interests offer some unique insights into economics and human behavior.

I had a chance to catch up with John and talk about his experiences as an economist, his perspective on which countries will grow the fastest in the coming decades, how he sees demographics affecting the world, and a bonus question from one of our 1400 Twitter followers

Damien Hoffman: John, was economics part of your schooling or a passion of yours right from the start?
John: I had a triple major in college, one of them being economics and history. So I’ve always been fascinated by history, economics, and finance. The markets are a big puzzle to me and I’m a puzzle addict. So it feeds my addiction. I started reading the Austrian economists first. That was my introduction to economics. Over time, if you stay around long enough and read enough, you can pick up all the other schools of thought like I did.

Damien: Based on some of your newsletters, I can see you are also interested in anthropology via the studies of the generations. These are major themes for investors to trade because they’re based on slow-moving macro phenomena. Can you share what interests you about this particular framework?

John Mauldin: That’s a good question and a difficult one. This topic covers a book I’m trying to write. I don’t know if I’m ever going to get it done, but it’s called The Millennium Wave. It’s about what the world is going to look like in twenty years. My basic thesis is we’re going to see a pace of change that far exceeds anything human beings have experienced since the dawn of man. Furthermore, in terms of technology that change is going to accelerate. We’re going to have multiple waves of technological change. It would be as if electricity, the automobile, and the steam engine all showed up at the same time. Boom!

We’re going to see massive technological revolutions. However, as human beings our psychology was developed on African savannas, dodging lions and chasing antelopes. So, we have a much slower rhythm to us. We’re not paced for change. Therefore, we’re going to have a backdrop of slow moving generational changes.

Demographic changes are predictable: we know how many people are going to be here in forty years because they’re already born. We know how many forty-year olds we’ll have in forty years because they’re already born. So, we can see these changes coming at us.

If you’re Japan, you’re walking into a demographic nightmare. Russia is a demographic train wreck. And it’s not going to be but a few decades, in the grand scheme of things, when Iran will have more people than Russia. That’s got to file into your equations. You’ve got to look at these large, broad changes that are happening.

In the US, we’re going to be running into the freight train of Medicare and Social Security. There’s just not any way to get around it. We’re going to have to make tough generational decisions about how to handle that. And how we handle that is going to have enormous implications for our economy. If we handle it the way it’s likely to be handled – which is by raising taxes – then we have said we’re making a decision, conscious or not, that we’re going to become Europe. That means high residual unemployment and other difficult, slower growth for individual opportunities.

There are other large changes when you talk about the demographic issues. Europe would have to take massive amounts of immigrants in order to support their system. They’re just not prepared for that. Neither is Japan. The US is blessed with a world population that wants to come here and are not very culturally different from us – especially the Hispanic populations. We’re going to need those immigrants. I think that one of the most economically suicidal things we’re doing today is trying to figure out how to close the borders. We need to be doing the opposite. We need to figure out how to open the borders. It needs to be a more rational policy than we have now. Again, you have to put those things into the financial equations.

We also have the fast moving things such as the growth of biotech and the complete retooling of our telecommunications network over the next ten years. The way we communicate with each other and the way we receive information is also going to be significantly different in the next ten years. There will still be human beings talking, but how we assess and sort through information is going to be different. There are going to be winners and losers in that competition.

I do a lot of biotech research to determine where it’s going. For instance, you could construct an investment play where you are long life insurance companies and short annuity insurance companies because we’re going to live much longer than any of the actuaries would tell us. That means life insurance companies aren’t going to have to pay while annuity companies are going to have to pay longer. That trade is probably not ready to happen yet. But when the perception kicks in, that’s going to be a very good trade.

The new medical devices and therapies that are coming along are going to be transformational. I think about what kind of impact that will have on societies and generations – what John Howe and Richard Strauss call “the Fourth Turning,” which we’re in the middle of. All of these things have an impact on the way I think.

Click here for the full interview.

Source: Damien Hoffman, Wall St. Cheat Sheet, September 9, 2009.

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