John Mauldin - 2012: A year of Choices

Now that we are up posting on a weekly basis you will likely see John Mauldin's weekly newsletter here on the DWCM site.  John Mauldin is a renowned financial analyst who has had a long and successful career detailing market, social, and economics events throughout the year.


In this week's post he dives into what he sees as the big issues in 2012 including a topic is focus's on quite specifically which is Path Dependency.  Here is the  link a word copy of Mauldin's newsletter this week and the points that I took away that I thought were particularly relevant.

• There are several different types of path dependency. The simplest analogy is that we go down a path, come to a fork in the road, choose one direction, and go down that path until we are presented with another fork. If we decide we don't like that path we can always go back to some previous fork and take another path. Our only loss is the time we took and the energy (or money) we spent on that path, while we did gain some knowledge of the path we left, even if we ultimately decided not to go on.
• The problem is that there is another type of path, one that we cannot retrace. After we choose that sort of path, the way back is blocked, and we must go on dealing with the consequences of our chosen path. We may come to forks in the road and vary our directions on the path, but we can't turn back, no matter how much we would like to. We can choose other paths into the future, but the past will always be there.
• And then there is yet another category of paths, the ones that are chosen for us, whether by family, circumstances, or fate; and once on them we don't know what we may have missed on alternative ones. Parents move to a different town and take the kids with them. A "chance" meeting becomes a new business endeavor. A torn muscle forces a promising athlete into another career. War erupts and changes the plans of young men. Accidents happen.
• We all have a lot of stories about the paths that we chose or the limits of our choices. The good choices we take credit for and the bad choices we blame on circumstances or find some way to rationalize them.
• And our choices add up. They become cumulative and create an economic tide. Policies and practices that initially seem small in the grand scheme of things can become much more significant when taken together and given a little time.
• "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.
• We increase the amount of debt in a system until there is too much debt. Each and every time, the people and leaders in a country convince themselves that "this time is different" and the debt is not a problem to worry about. And that is true until some moment in time when the markets lose confidence in the ability of governments or businesses to service the debt.
• When they begin to lose confidence that a government (or business) will be able to raise enough revenue to pay off the debt at some point in the future, interest rates begin to rise.
•  And make no mistake, austerity is a path for slow growth and/or recessions.
• No country starts borrowing money with the thought that they will keep on borrowing until there is an economic collapse. It all starts with good intentions. No bank lends money not expecting to have it returned. Then things change over time. Since there seemed to be no problem with the current level of debt (and spending), why can't we increase it a little more?
• At some point, the math, even for the US, does not work. There is a limit to what a government can borrow and a central bank can print without a total collapse of the economy.  
• And in the midst of a crisis, how do you get Congress (or any politician) to make the right decisions?
• The credit markets are telling us there is a crisis in the making, on the scale of Bear Stearns or Lehman in 2008, except that now governments have less ability to step in and salvage the banks. Now, government debt is the problem.

There is a distinct possibility that over the next 1 to 3 years we could have another devastating recession.  What are you doing to prepare?  The time to buy house insurance is before a fire occurs not while your house is on fire. 

It is better to make the wise, if harder, choice as soon as you can.