John Mauldin writes: Nearly everyone I talk with has the sense that we are at some critical point in our economic and national paths, not just in the US but in the world. One path will lead us back to relative growth and another set of choices leads us down a path which will put a very real drag on economic growth and recovery. For most of us, there is very little we can do (besides vote and lobby) about the actual choices. What we can do is adjust our personal portfolios to be synchronized with the direction of the economy. The question is “What will that direction be?”

Today we are going to look at what I think is a very clear roadmap given to us by Dr. Woody Brock, the head of Strategic Economic Decisions and one of the smartest analysts I have come in contact with over the years. This week’s Outside the Box is his recent essay, “The End Games Draws Nigh.” For those who have the contacts in government, I urge you to put this piece into the correct hands so that Woody’s very distinct message gets out. I think this is one of the most important Outside the Box letters I have sent out.

Woody normally does not allow his work to go beyond the circles of his clients, but I suggested to him that this piece was quite macro in scope and important for both individuals and policy makers everywhere to understand. In my own simple terms, trees cannot grow in some unlimited manner to the sky. Families cannot grow debt without limit beyond the growth of their incomes. And countries have the same constraints. While growth of debt in the short term is viable, growth of debt faster than the growth of GDP is not viable over the long run. This is not debatable. It is a simple fact. Therefore, as Woody says, it is important that you get the growth side of the equation right as you increase the debt side. Without the proper balance, you are heading for disaster.

From his intro:

This is longer than the usual Outside the Box, and will require you to put on your thinking cap. But you need to digest this, and especially the conclusions. But it is very important that you understand the principles and concepts Woody discusses. We are at a very critical juncture, and the paths we choose will have profound impacts on our lives and fortunes. I cannot overemphasize the point. If we choose a path of growing debt faster than we can grow GDP, the negative implications for many traditional asset classes are enormous. (05/20/09)
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Ilargi: There’s
no better way to understand why we will not climb out of our
present crisis hole on the sunny side than to read and hear reporters
and the people they quote. Everybody tells us that everything they do
and say is shaped by their firm look towards the future. And the
problem, of course, is that nobody is actually looking at the future.
Everyone looks at the past, to pick what they like best, maybe tweak,
twitch and embellish it a little bit, and project in unto and into the
future. But that particular kind of future is no longer available. Too
many among us have too much debt, and would need to make absolute
fortunes in order to ever pay it off.

Instead, we’re on our way
back to making what we need. Literally. Those of us who are lucky. It’s
like Chris Whalen explained over the weekend, and again today, about
AIG. There was never any chance of AIG paying its debt, since there was
never any way the company could generate enough income to cover its CDS
contracts. Or, as Tim Freestone put it years ago, addressing AIG’s
actual value: “To justify the share price [..], it would have to
grow about 63% faster than [its] peers for the next 25 years. If
investors believe that AIG can sustain this type of performance for
that period of time, then AIG is properly valued“.

It’s
probably clear to many of you that AIG has no future, and that the only
reason your money is dumped in it is the risk (or certainty) that its
demise will bring down some, if not most, of the most powerful
financial institutions on the planet.

What is apparently much
less evident is that AIG is the perfect, tailor-made metaphor for our
entire economic system and indeed our entire societies. We would all
have to grow that 63% for those 25 years in order to save our skins as
the nations and communities we are today. It is equally impossible.

The
fact that AIG is still around makes it much harder to learn the lesson
that lies in that metaphor, understand what has happened and why it
has, and then move on. By refusing to owe up to our losses, we rob
ourselves of the chance to prepare as societies for what lies ahead.
And if we don’t do that, individual preparations, while not necessarily
redundant, become an all-out crapshoot.

I see very few people
who, when they talk about their own ways to try and get ready for what
will admittedly always be an uncertain endeavor, fully take into
account how they fit into their societies in all their multiple layers.
Just about everyone relies on concepts of the world which surrounds
them staying more or less the same to a large extent. And it won’t, not
a chance. (05/20/09)
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