By John Mauldin and Jonathan Tepper
This month, I am reviewing Endgame: The End of the Debt SuperCycle and How It Changes Everything. See below to learn how you can win this book!
I am a big fan of John Mauldin and I eagerly await his weekly newsletter, Thoughts from the Frontline, (if you don’t already subscribe, it is a must-read and it is free – you have no excuses) which is filled with valuable insight backed by in-depth research that Mauldin both conducts on his own as well as gleans from a vast circle of analysts, economists, academics and fund managers. I was excited to see that he had a new book, Endgame: The End of the Debt SuperCycle and How It Changes Everything, and I was lucky in that I was able to arrange an advance copy. Having now finished Endgame, I can report that, once again, Mauldin did not disappoint. Longtime readers of his newsletter will already know the major themes that he covers, but will still derive a significant amount of value in that he goes into more depth, and Tepper adds insight previously not covered in Mauldin’s newsletters.
The book is organized into two parts, so I will do the same. The first part builds up from basic economic principles to explain the debt supercycle and the endgame. This gives the broadest overview of the situation and the options countries now face. The second part goes around the world to look at particular case studies of countries and regions and the problems they face, applying the principles from the first part to show how they work in practice.
Part 1: The End of the Debt Supercycle
In the first part of the book, the authors explain the debt supercycle and how it is unsustainable. The ability of countries to continue running massive deficits is finite. Each country faces its own limit which is defined by investor confidence rather than fixed rules, and so it is by nature highly unpredictable and with sudden onset due to the loss of investor confidence resulting in the inability to roll over debt. For Russia in the ’90s, it was debt at 12% of GDP. For Japan, it is now around 230% of GDP. (Mauldin has been calling Japan a “bug in search of a windshield” for a while now… I wonder if the recent earthquake/tsunami is that windshield?)
The authors look to the study upon which the book This Time is Different: Eight Centuries of Financial Folly is based. The authors of that book are Carmen Reinhart and Kenneth Rogoff and they studied 250 financial crises in 66 countries over 800 years. Their conclusion?
Highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.
This is the basis of the book. Debt cannot grow faster than GDP forever, and at some point difficult decisions have to be made. It is better to make those decisions soon, as the cumulative effect of kicking the problem further down the road leads to potentially insurmountable problems once further delay becomes impossible. Many countries are now facing these issues. The choices aren’t pretty, but they have to be made.
Part 2: A World Tour: Who Will Face Endgame First?
The second part of the book presents case studies of specific countries or regions that have particularly difficult choices ahead. The authors provide a list of five things that we need to look at when analyzing individual countries:
- Debt levels: Default is, as expected, highly related to both the level of debt and the interest rates being paid on that debt.
- Structure of balance sheets: Default is more likely with foreign-denominated and short-term borrowings.
- Underlying Economic volatility: The more volatile, the more likely there will be a default. This is especially true for commodity-based economies.
- Structure of the investor base: The more leveraged the investor base, the more prone to contagion.
- Composition of the investor base: Default is more likely to occur where creditors are foreigners with little domestic political power.
With that, the authors look at the United States, United Kingdom, European periphery, Eastern Europe, Japan, Australia and Emerging Markets. Except for the latter (Emerging Markets, which are supposed to do quite well as capital inflows pick up), the others have difficult (and politically unpopular) choices to make. The authors do a great job of detailing how these situations came about, how and why they differ from each other, and precisely what choices they have to make now. The authors present clear recommendations and frank assessments of whether they think the countries will be able to accomplish what is necessary.
The authors are able to present their case in a well researched and balanced manner, without becoming hysterical (i.e. this is not the typical gold bug’s fire and brimstone prognostication), which I think adds to the book’s credibility. This book makes complex topics easily accessible while covering a lot of ground (much like Mauldin’s newsletter), and so I think it provides some value for everyone. I highly recommend it.
Buy This Book Here or Win This Book!
As I have done with the last few book reviews, I will be using this book as an award for the best investment idea sent to me during the next month. Email me your investment ideas here.
Note: In assessing the quality of your investment idea, I will be looking at how it fits with the investment philosophy I espouse on this site and the strength of the supporting arguments (which can include excel models) as well as the identification of potential pitfalls. I hope that all of those who submit ideas will get some value out of the ensuing discussions.
Author Disclosure: This book was provided for review by the publisher