John Mauldin on Yahoo's Tech Ticker

I highlighted Jon Mauldin's weekly letter in our weekly summary this week; it truly is a heck of a read. Below are 3 video clips (5 min or so each) of Mauldin with Aaron Task on Yahoo's Tech Ticker. Almost all of this mimics exact posts we have put up on the site the past year. The bottom video is the topic he focused on his weekly letter - I highly recommend the 15 minute investment into these videos this weekend.

before that, the market failed to reverse like I hoped so while light on the short side of the ledger, I cut back some of my bullish sector/index ETFs that I bought into the dip this morning. We have 1 hour to go but the action this afternoon was not very inspiring. General Electric (GE) cut their dividend ... just add it to the tiller of cut dividends. Interesting stat of the day - the market is down for 6 consecutive months for the first time since 1942.

Back to your normally scheduled post.

Don't 'Buy and Hope:' How to Survive Until the Next Bull Market

With the market heading lower again and the Dow hitting yet another new 11-year low intraday Friday, it's hard to believe stocks will ever be a good investment.

But "there's a bull market in our future," says John Mauldin, president of Millennium Wave Advisors.

That's the good news.

The bad news is Mauldin, who selects active fund managers for his high net worth clients, says any 1990's-style bull market that rewards passive index funds and "buy and hold" investors is unlikely to arrive before for another five-to-six years.

In the interim, the investor and author of the Thoughts from the Frontline e-letter says investors should focus on:

• Staying conservative and preserve capital for the "great opportunities" that will emerge when the dust settles.
• Be active with your portfolio and only buy stocks if you're both a good stock picker and an astute trader.
• Avoid index funds: "Buy and hold was always a bad idea," he says.
• Own some gold as a hedge: But he is not a gold bug or major dollar bear, as detailed here.
• Seek income in quality munis, corporate bonds and dividend paying stocks but (again) you have to be smart with your selection, or find a manager who is.

As the name of his firm implies, Mauldin's market-timing work focuses on the market's "big" cycles - like 15-25 years - from bull (i.e. 1982-1999) to secular bear (2000-present). Price-to-earnings ratios are key to determining when the cycles switch, and Mauldin believes stocks are not "cheap" today based either on trailing 1- or 10-year P/Es, or by market-weighted P/Es as "Stocks for the Long Run" author Jeremy Siegel curiously argued in The WSJ this week.

Mauldin's baseline prediction is for "another leg down" this summer that takes major averages to new lows but sets the stage for a "1974-type bottom"; the key here is to recall the Dow bottomed in price in 1974 but then spent the next 8 years flip-flopping in a wide range around 1000, before beginning its historic rise to 10,000 (and beyond) in 1982.

$1.75T Deficit, Higher Taxes, "Bogus" Stimulus: John Mauldin Sees Silver Lining

President Barack Obama formally unveiled his budget blueprint Thursday and predicted the federal budget deficit will hit $1.75 trillion in the current fiscal year, ending Sept. 30.

Obama aims to pay for the orgy of spending largely by increasing taxes on the wealthiest Americans, "the first on high-income earners since 1993 and would reverse a course set by [former President George W.] Bush of lowering the tax burden on the nation's wealthiest people," as detailed by Bloomberg:

• Reinstate the top two Clinton-era tax rates of 36% and 39.6% in 2011, up from the 33% and 35% the richest Americans now pay.
• Raise taxes on capital gains and dividends to 20% for top earners, up from the 15% set by Bush in 2003.
• Additionally, Obama seeks to raise $318 billion to pay for health care reform by reducing mortgage and other tax deductions for households currently paying the 33% and 35% rates, The WSJ reports.
• Raise $210 billion over the next 10 years by "limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation," The Journal adds. "Another $24 billion would come from hedge fund and private equity managers, whose income would be taxed at income tax rates, not capital gains rates."

While pledging to cut the deficit 50% by 2013, Obama didn't offer specifics on what the deficit will look like in fiscal 2010-2012. But they're likely to be in the same (nose-bleed) vicinity as 2009 unless the economy makes a remarkable V-shaped recovery and tax receipts surge in 2010 and beyond.

John Mauldin, president of Millennium Wave Advisors, believes that's a highly unlikely scenario; therefore, more Americans should expect higher taxes in the years ahead to help cover those budget gaps, he says.

Mauldin is "not very sanguine" about the outlook for taxation and calls the recently passed $787 billion stimulus package "bogus" and unlikely to actually stimulate the economy.

Still, the investor and author of the Thoughts from the Frontline e-letter does agree with Barack Obama's pledge: "We will rebuild, we will recover, and the United States of America will emerge stronger than before."

So, assuming they're both right, there is a silver line in this otherwise grim tale.

Europe's Crisis: Much Bigger Than Subprime, Worse Than U.S.

John Mauldin, president of Millennium Wave Advisors, was among the few analysts whose forecasts for 2008 proved accurate. Mauldin, author of the popular "Thoughts from the Frontline" e-letter, joined us to discuss the economic situation in Eastern Europe.

Scroll down to read highlights from Mauldin's analysis, and click "more" to embed the video.

From The Business Insider:

If you think things are bad here, take a quick peek at what's going on across the pond:

The Telegraph: Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

"This is the largest run on a currency in history," said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

A note from Strategic Energy, as quoted by John Mauldin:

"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.

"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"

This is why some folks think the dollar is going to remain strong over the coming months: Because the rest of the world is falling apart even faster than we are.

Just as the global economy wasn't "decoupled" at the beginning of 2007, however (when the majority of Wall Street strategists believed that it was), it's not "decoupled" now. So the collapse of Eastern Europe--and, with it, the Western European banks--would almost certainly jump across the pond.

John Mauldin summarizes:

Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.

In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.

But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.

Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)

The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

As John Mauldin explains, fixing the problem in Europe will be even more difficult than it is here:

This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?

We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.

However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.

As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.

As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.

"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.

It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged.