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Thoughts from the Frontline

Forecast 2011: Better than Muddle Through

January 7, 2011

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How Did We Do on 2010?
Russia and the Roots of World Inflation
The US Will More than Muddle Through
December Unemployment Better than Headline
A Very Fluid Economy
Cabo, LA, Winnipeg, Meet Me in Vegas, and Thailand

It is time once again to throw caution and wisdom to the wind and actually make my 11^th annual forecast. I have to admit this is the most stressful letter I write each year. I do at least 5-10 times more research and thinking about this issue than any other. On a positive note, this may be one of the more optimistic forecast letters I have done in a long time. But there are some asterisks, as always. We will survey the world, trying to peer through the fog of the future. There are some very interesting side trails we will want to explore. Did you know some events in Russia could have real ramifications for inflation in China, the US, and the world? I pay attention to the background details and bring them to you. So settle back as we tour the world.

But first, as you are fastening your seat belts, I am proud to announce that FINALLY we are a full go on my new web sites, which have been in soft launch for a few weeks. The main site is now www.johnmauldin.com, where you can access everything I do, including Thoughts from the Frontline and Outside the Box, as well as ten years’ worth of archives.

There’s a lot that’s new, as Tiffani is dragging me into the new world of Internet 2.0. Our old site was so ’90s. Now we are the cutting edge. Everything is done in HTML 5, and we are one of the first and few financially oriented sites to use this new code. Very crisp and clean.

But more importantly to you, we have ways for you to interact with me and the “Mauldin Community.” You can comment on each weekly Thoughts from the Frontline and Outside the Box, and I will read your comments. There is a forum where you can join the community and discuss topics I bring up, whether you agree with me or not. I have always contended that my readers are the smartest, most well-informed of any writer’s, and now you can benefit from your collective wisdom.

The only general rule is that you have to be civil and have some sense of decorum.
At least on the small part of the Web I own, there will be a sense of dignity and probity. You can disagree with me or some other commenter to your heart’s content, and I encourage it, as that is the way I (and we) learn; but no flame mails, no casting aspersions on anyone’s character because of the views they hold.

I will also be doing voice podcasts that we call The Mauldin Minute. And you can view my latest media spots. Want to ask me a question? There’s a spot for them in the upper left-hand corner of our home page, and each week I will pick 1-3 questions to respond to. Rule: it has to be a question that does not need a book chapter or an e-letter to answer!

We also have a new site called The Mauldin Circle, where you can find investment professionals around the world who can help you find appropriate investments, generally in the alternative space, which can add some real diversification to your portfolio. (If you have signed up for the accredited investor letter in the past, you do not need to do so again. In this regard, I am president of and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

If you have a minute, go to www.johnmauldin.com, put in your email address, and sign up. (You won’t get two copies of my letters if you are already on the list!) Tiffani and I really would like your feedback on the new site.

And now on to the topics of Forecast 2011, in no particular order.

How Did We Do in 2010?

I rarely go back and read my annual forecast until the following year, and this year was no exception. So I was pleasantly surprised to see that my batting average was pretty good. You can read the first two letters of last January, which comprised the forecast, at http://www.johnmauldin.com/frontlinethoughts/archive/2010/01/.

After noting my bearishness on the yen, euro, and pound (against the dollar), I wrote:

“So, where are the strong currencies going...

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Rolf H Parta

Jan. 8, 2011, 10:48 p.m.

deep background re: structural unemployment in the US and the apparently increasing pace of layoffs in this recession.

For those who have not yet discovered it, I commend to your attention the work of Professors Barro and Lee on Educational Attainment. Writing in NBER working paper number 15902 in April 2010, they present average educational attainment of all of the world’s 146 countries at five year intervals from 1950 through 2010. The actual data is available free at http://barrolee.com/ with a convenient retrieval tool.

My look at this data indicated that the United States’ average educational attainment stopped increasing in about 1982. Further, we are the ONLY country that stopped providing our workers with more learning.

I believe this is part of the reason why so many jobs have fled the United States. Work that we once had a competitive advantage in doing has become work that we no longer have a competitive advantage in. Since the US is a high [per hour] cost of labor country compared to much of the world, it follows that an increasing proportion of what were once US jobs now have cheaper foreign competition.

Unfortunately, it also suggests that many of those jobs will NOT be returning. Even worse, since educational attainment can not be quickly changed, further jobs will be lost over at least the next five years, and likely over the next two decades.

Professors Barro and Lee estimate in their paper that the annual increase in income due to an increase of one year in educational attainment is 13.3% [for advanced nations]. This makes improving learning the likely most powerful driver of increases in GDP [aside from quitting socialism and moving people from subsistence agriculture to paid work].

{By comparison, a 13.3% increase in hours worked per year would be about 265. Since Americans already work as many or more hours per year than any other people, this could not be continued year after year as learning gains can be. Similarly, a 13.3% increase in capital employed per worker would be a decade plus long project requiring the net investment of over $10 trillion.}

This concept has application at all levels in the economy from the family through the company, region and nation. The aftereffects of national policies in this area will shape the future of nations.

Francis Weld

Jan. 8, 2011, 6:27 p.m.

Hi John, I really like your analyses over these past years. Very insightful, and ahead of the curve, and you have been too modest about taking credit for your on-target predictions of the current mayhem. I’m old (71) so your new website grates on my mindset, but I generally get out of my preconceived quicksand in the measure of time; no negative points there. I liked your old photographs better. You now look like a 30 year old without any brains (but I know better), or a 60 year old who had plastic surgery (I’m a doc).

I have a grumble about the advertising that you and Patrick have done for ISCO’s Lifeline skin creams. To me, it has been all hype with no data. Seventeen year old girls on the website just don’t cut the mustard. Where are the before-and-after photographs? Where are the objective data? (BTW, one of my very few criticisms of your writing is that you treat “data” as a singular noun, but it is plural. The correct English is “data are,” not “data is.”)

All in all, you have been the most important analyst I have followed in the past 10 years. You are so “on target” that I will never miss your weekly e-letters.

With great appreciation, Francis M. Weld

Page 3 of 3 < 1 2 3

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