Investment writer John Maudlin is frank about the depressing news coming out of the US.

Bruce Whitfield:
The US investment writer John Mauldin joins us now; he is in South Africa on a second visit to this country. It comes at a time of, I suppose, still great uncertainty on international markets despite the apparent recovery in global markets since the middle of January and you will know John from his regular investment newsletter, ‘Thoughts from the Front-Line’, he is in South Africa, he is in the ‘World at Six’ studio. How is the front-line John?

John Mauldin:
Well, it's still a continuing crisis. When I was here last February, I was talking about the sub-prime crises.

Bruce Whitfield:
And that was a day when nobody knew what sub-prime was.

John Mauldin:
Nobody knew what sub-prime was. I was trying to explain why CDO’s were going to blow up and you know, that was when people said well there will be no housing bubble, there is no crisis, well, of course there was and so now we are watching a recession happen in the United States which I predicted in January, I said we would have one by the end of the year and we did.

Bruce Whitfield:
Is the US in recession?

John Mauldin:
It is in recession and the only reason that the data came out and said it wasn't a recession is that they fudged the inflation numbers. There are two agencies that figure inflation for the US Commerce Department, if they used the inflation figures from one agency, the US would have been in a recession for the last two quarters, officially okay, they used these cooked numbers so it shows us growing at 6/10 of one percent.

Bruce Whitfield:
Benjamin Disraeli comes to mind.

John Mauldin:
You know there’s lies, damn lies, and statistics. And I think we are going to be in a recession probably through the third quarter because the two reasons we are in a recession, the housing crisis and the debt crisis, aren't something that can respond to the Fed lowering rates. Lower rates will help but they are not really the problem, the problem is we have got two million homes that are vacant that we have got to sell and the American housing market grows by about one million homes a year just because the population grows so we have got a couple of years to work through those excess homes. The second problem is we destroyed all of the people that bought our debt, all the SIB’s and the CDO’s and all of those alphabet soup things and they are not coming back, they are dead. And so we have got to create an entirely new credit world and an entirely new credit market and we are not going to be able to do that in two quarters that is going to take several years.

Bruce Whitfield:
Whose fault is the current crisis? Can we point at Alan Greenspan, we are hosting him incidentally in a couple of weeks time in a live conference in Johannesburg.

John Mauldin:
Well, say hello to him for me.

Bruce Whitfield:
Do we point a finger?

John Mauldin:
I think he is probably number five on the list. Okay if I have my list of culprits I think the first suspect is the rating agencies. They were supposed to be the adults supervising the sandbox and they sold their AAA ratings on something that statistically had no correlation with their bond ratings and yet a bond buyer is sitting at a bank in Switzerland will just - oh AAA I’ll hit that button and I’ll buy. And you know it was dogs and cats, apples and oranges, and they are the number one culprits. Then the mortgage lenders who packaged the stuff up and letting people get loans what we called in the US, liars loans, no documentation, you know you got to state whatever your income was, it was completely bogus. In essence what we did was banks sold and at the money put and at the money call at the same time for zero okay because if the house went down in value you can go give the bank back your keys and say, this is your house what are you going to do with it.

Bruce Whitfield:
In a rising house market that's okay.

John Mauldin:
And if it goes up by 15 or 20 percent a year after two years I can sell the house, I get my two percent teaser rate, that's okay, even if I owe five percent more on the house because you know it is a backward walking mortgage I still make a lot of money on zero capital investment - what a great deal - and that is what we did. So they are the culprits, the investment bankers you know gave the day to the people. Alan Greenspan did keep rates too low for too long and he talked about adjustable rate mortgages and how wonderful they were so yes but at the end of the day I think he is probably number five and so you give him like a 10 percent of the blame.

Bruce Whitfield:
We won't blame him entirely when we see him in June.

John Mauldin:
I think you have to hold - frankly Warren Buffett, who owns 20 percent of Moody's should probably be targeted as much as Alan Greenspan. Buffett should have been watching one of his major investments.

Bruce Whitfield:
That’s a very good point to make. Where does it leave us now though? Globally we look at the recovery in world markets, equity markets, the Dow around the 13 000 level, European markets have been really strong recently, our South African market has recovered very strongly - do you think this is a short-term bounce with more pain to come?

John Mauldin:
I think it is a bear market rally and frankly, in the US okay, because we are going to see more earnings disappointments. The US consumer is spending constrained, for all sorts of reasons they can't borrow against their house, we are going to see any company especially in the US that is tied to the US consumer, any companies around the world that are tied to the US consumer, their earnings are going to get hurt.

Bruce Whitfield:
We have seen it come through recently, General Electric and others.

John Mauldin:
Yes and so what is going to happen is that you will have another quarter at the end of this quarter of earnings disappointments, typically it takes three rounds of earnings disappointments before investors get really disappointed and start selling. Remember during the 2000, 2001, 2002 bear markets we had three corrections of plus 20 percent, three times the market went up 20 percent and every time the media pundits said the bull market is back.

Bruce Whitfield:
Absolutely.

John Mauldin:
There is no bear market, jump into the market with both feet, and what happened to investors? They got wiped out. You have to look at fundamentals, you have to look at the valuations, you have to pay attention to details, you have to be a start picker. Trying to just jump in the market and play momentum is a fool's game in a circular bear valuation market like we are in. I mean remember human beings learned to trade the stock market on the African savannahs when we were dodging lions and chasing antelopes and something would move in the bush and we would be scared. So we are tuned psychologically to go with movement and when we see something going up we jump in and we buy and when something is going down we get scared and we sell and that is why most investors are really bad and contrarian value investing at the end of the day always wins out.

Bruce Whitfield:
And that’s the place you got to be at the moment, you have got to be looking contrarian, you have got to be looking at value investments and you have got to have time and patience on your side.

John Mauldin:
Absolutely, I mean, if I am looking at the African markets today I like what I see, I like commodities because the Asians are going to be buying more and more, I like agriculture because they want to eat meat and meat needs grain and at some point, until the US Congress and the Europeans decide to stop taking our food and using it for fuel, which is probably one of the dumbest policies that we have ever… I mean we are making the mamasetas have to pay twice as much for their tacos in Mexico. It is really absolutely outrageous what we are doing.

Bruce Whitfield:
The global food crisis is something that we have only seen the beginning of.

John Mauldin:
And I will leave you with one really scary thought because I think we are getting close to the end of our time. The US weather has had an 18 year run of great weather, I mean, in the Midwest in our grain markets. You have to go back 800 years to find a run of good weather as good as we have had. Our food stocks around the world are shorter than they have ever been, we are one bad weather year in North America, because we can include Canada too, one bad weather year away from having a real crisis and we continue to turn food into fuel.

Bruce Whitfield:
The 1929 stockmarket crash, soon after that, probably one of the worst droughts in American history, Steinbeck wrote about it, Grapes of Wrath, all that sort of thing as well — potentially headed for another situation?

John Mauldin:
I think we have got a serious food crisis, there is a potential for a food crisis and you know, knock on all sorts of wood, hopefully we continue having a run of great weather and maybe McCain or Obama, both of them, by the way, would vote against, would want to get rid of the ethanol policy. So maybe we can have some sanity return to America — that may be wishful thinking.

Bruce Whitfield:
Yes politics, sanity, they don't necessarily…

John Mauldin:
Not in the US — there is nothing sane about our politics.

Bruce Whitfield:
John Mauldin, lovely to see you, thank you so much.

John Mauldin:
It was great to be here.

Bruce Whitfield:
Thank you very much for coming in John Mauldin, investment writer in South Africa, thanks very much for popping into the ‘World at Six’ studio.


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