Do you have a net worth of $1 million? Own a hedge fund? If the answer to one of those questions is "yes," then chances are that you know John Mauldin -- president of Millennium Wave Advisors, author of the weekly e-letter " Thoughts from the Frontline," and perhaps the leading proponent of the theory that America is in the midst of what he calls a secular bear market. When you need a big-picture view of what's going on in the economy, John Mauldin is the guy to ask. Fool contributor Rich Smith did just that. (Don't miss part 1 and part 2.)
Rich: In your weekly letters, you collate reams of raw data into one or several easy-to-understand conclusions. Let me give you a few pieces of data, and ask for a conclusion here today:
a. You predict we'll see a bear market followed by a slowdown toward the end of 2006 and maybe a recession sometime in 2007 if the Fed goes too far.
b. You also predict a total of about two bear markets over the next decade, followed by another secular bull market as the world and its economy changes in unimagined ways, for the betterment of us all.
c. Warren Buffett counsels investors to never buy a stock that they would not be comfortable owning if the stock market should close for business tomorrow and not open again for 10 years.
Now, a lot of Fool readers, and especially subscribers to our Rule Your Retirement newsletter, like to think long-term, but are also facing retirement within a relatively short period of time. Say you're counseling Joe Fool, age 57, due to retire in 2016. Joe is considering investing tomorrow in one of the following:
- A Vanguard S&P index fund
- A high-tech superstar, say Apple Computer (NASDAQ:AAPL)
- U.S. treasuries
- His local bank's money-market fund
Over the next 10 years, where's he going to make out the best, and why?
John: Hmm. Well, not the S&P, and not the high-tech superstar. Investing in just one company is too dangerous for a retirement portfolio. Out of those four, I'd honestly go with U.S. treasuries. At a 5% yield, I think they'll outperform the S&P over the next decade. But I would hope there are other and better choices.
Rich: That's surprising. I would think most investors expect the S&P to beat treasuries.
John: You've got to remember that the market goes in cycles, from high, to low, and back to high valuations. Right now, we're at about a 20 P/E for the S&P based on trailing core earnings. The long-term average is a 14 or 15 P/E.
When you start with a market that's at a high valuation as this one is, you're not going to see that 10.5% appreciation rate that everyone talks about. What's more, there's a very real possibility that the S&P will decline in value over the next decade. Historically, there have been several instances in which the stock market returned 1% or 2% -- or even lost money -- over a 10- or 15-year stretch when your starting point is where the valuations are today.
For these reasons, I don't think anyone contemplating retirement within the next decade should put their faith in a broad market index fund.
Rich: The Motley Fool is investors writing for investors. Few people in this country have your wide range of experience in investing and your extensive contacts. Can you give us a handful of stock ideas that we might not have heard about, but should watch?
John: I specialize in researching managers and hedge funds. I really don't do stocks. But as general areas for your readers to research, I like Eastern Europe, Canadian tar sand plays, and resource plays in general. China is of great interest to me, and I am devoting some time to looking at a few opportunities over there.
Rich: Speaking of China, and tying in to the previous question on mergers and acquisitions and such, we've seen CNOOC (NYSE:CEO) try to buy Unocal (before Chevron (NYSE:CVX) picked it up); CNPC just bought PetroKazakhstan; and now it seems China Construction Bank wants to take a stake in Bear Stearns (NYSE:BSC). What's with all the Chinese acquisitions? Any theories?
John: Well, Bear Stearns is simply a case of a U.S. bank seeking better access to the Chinese market. I don't think China Construction Bank came up with this idea on its own.
But as for the asset buys you mention, this is no different from ExxonMobil (NYSE:XOM) buying up wildcatter oil producers. China's economy is growing at 7% annually, meaning that in 10 years' time, the size of the economy will double. Where are they going to get the resources they need to feed an economy twice the size of today's?
It's the same problem facing India, growing at 5% to 6%, or any number of other Asian countries. Their economies need raw materials, and they have to go out and buy access to these raw materials. I think this is another long-term trend, and we could be seeing China buying foreign companies for another 15 to 20 years before it eventually succumbs to the same business cycle that controls all developed countries and begins to see its growth slow.
Rich: You're on record saying that the U.S. dollar has to devalue eventually. Which parts of the world look best set to weather a U.S. dollar storm: Old Europe, Japan, South America, other?
John: I essentially like all of Eastern Europe. As for Old Europe, the legacy costs there are going to weigh on the economies. France in particular is a "short." Meaning, if it was possible to short a country, France would be it.
As for other regions, I like some of the Asian economies and China in particular. Oh, and Canada. The Canadian dollar is going to get stronger over time. A few years ago, I said that eventually the Canadian dollar would reach parity with the U.S. dollar. People said I was crazy at the time -- and they may still think I'm crazy. But today, the Canadian dollar has already moved halfway toward parity.
Rich: Final question, John. You've mentioned in your letters that you've taken the exams necessary to become a registered broker with the Financial Services Authority (FSA) in England. Do you have any thoughts on the Nasdaq's (NASDAQ:NDAQ) purchase of a stake in the London Stock Exchange or a possible bid by NYSE Group (NYSE:NYX)?
John: As for the regulatory environments themselves, I much prefer the FSA to the U.S. counterparts. The regulatory climate over there assumes that listing companies and financial services firms are "good guys" and they work with you in a non-adversarial manner. If you do something serious to step out of line, they'll go after you, of course, but they do not see themselves as an adversary. Our rules, in contrast, assume that a company is "evil" from the start, and pile on the regulations, fining people for small potatoes infractions and imposing huge regulatory costs. Don't get me wrong, if you break the rules and hurt clients, you should get hammered. Late trading and the recent accounting scandals have no place in a financial world. But now, it seems like too many people want to be Eliot Spitzer. That's a major reason why you see so many new foreign companies listing in London and not in New York. We are losing market share in what should be an area where we are the best and clearest choice. And then we pile on costs like Sarbanes-Oxley and it is no wonder the LSE is beating us.
Now as for the businesses, an acquisition of the LSE by one of the U.S. companies wouldn't have any effect on listings or listing companies. It would simply determine who gets to profit from all the business that is now being sent London's way.
Fool contributor Rich Smith does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.
