Saturday 14Jul2012 - Opinion That Matters! - A John Mauldin Excerpt

The following brief excerpt is from todays John Mauldin weekly newsletter. Regardless of what our political leaders and investment advisors tell us, everything is not copasetic (aka - hunky-dory).

   "I have long made the case that we are in a secular bear market in the US (and much of the developed world). But that simply means that I think equities in general offer little upside potential at today's valuations. These periods run in very long cycles and to ignore them is simply, well, dumb. So we look for opportunities elsewhere than in index investing. What makes it particularly challenging today is that central banks are pushing interest rates down and forcing investors to work far harder for their returns. Simple bond investing will not give us the returns that most of us need for our retirement and desired lifestyles.

I prefer to think of myself as an optimistic realist. Rather than trying to force or vainly hoping for a return that is not there, I choose to look elsewhere. There are always opportunities somewhere. In preference to index investing, I look for specific targets. You might say that I prefer a rifle to a shotgun.
Of course, if your worldview is consumed by US equities, if you live and die by every move of the market, then I might seem like a bear to you. I would suggest that if that is the case, you might want to broaden your investment horizons.
What I am bearish on, however, is governments gone wild with ever-increasing taxes and spending, and especially governments that take on too much debt. When governments decide to spend today more than they can collect in taxes; when they borrow ever-greater amounts to live a national lifestyle that is beyond their means, obliging our children to pay in the future for our spending today to maintain that lifestyle; we know that there will eventually be a day of reckoning.
That day comes when the debt is growing faster than the economy. The final Bang! moment happens when the total interest on the debt overwhelms the nominal growth of the economy.
When that happens, whether to a family, a company, or a nation, either spending must be slashed or taxes raised (which will hurt overall growth), or there will be a default. There comes a moment when investors start to worry more about the return of their capital than the return on their capital. Rates begin to creep upward and the process turns into an ever-tightening spiral of rising taxes and falling spending (which we currently call austerity), which hampers the growth of the nation and makes it ever more difficult to escape the debt trap.
In the course of human experience we have watched this process unfold literally hundreds of times, yet we never seem to learn. Somehow, we always manage to tell ourselves that this time is different. Someone else can pay more taxes. We can grow our way out of the problem, just like we did the last time. Or we settle for the desperate, cynical belief that future generations will sacrifice their lifestyles so that we can get paid our unfunded pensions and health care."