John Mauldin On His $1 Million Yen Bet

December 10, 2015

John Mauldin is chairman of Mauldin Economics. He is a noted financial expert, a New York Times best-selling author, a pioneering online commentator and will be a keynote speaker at the upcoming Inside ETFs conference in Florida. Mauldin recently sat down with ETF.com to discuss some of his bold market views and outlook for the future.

ETF.com: One of the things you've been talking a lot about recently is geopolitics, and how these concerns are going to require more attention. Can you expand on that?

John Mauldin: Europe is imploding. It's very possible in the next five to 10 years, we’ll see Europe and the eurozone break up because of geopolitical pressures. What we have are 51 nation states in Europe; they are all packed together and have contentious histories.

Additionally, they've never been very good at assimilation. They've been taking immigrants in France for decades and decades, but none of them assimilated. So you end up with what happened in Paris, and then we wonder what went wrong, whereas, in the U.S., Canada, Australia, we're nothing if not a bunch of immigrants. We've got layers and layers and layers of immigrants, but they assimilate.

ETF.com: Another topic you've discussed extensively is the Japanese yen, which you've been extremely bearish on. You even went so far to say you mortgaged your apartment with the yen. How much more can the yen decline?

Mauldin: I basically covered my apartment mortgage with $1 million worth of yen puts using options that I got from J.P. Morgan. There are two or three of us here in Dallas that have done that. We're all Japan bears.

My strikes are at 130, and I think we'll hit 130 next year on the dollar-yen exchange rate, and 200, longer term.

ETF.com: What makes you so bearish on the Japanese yen?

Mauldin: Japan has too much debt, and they got old. The pension companies bought bonds because they were required to buy bonds; they weren't buying them because they really wanted them.

So when they started selling the bonds, there was nobody to buy. And that's when the central bank had to step in. Because if they actually floated them in the market, interest rates would go up to 8%, and the Japanese government would be bankrupt.


Basically, the central bank is monetizing its debt. If the central bank pulls out of the bond market, there's no trading done. The central bank is the bond market now. It’s going to have to do an enormous amount of QE. It’s going to do more QE than anybody can possibly imagine. I don't know when it stops, but I don't think it will be in the next three or four years.


Meanwhile, the big pension companies are going to sell 25% of their bond position and buy equities. They're buying U.S. equities, European equities, emerging market equities and a ton of Japanese equities, which, unsurprisingly, means that the Japanese equity market is going up.

The ETF that is long Japanese stocks and short the yen [the WisdomTree Japan Hedged Equity ETF (DXJ | B-74)] is just killing it. It's a great trade.

ETF.com: You've had a lot to say about China. Is the economy there slowing more than you expected?

Mauldin: China has had the advantage of being a top-down, command-and-control economy, so the government could tell everybody what to do.


Now China is trying to transition to a bottom-up consumer economy. But a bottom-up economy is a significantly different control structure than any of those guys have ever contemplated or worked with. Nobody in that country is familiar with it, so they don't know how it's going to work.

A smooth transition is one of those one-in-10/one-in-five propositions. It's far more likely they hit some bumps along the way in the next five or 10 years.

It’s trying to become a consumer society and maintain their growth rates, but it doesn’t have the wealth to do it. It’s getting old, if you will, before it’s getting rich. The U.S. had 200 years; Canada had 200 years; Europe had 300 years to develop economies that were bottom-up and entrepreneurial.

China under Deng Xiaoping started developing its economy only in 1982. Back then, 90% of the country was medieval; it were literally living in pre-modern times.

Even today, there are still a billion people in China living on $3 a day. We see the green cities and all that, but you go into the center of the country and it's a completely different economic world.

ETF.com: You wrote an interesting article about the biggest risk to the markets in 2016. You talked about how the dollar is entering a mega-bull market. How high do you think it could go, and what are the risks associated with its ascent?

Mauldin: With modern automation, tools, robotics, and all the other things, U.S. business will be able to compete and lead the world. Monetary policy also favors the dollar. Could the Dollar Index go to 110? Sure. I don't see any glass barrier there.


There's something like $5 trillion of dollar-denominated debt overseas. If you have dollar-denominated debt and your currency that you're earning your income to pay that debt is going down against the dollar, the technical economic term for that is that you're screwed. That's just not a good outcome for you.

It's not a matter of whether there'll be defaults; it's just a question of how many and where.

ETF: What areas are you optimistic about?

Mauldin: We're going to see more technological transformation in the next 20 years than we saw in the last 100. The amount of technological transformation and the breadth of it is going to be utterly overwhelming. That's what I'm going to be talking about at the Inside ETFs conference.

Go back 20 years ago to 1996 and look at the bricks we were carrying while calling them phones. Look at what we had for audio and video. Look at what we had for robotics. My 1996 car, I guarantee you, isn't as good as the car I've got today. In 2026, my car will be electric and automated. And by 2030, my car is going to be designed probably without me even steering a wheel in it; I'm just going to get in it and it's going to be a very comfortable seat. It's going to be more like a workspace.

We're going to increasingly see an odd mix of urban and rural lifestyles because people are not going to be worried about commuting. Commutes are going to be faster and automated cars will cut down commute times considerably because they'll talk with each other and they'll go faster and smoother. And you won't worry about it because you're going to be working, you're going to be connected, you're going to be watching your media, and doing whatever you want to do.

Think of the materials side. We're going to have completely different types of batteries. Solar growth is compounding at 30% a year. If it kept that up, by 2036, we'll be getting 100% of our energy from solar.

Don't get me wrong; it's going to be scary because a lot of jobs are going to go away due to automation. But a lot of new jobs will also be created because of technology, and we'll become more efficient.

Believe it or not, I'm actually positive about the future. The race is between how much money governments destroy versus how much humanity creates. Long term, I'm going to bet on humanity. In the short term, I'm afraid governments may destroy more than we're going to be happy with.


Contact Sumit Roy at [email protected].

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