|Orlando, Naples, Cleveland, and Grandkids|
This week we look at the second
half of my speech from a few weeks ago at my annual Strategic Investment
Conference in La Jolla. If you have not read the first part,
you can review it here.
The first few paragraphs are a repeat from last week, to give us some context.
Please note that this is somewhat edited from the original, and I have added a
few ideas. You can also go there to sign up to get this letter sent to you free
Okay, when you become a central
banker, you are taken into a back room and they do a DNA change on you. You are
henceforth and forever genetically incapable of allowing deflation on your
watch. It becomes the first and foremost thought on your mind: deflation, we
can't have it.
MV=PQ. This is an important
equation, right up there with E=MC2. M (money or the supply of money)
times V (velocity -- which is how fast the money
goes through the system -- if you have seven kids it goes faster than if
you have one) is equal to P (the price of money in terms of inflation or
deflation) times Q (roughly standing for the Quantity of production, or GDP)
So what happens is, if we increase
the supply of money and velocity stays the same, and if GDP does not grow, that
means we'll have inflation, because this equation always balances. But if you
reduce velocity (which is happening today) and if you don't increase the supply
of money, you are going to see deflation. We are watching, for reasons we'll
get into in a minute, the velocity of money slow. People are getting nervous,
they are not borrowing as much, either because they can't or the animal spirits
that Keynes talked about are not quite there.
To fight this deflation (which we
saw in this week's Producer and Consumer Price Indexes) the Fed is going to
print money. A few thoughts on that. The Fed has announced they intend to print
$300 billion (quantitative easing, they call it). That is different than buying
mortgages and securitized credit card debt -- that money (credit) already
When they just print the money and
buy Treasuries, as with the $300 billion announced, they can sop that up pretty
easily if they find themselves facing inflation down the road. But that problem
is a long way off.
Sports fans, $300 billion is just a
down payment on the "quantitative easing" they will eventually need to do. They
can't announce what they are really going to do or the market would throw up.
But we are going to get quarterly or semi-annual announcements, saying, we are
going to do another $300 billion here, another $500 billion there. Pretty soon
it will be a really large total number.
When we first started out with TALF
and everything, it was a couple hundred billion, and now we just throw the word
trillions around and it just drips
off of our tongues and we don't even think about it. A trillion is a lot. It's
a big number. And the total guarantees and backups and all this stuff we are
into -- I saw an estimate of $10-12 trillion. That's a lot of money.
Understand, the Fed is going to
keep pumping money until we get inflation. You can count on it. I don't know
what that number is; I'm guessing maybe as much as $2 trillion. I've seen various
studies. Ray Dalio of Bridgewater thinks it's about $1.5 trillion. It's some very
big number way beyond $300 billion, and they are going to keep at it until we
Side point: what happens if the
$300 billion they put in the system comes back to the Fed's books because banks
don't put it into the Libor market because they are worried about credit risks?
It does absolutely nothing for the money supply. Okay? It's like, goes here,
goes back there -- it doesn't help us. The Fed has somehow got to get it
into the financial system. They've got to figure out how to create some
Will it create an asset bubble in
stocks again? I don't know, it could. Dennis [Gartman] talked about being
nervous yesterday. I would be nervous about stock markets both on the long side,
as I think we are in a bear market rally, but also there is real risk in being
short. Bill Fleckenstein will be here tonight. He is a very famous short
trader. He closed a short fund a couple of months ago. He says he doesn't have
as many good opportunities, and basically he's scared of being short with so
much stimulus coming in. So it's going to work, at least in terms of reflation,
but the question is, when? A year? Two years?
Financial Innovation: The Round Trip
Financial innovation is one of the
drivers of the velocity of money. We started in approximately 1991 creating the
first securitizations and CDOs. It was done at Merrill Lynch, if I remember
right. But they started getting copied, and then we went into warp speed,
creating all kinds of new CDOs and SIVs that invested in loans, securitized
mortgage debt -- most of which was rated AAA -- banks loans, credit
card debt, etc. Without thinking about it, we created a shadow banking system
that funded a huge chunk of our total credit markets. It was outside the
bailiwick of the normal regulatory authorities.
Then in 2007 we began to destroy
the shadow banking system. If it was working so well, why did we do that?
Because they mismatched their liabilities and assets. They were borrowing short-term
and lending long-term, and doing it highly leveraged. They were buying up long-term
assets at 4-5-6%, some (or most) of them rated AAA. Then they were selling
commercial paper at 1% or 2% -- so you get a 2-3% profit spread.
A 2-3% spread doesn't really make
you anything, you're not really excited about that; so since we're dealing with
AAA investments that everyone believes to be absolutely safe, let's leverage it
up 6-7-8 times. Now you're talking a 20% return. Now you're talking about
making money, real money. And I should note that we were also talking real
commissions and monster bonuses.
I think one other side note needs
to be made here. In hindsight, we can now look back and wonder what the
investment banks were thinking. They "must" have known they were pushing bad
paper into the system.
But their behavior tells us they
didn't know. If they really believed they were, there would not have been so
much of the toxic debt left on their books. Bear Stearns launched very large
funds to buy this debt at obscene leverages and sold it to their best
customers. At least some people in management thought there was real value in
these securities, which just goes to show how lax or ignored the risk managers
were in all parts of the financial industry.
Then it all began to implode,
because people started paying attention to some of the assets on the balance
sheets of the various SIVs and CDOs and suspected they might not be worth what
they had originally thought. You have subprime mortgages in your Special
Investment Vehicle? Hey, I'm not going to buy your commercial paper. Suddenly,
the commercial paper market simply imploded. This was the start of the banking
So we started taking the innovation
of securitizations off the table. The innovation that had driven the velocity
to new highs was now slowly being pulled off. So, velocity slows down, and it's
continuing to slow down with each passing month.
Let's survey the economic
landscape. We have an unstable economy. Housing doesn't bottom until 2011 or
2012, unless, as I wrote the other day, we give immigrants a green card to come
here. We need the immigrants anyway. We need smart immigrants. By the way, I've
never had as much response to my letter, both positive and negative. It ran
about 60/40 for. Many of the "against" were people outside of the US, saying
why are you trying to take our best, we need them. I suppose there is a certain
logic to that, but if we could pull a million homes off the market, it would
solve a big part of the US credit crisis right now, not to mention, we would
have people putting money into our system and it wouldn't cost taxpayers
But back to the current scene.
Consumer spending is slowing, and it's going to slow for years as savings
increase. At one time we were savings 7-8-10% of our incomes, back in the early
'80s. We grew from 63% of the economy being consumer spending, to 71% in 2006.
We are going back to the mid --to low 60s in terms of the percentage of
consumer spending in GDP. We are not doing it all at once, it's going to take
years; but, gentle reader, it's the blue screen of death! We are hitting the
Economists have a term for this
process. It's called rationalization. We have too many stores to sell "stuff,"
all sorts of stuff. Too many malls. We have too many factories to build too
many cars, too many plants to build too many widgets for an economy where 65%
of GDP is consumer spending. When we built all that capacity it was for an
economy in which consumer spending was 71%; and because we were enthusiastic
and believed we would grow at 3% forever, we probably built it for 73% or 74%.
We are watching capacity
utilization fall off the table. It is down to 67%, fully 15% below normal. What
happens when you see that? You start closing factories. It's just what you have
to do. We are going to have fewer restaurants, fewer clothing stores. The survivors
will get bigger market shares; that's just what happens. Schumpeter called it
And this being a different type of
recession -- because we are hitting the full credit-cycle reset, it's going
to take longer. I think the recession -- the actual, honest,
mark-to-market numbers --will be negative through 2009. Then we'll start
to improve. This current first quarter is going to be ugly again, then it will
be a little better in the third quarter. The second quarter -- I don't
know how bad it's going to be, but it's not looking good.
But in 2010 we could start seeing
slow growth again, maybe Muddle Through. There might be a sluggish recovery in
2010, but we have to put an asterisk on that possibility because the Democrats
are going to push through the largest tax increase in history.
First of all, the tax increase is
the Republicans' fault. They didn't make the tax cuts permanent when they had
the chance, so consequently they go away in 2010. US taxes are going to go way
up, whether there is no compromise, so that we go back to the pre-Bush years,
or there is some compromise because the Obama Administration realizes that
putting in that type of a tax increase will throw us back into recession.
Remember Roosevelt? What did he try to do? He raised taxes in the middle of a
recession (1937), when unemployment was 14%, driving it back up to 20%.
Unemployment will be 10% or 11% by this time next year, and maybe by the fourth
If you count those who are working
part-time but want full-time employment, the unemployment number is closer to
15%. Yesterday, my taxi driver was a mechanical engineer who lost his job, but
had kids and had to do whatever he could to put food on the table. He said
there are a lot of people like him here in California.
The deficit is going to explode way
past $2 trillion unless somebody can show some sense. Let's look at the carbon
credit problem. Obama wants to impose this new carbon credits program, which
sounds benign. We call it a credit and not a tax. Here's the issue. It gives us
two bad possibilities, one of which is going to happen. Number one, he is
assuming there is something like $800 billion coming in over the next decade
from these carbon credits, and he's put that as income in his proposed budget,
like it's going to get passed into the system. He is assuming that revenue. If
he doesn't get it, deficits are much higher in the near term.
But if he gets it, it's even worse,
as US industry becomes uncompetitive with Third World industries that don't
have the same carbon credits and energy costs. Do you think China or India will
pass the same legislation? They are building more coal-fired plants every month
than we build in a year.
We are going to be seeing factory
after factory shut down and moved off-shore, because they simply won't be able
to compete. Either way, we go back to that economics technical term I used
earlier: we're screwed. The carbon credits program is just a massively bad
idea. There are things that we should do to cut down energy usage, but this is
not the way to go about it. We can talk about other ways to do it if you want
2010-11: Back to the Future Recession
I think the country could re-enter
a recession in 2010 and 2011; we would go right back into it when those tax
hikes start to hit. What do tax increases do? They take money out of consumers'
pockets -- and the consumers that actually spend. Plus, 75% of those who
will see their taxes rise are small businesses that employ people, so we
Liberal economists are going to
argue, "Wait a minute, John. We are taking it from these [rich] guys, but we
are giving it to lower-income families, so it will get spent." But it's going
through the government -- we don't get the same bang for our buck. We
don't get new employment. We're simply transferring and creating a new welfare
state; plus, we have a number of recent studies which show that the propensity now
is not to spend the new money but to use it to pay down debt. This is not a
pro-growth policy, and growth is what we need. Not wealth transfers and a new
At some point inflation starts to
show up again, because when you start running two-trillion-dollar deficits and
you start trying to borrow it, at the same time the Fed is printing money, at
some point in this process the bond markets (and the currency markets) are
going to rebel. An unsustainable trend will keep going until it stops. I don't
know when that day is, but the current policies mandate that we will hit the
proverbial wall. One day it will be just like August 2007. Someone is going to
ring a bell and the Treasury bond market is going to look the deficits and
wonder how they will fund them, and they are going to let out a huge gasp and then
throw up. Because you can't run two- to three-trillion-dollar deficits as far
as the eye can see.
As Woody Brock so capably points
out, the key to watch is the debt-to-GDP ratio. You can grow debt fast; but at
some point you start to have to grow the economy faster than you are growing
debt, or you become an economic basket case, where the dollar is devalued and
interest rates go up fast. At that point, the Fed will have lost control. The
key item to watch now is the budget debates. Are we going to build in $2
trillion deficits, or we will show some fiscal restraint?
The Fed at the Crossroads
And, are we going to try and do
this when unemployment is at 10% or more? The Fed at some point is going to
come to a crossroads. They can allow inflation, like the '70s. (And some of us
are old enough to have lived through the '70s, though I really didn't notice much
-- I actually made money on inflation during the '70s. I was in the
printing business before I went into the investment publishing business. I
would buy traincar loads of paper on credit and put it on warehouse floors; and
because I was the only guy who could get paper and I had it at a good price, I
got a lot of business. So I made money off of that inflation cycle.
We figure out how to Muddle Through,
even during periods like the '70s. So the Fed can bring that back -- which
they all swear they won't do -- or they can withdraw liquidity. What
happens if they withdraw liquidity? It slows the economy down, because we are
pulling money out of the system. Just as higher interest rates begin to take a
toll on the economy, they will have to start pulling money out of the system to
avoid higher inflation. By the way, if rates are rising that means the interest
payments on the federal debt are rising, because we have a lot of short-term
federal debt. Frankly, as a government, we should be buying all the 30-year
bonds we can possibly buy. But we are not, because that would increase the
pressure on the current debt. We have the long-term forecasting ability of a
We are in the middle of a Great Experiment,
the one truly great experiment of this time; so the economists are fascinated.
We have Keynes versus von Mises versus Irving Fisher versus Friedman, and they
all have theories about what you should do after depressions and what works.
Someone commenting on Keynes said, "In a world organized in accordance with
Keynesian specifications there would be a constant race between the printing
press and the business agents of the trade unions. With the problem of
unemployment largely solved, the printing press could maintain a constant
Printing money. That's what the
current Fed is doing. Just as aside, here is a great quote I came across. It
really doesn't have anything to do with anything, but it's fun. John Ehrlichman
told us about a conversation between Richard Nixon and Arthur Burns, who was
Nixon's nomination to be Chairman. Nixon said, "I know there is the myth of the
autonomous Fed [short laugh]. When you go up for confirmation some Senator may
ask you about your friendship with the President. Appearances are going to be
important, so you can call Ehrlichman to get messages to me, and he'll call
you." I'm sure that's not done today.
Seriously, the independence of the
Fed is critical, Nixon notwithstanding. Given the recent revelations about
Bernanke and Paulson supposedly telling Ken Lewis at Bank of America not to
tell the public about how bad the Merrill situation was -- do you think
there might possibly be some pressure on Bernanke? His term is up early next
year. It is quite possible we get a Fed chairman who would be more
accommodative of a left-wing agenda than Bernanke, who I believe really will
pull back from allowing inflation to get too high.
This would force budgetary
discipline on Congress, which the left will not like. I can see some real
issues in the upcoming nominating process if Bernanke is not left at the helm.
Do we really want Larry Summers?
Let's get back to our discussion of
the Great Experiment. Von Mises said there is nothing you can do about a
deleveraging cycle, you basically just let it all go to hell and then pick up
the pieces. The hair-shirt economists, I call the Austrians: just let it drop,
take your medicine, take your 15-20% unemployment, and just deal with it, because
you'll be able to come back faster from the lower base. By the way, to von
Mises, the velocity of money was a meaningless concept. Gold was where you
should have had your money to begin with.
Then there is Friedman, who produced
his great work that says inflation is always and everywhere a monetary
phenomenon. He had his studies to prove it. But when he did his studies, in the
30 years that he analyzed, the velocity of money was remarkably stable. So of
course, inflation had a 1-to-1 correlation with money supply.
Fisher says, "The velocity of money
is important." For Fisher, debt deflation controlled all other economic
variables. It was the driving economic force. You're going to have to
rationalize all your debts. There's nothing you can do about it; but what you
do is, do as much as you can to provide a soft landing for the people who lose
their jobs. Do whatever you can to get them along and to keep the system
working, but you are still going to have to go through a credit reorganization.
We are going to find out in 5-6 years who was right. That is the experiment we
are living through. My bet's on Fisher, just for the record.
How Did We Get It So Wrong?
So how did we get it so wrong? How
did we get here? Let's go back to first principles: Ideas have consequences.
And bad ideas tend to have bad consequences. We've taught two generations of
financial managers theories that were patently absurd. Rob Arnott is going to
be here later with us for the panel discussion. Rob recalls standing in front
of 200 academics, professors in schools that teach economics. He asked them,
"How many of you believe in the efficient market hypothesis?" Something like two
or three raised their hands. "How many of you teach it?" All of them raised
We have been teaching generations of
MBA students economic garbage. Gaussian curves and things you could model. The
classic line is from Ibbitson, is a brilliant professor and a brilliant mind, who
said economics is a science. No it's not. It's barely an art form. It's voodoo.
That's what we practice. We look at the entrails of the Wall Street Journal and try to predict the future. Sometimes it's
about as bloody as sheep entrails. CAPM... poor Harry
Markowitz's Modern Portfolio Theory got so twisted beyond recognition. I
remember being with Harry Markowitz. I gave a speech at a big hedge fund
conference about five years ago, talking about why Modern Portfolio Theory was not
going to work. The next year it was the 50th anniversary of Modern
Portfolio Theory, and they brought Harry out to speak. He of course talked
about why it was. I remember meeting
him in the hall of this big hotel. And I asked him a couple of questions; I
forget what they were because he so staggered me with, "Oh, you missed the
whole concept of correlation and assets. Correlations change."
And he started drawing quadratic
equations in the air. But because I was standing in front of him, he was
drawing them backwards so I could see them. I mean, this guy is absolutely
brilliant. But he's right, you should have a diversified portfolio of noncorrelated
assets; but as John was showing yesterday, correlations in a crisis all go to
What money managers did was to
create models that said, "If you do this, diversify your portfolio like this, and
here are all your noncorrelated asset classes -- see what happens? You get
long-term positive results."
And they would project that into
the future. But they didn't project crises, when correlations go to one. Modern
financial theory only works in models if you assume a few things that are
patently not true in the real world. So we trained a generation of managers and
investors that they should buy 60% stocks and 40% bonds. Yet for the last 40
years, bonds have outperformed stocks. Where was that in the model?
Well, we can go back to the 19th
century and see it. But we created a trend from 1944 to 2000 that said we were going
up, and we trained a generation to believe they could model, and they did it.
They modeled garbage, and now we've wiped out a generation of retirement
income. I could go on and on, but it's nonsense.
We let the rating agencies become
way too important. They were supposed to be the adults supervising the sandbox,
and they weren't. They started out perfectly acceptably, but then they decided
they wanted to rate multiple-obligor securities like real estate mortgage bonds
using the same ratings they used for corporate bonds. They sold their business
souls and didn't even realize it.
Remember, we trained a generation
of people to think they could model this stuff. So they modeled what potential
defaults would be, based on past performance, and not even past performance
that looked like the assets in the investments they were rating. But it was
scientific and looked like the models they learned in school.
Every time you get a letter from
me, there is a page and a half down there at the bottom, full of disclosures. At
least twice in those disclosures I say past performance is not indicative of
future results. It's like, "coffee is too hot, don't spill it." We don't pay
attention to it, but it's the most important thing, because past performance
has nothing to do with future history.
The future is going to look
different, yet we think we can model it. The models are bullshit. (That's a
technical economics term that requires advanced degrees to use.) They just are.
Now you can take some comfort from them, and you have to try and figure stuff
out, and you look for correlations. That's what I do, and we all do that. I
confess I use models every day.
But you have to recognize that the
model has a huge asterisk beside it. You just can't bet the farm on it. And
God, have I learned that the hard way. I've got bruises on my back from making
assumptions. That's why I don't go around half-naked, because it would just
We let the rating agencies use a
corporate bond-rating system -- AAA, AAB -- for multi-obligor bonds
that had nothing to do with reality, and they rated them up on the way up and
now they are rating them down on the way down, and they are screwing us both
ways. Because if you lose 1% on a triple-A bond, it immediately goes to junk.
That means the banks have to write it off their capital and sell it for 50
cents on the dollar.
When did this problem start? July
of 2007, when we introduced mark-to-market accounting. When did AIG have a
problem? When they had to start writing their AAA's down. Now we should never have
let it get to that place to begin with, but now we have to deal with reality.
You can't just sit there and say, "Tsk, tsk, we need to let these guys go
No, you can't, not unless you want
25% unemployment again. We have "X" amount of pain to go through to get back to
whatever the "new normal" will be. Think of this as a big tube of pain, OK? We
can do it in one year or in seven or eight years. I vote for seven or eight. I
don't want 20-25% unemployment. I would rather have 10% unemployment for seven years.
Now, that's just me, because I know when my neighbor is unemployed, when my kid
is unemployed, that it hurts.
The Trend Is Not Your Friend When It Ends
So, the establishment is now
saying, "Let's keep the system going." Now, are we going to have problems when
the Fed starts trying to pull the extra cash they are printing out of the
economy? Yes. Is that going to create a different form of future history than
we have experienced in the past? Yes. Therefore, trying to model the future
based upon that past, will not work.
We believed the trend. The trend is
not your friend when it ends. OK? It just isn't. Now, I'm the guiltiest person
in the world. I live on what one of my friends calls "psychic income." That is
the income you get when you take a current business model, the current business
you are in, and you say, if I could grow these assets to "Y" I would make "Z".
That "Z" charges me up. I haven't earned it yet and the train probably won't go
there, but it gets me up in the morning. That's my psychic income. We all do
that. But we rarely realize that it's just psychic income; it's not real income
until the cash is there.
Given all that I have said, I still
contend I am not a pessimist, at least not in the long term. Stocks go from
high valuations to low valuations to high valuations. They've done it in US
markets and world markets, and we are halfway through the trip in a secular
bear market. We haven't gotten to low valuations yet, I don't care what they
say. The P to E at the end of July was something like 289 on the S&P. You
can go to the S&P website and you can see that. Now you smooth it with five-year
curves and performance, and it goes to 20. 20 is not cheap. But it's going to
get cheap -- at least that's what history tells us.
Now maybe history is wrong, because
past performance is not indicative of future results; and I could be wrong, but
sometimes you just have to set an anchor and say this is what I'm believing. I
think we are going to lower valuations, and when that happens we will have
compressed price to earnings ratios just like we did in 1982. The world will be
coming to an end and we'll be moaning and groaning. We haven't gotten as bad as
we were in '82 -- whoever pointed that out is correct.
But what will happen? The stock
market will be a coiled spring and we'll have a bull market and we'll get to
have fun in the stock market again. Until then, be careful.
Orlando, Naples, Cleveland, and Grandkids
am writing today's letter at the St. Regis Hotel in Laguna Beach, California. I
am going to hit the send button a little early so I can get out and walk
around, as it looks to be too beautiful a place to be in my room writing. This
weekend I join Rob Arnott and his friends (Mohammed El-Erian, Harry Markowitz,
Jack Treynor, and Peter Bernstein, among others) at his annual conference. It
is one of the few conferences I attend where I just go just to absorb as much
as I can, and don't speak. This one looks to be special.
Monday I fly out to Orlando to speak at the Chartered Financial Analyst's
national conference on the "state of the union" of the alternative investment
industry. I think my talk will garner mixed reviews, and is certain to be
controversial in a few circles. I hope I get invited back some time.
I am back home for most of the next two months. I will make a quick trip to
Naples to be with my friends at Jyske Global Asset Management for their
conference the 29-31 of May (www.jgam.com).
And I am going to schedule a quick trip to Cleveland to get a full physical at
the Cleveland Clinic with my good friend and best-selling author Dr. Mike
Roizen. I have put it off too long. I will tell you more about the really
interesting program they have, where you can get a three-day, thorough physical
in one long day. I think it is a real value.
then there was a call from Tiffani last Saturday. She was in Kentucky visiting
friends. One of my standing rules is that when I get back from Europe I am not
to be disturbed before 10 at the earliest the next morning. But I got a call
from her, and I groggily took it, worried that something was wrong.
I'm pregnant. It's going to be a Christmas baby. What do you think?" Didn't she
just tell me January 23 or so that they were going to try? That didn't take
long. Not long at all.
and Angel are due in June. Chad and his SO Dominique are due in October. I will
go from no grandkids to three in the space of a few months. And Amanda is
getting married in August. Lots of things happening in the Mauldin clan. And it's
need to wrap it up. Tiffani will be here in a few hours, and then the meetings
start. Have yourself a great week; and if you are at the CFA conference, be
sure and look me up.
Your almost ready to be a grandfather analyst,
Copyright 2009 John Mauldin. All Rights Reserved
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confidential basis, and subscribers to the Accredited Investor E-Letter
are not to send this letter to anyone other than their professional
investment counselors. Investors should discuss any investment with
their personal investment counsel. John Mauldin is the President of
Millennium Wave Advisors, LLC (MWA), which is an investment advisory
firm registered with multiple states. John Mauldin is a registered
representative of Millennium Wave Securities, LLC, (MWS), an FINRA
registered broker-dealer. MWS is also a Commodity Pool Operator (CPO)
and a Commodity Trading Advisor (CTA) registered with the CFTC, as well
as an Introducing Broker (IB). Millennium Wave Investments is a dba of
MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the
consulting on and marketing of private investment offerings with other
independent firms such as Altegris Investments; Absolute Return
Partners, LLP; and Plexus Asset Management. Funds recommended by
Mauldin may pay a portion of their fees to these independent firms, who
will share 1/3 of those fees with MWS and thus with Mauldin. Any views
expressed herein are provided for information purposes only and should
not be construed in any way as an offer, an endorsement, or inducement
to invest with any CTA, fund, or program mentioned here or elsewhere.
Before seeking any advisor's services or making an investment in a
fund, investors must read and examine thoroughly the respective
disclosure document or offering memorandum. Since these firms and
Mauldin receive fees from the funds they recommend/market, they only
recommend/market products with which they have been able to negotiate
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF
LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED
FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS,
YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME
PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT
PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE
ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION
INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS
IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME
REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN
MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN
ONLY TO THE INVESTMENT MANAGER.