Mauldin, The Great Reset – 2022 Update

The Great Reset –

2022 Update

By John Mauldin

In May 2017, I began writing about a coming potentially turbulent event I call “The Great

Reset.” I said it will be the most important topic I’ve ever written about and I continue to

hold that belief today. What is The Great Reset? It is the point in which we reset the

massive imbalance between the debts governments owe and the promises

governments have made, and the taxes governments need to collect.

After the massive stimulus provided by government in response to the Covid pandemic,

we are still running a $2 trillion+ deficit (not including state and local debt building up).

Using current optimistic CBO projections and assuming just one recession in the next

10 years, we will easily be at $50 trillion of total debt around 2031. (Although I may be

optimistic. Every few years when I make a projection for long-term US debt, I have to

revise the number upwards.) Mounting entitlement spending will continue to increase,

making the deficits even larger.

The timing of The Great Reset is somewhat unpredictable, and investors should brace

themselves for enormous market turbulence in the future. My best guess today is that

we are looking at the latter part of this decade, but governments and central banks will

do everything they can to kick the can down the road. By the way, this is not a problem

for just the United States.

Let me pause for a moment and create some footing around what I share with you in

this update. If what I am saying sounds scary to you, I encourage you to shift your focus

and view the information unemotionally. As an investor, my goal is to position my money

and my clients’ money to do well in all kinds of market environments--whether it is a

secular bull or secular bear market, whether interest rates are rising or falling, or

whether we are in an inflationary, stagflation or deflationary environment. There are

always people that will do well. It’s a question of positioning. Neither you nor I put us

into debt. But we do have to consider its consequences.

The reality is we don’t know what legislators will do, who will be in charge, nor how

central banks will respond. My job as a global macro economist and investment

fiduciary is to understand and manage risk while at the same time seek and evaluate

opportunities. The ultimate objective is to protect and even grow your wealth in order to

get as much of your buying power to survive The Great Reset. And, if navigated

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successfully, you’ll be able to take advantage of the opportunities a large bear market

dislocation creates. Recall the investment opportunity the Great Financial Crisis in

2008-2009 created and the double digit returns that followed.

That’s what I believe will happen. If I’m wrong, and I could be, I’m investing in well

collateralized CORE investments yielding in the mid-to-high single digits. And I created

a strategy that diversifies to different risk-managed ETF strategies. By diversifying to

these different types of investments, my goal is to earn returns in the mid-to-high single

digits. I’m attempting to achieve the returns bonds used to provide us years ago. Bond

funds yielding 2% cannot provide you necessary income nor help your portfolio. There

are a number of opportunities I like, and I’ll share a few ideas at the end of this letter.

Much has happened since 2017. Shortly after the onset of the global pandemic, I wrote

a paper entitled, How the Coronavirus Accelerates the Endgame and The Great Reset.

The “gripping hand” of Covid remains a force of acceleration. Observe its impact: U.S.

debt has increased from $20 trillion to $29+ trillion since 2017, increasing 50% in just

five years. By our estimation, it will almost double to $50 trillion by the end of this

decade. Today it looks like this (courtesy www.debtclock.org):1

1 As an aside, US debt-to-GDP is now 127%. It wasn’t all that long ago that I was writing about how Italy

was a basket case at 120% debt-to-GDP. Italy is still a basket case financially, but the US seems bound

and determined to catch up. Assuming 5% nominal GDP growth, approximately double what we have

done for 20 years, the compounding debt will be roughly 200% debt to GDP by ~2030.

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It wasn’t that long ago that I was writing how Italy was a basket case at 120% debt-to-

GDP. Total U.S. Debt is now 127% of GDP. However, it is the entitlement promises

made, Social Security, Medicare and the underfunded federal, state and local pension

systems, that have me most concerned. According to USDebtClock.org, total U.S.

Unfunded liabilities are $163.6 trillion. Read again with stiff drink near, that’s $492,215

dollars in debt per U.S. citizen.

The debt and underfunded entitlement obligations collide in the late 2020’s. We are

flying at 36,000 feet at 500 miles per hour into a perfect storm. We will survive the

turbulence, but it is going to get bumpy.

Make no mistake, those on Social Security and other entitlement programs expect to be

paid just as any bondholder. The problem is we owe too much, and we can’t tax our

way out of this one.

In 1997 my friend Neil Howe co-wrote with William Strauss a book called The Fourth

Turning: An American Prophecy - What the Cycles of History Tell Us About America's

Next Rendezvous with Destiny. I’ve written much about Neil and also about my friend

George Friedman’s cycle work and they both believe there are three different sets of

cycles that all come to their point of greatest impact in the late 20s.

Strauss and Howe look back 500 years and uncover a distinct pattern: Modern history

moves in cycles, with each cycle lasting about the length of a long human life, each

composed of four eras—or "turnings"—that last about 20 years and that always arrive in

the same order. First comes a High, a period of confident expansion as a new order

takes root after the old has been swept away. Next comes an Awakening, a time of

spiritual exploration and rebellion against the now-established order. Then comes an

Unraveling, an increasingly troubled era in which individualism triumphs over crumbling

institutions. Last comes a Crisis—the Fourth Turning—when society passes through a

great and perilous gate in history. Together, the four turnings comprise history's

seasonal rhythm of growth, maturation, entropy, and rebirth. And, just in time to make

Neil’s projections look very prophetic, we have a debt crisis and The Great Reset

showing up inconveniently at the same time.

George Friedman writes about two cycles: a 50-year cycle and a similar 80-year cycle

of geopolitical turmoil. Randomly (or maybe not so randomly) both cycles coincide in the

latter part of this decade. Ugh.

It all comes together in what I call The Great Reset. It's one thing when I say we have

too much debt, but it is the inability to pay for the promises that further exacerbates the

size of the debt. As these unfunded liabilities become bigger and bigger and bigger.

They swamp the budget. We are well on the path, already spending far more than we

are making.

So, it's got to be “rationalized” and that's an economic term. The bottom line is we will

have to change the character or nature of the promises. Let me give you a real-life

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example: Social Security. I have paid into Social Security for 56 years. And I’m still

paying into it and for the last 45 years or so I pretty much always paid at the maximum.

I'm now 72 and I am getting ~$3,400 a month. 

Starting January 2022, the government is

increasing it to $3,671 per month, due to inflation and CPI. So, all of a sudden, I'm

getting 5.9% more. That's almost $45,000 a year. And inflation this year is going to be

high again. I’ll get even more per month next year. If you keep having inflation like that,

the cost of Social Security goes up proportionately. In 2021, the government spent ~$7

trillion and took in ~$3 trillion in tax revenue (part of that was in late 2020). They

borrowed $4 trillion to cover the shortfall. This is untenable.

So, let's talk about how we get to The Great Reset and what it looks like. When we get

there, it's crunch time. The markets will be in turmoil. Things will look uncomfortable

because people will be demanding their Medicare, Social Security, all those other

underfunded retirement benefits. Borrow another $2 trillion a year for 10 years and the

government debt will be $50 trillion. At just 1% interest rates costs on $50 trillion, add

another $500 billion per year to the deficit. At 2% interest rates, it’s $1 trillion per year

annual interest costs. What happens if we get to 3%? That is a real possibility unless

the Fed steps in with massive financial repression, which will utterly destroy the marketsignaling

mechanism.

Inflation during that period could make our current conditions seem like a walk in the

park. How does the Fed hold back inflation, accommodate government spending with

quantitative easing (“QE”) and not raise rates significantly? If they don’t, inflation gets

out of control. That would destroy the value of the currency. They have nothing but bad

choices.

When we get to crunch time, we are going to have to massively raise taxes or massively

cut benefits, or massively print currency or meaningfully monetize the debt, or a

combination of all of the these. And it's not clear what we’ll do because we don't know

who's going to be in control. Debt leads to tension whether it’s on a family’s balance

sheet, a corporation’s balance sheet, or a government’s balance sheet. And what we

are facing is not just a U.S. problem, it is a developed world problem. Governments will

ultimately find a way to rationalize the debts. When you are up against the wall with a

blindfold on, you are open to all kinds of solutions to save your life. Suddenly, the

unthinkable becomes all too possible.

Nothing has changed in my basic view on The Great Reset. We are five years closer. I

don’t believe we see the real turmoil until 2028, although it may take a few years longer

or it could present sooner. Individually, we still have time to plan.

Within a few years, the problems will be clear to most everyone. At some point, we will

have this crisis. We will have to rationalize that debt and people are not going to be

happy.

What's going to accelerate us along that path? What paths do we have? Well, number

one, we have to figure out inflation this year. The Fed said we're going to reduce QE

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and start raising rates. That's what the Fed is predicting. My friends Felix Zulauf and

Louis Gave say that's going to create a large market sell-off in the first half of 2022.

Felix believes risk to the stock market is -30% or more. Then, he believes the Fed will

respond with more QE to pump the markets back up.

If the Fed comes once again to the rescue, the market bottoms and may rally back up to

test the previous high. Zulauf is predicting the current secular bull market peaks in 2024.

He believes inflation becomes far worse than the 7% we are experiencing in early 2022,

then a big secular bear market takes hold.

As Milton Friedman famously said, “Inflation is always and everywhere a monetary

phenomenon in the sense that it is and can be produced only by a more rapid increase

in the quantity of money than in output.”

If the Fed comes in to rescue the stock markets, the message to Main Street would be

we are here to protect Wall Street. That is the absolute worst message the Fed can

possibly send.

I don't know what Fed Chair Jerome (Jay) Powell will do. I hope he says he is going to

beat inflation down to a pulp or at least to the Fed’s 2% target. Yes, there could be a

bear market. In this event, we could see very slow growth, maybe even a mild

recession. Recessions are, by definition, deflationary. Slow growth and/or a recession

would drive a stake through the heart of inflation. It would reduce demand and help

solve the supply chain problems faster.

Pouring more QE into the system would be disastrous. So, honestly, if Powell will stay

the course and fight inflation, not worry about a recession, as long as it's a mild one,

interest rates should stay relatively under control. If the country can't handle 1% interest

rates, then we're all in deep kimchi anyway. If Powell doesn't go down the inflation

fighting path, the technical term is we are screwed.

Zulauf and Gave think the Fed will take the QE path. The Fed’s behavior since the

Great Financial Crisis supports this view. Each crisis since the Great Financial Crisis

has required greater amounts of QE. If you think 7% inflation is an issue, just wait. By

2023-24 the inflation Jeanie will be totally out of the bottle and it will be harder to put it

back in. 

 are the endgame to the long-term secular bull

market in both the bond and stock markets. Everything reprices and Jay Powell goes

down in history as the next Arthur Burns, the former Fed chairman in the 1970’s that

created the inflation fire that Paul Volcker later put out.

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Frankly, if Powell doesn't fight inflation, he should be impeached. Since 1977, the

Federal Reserve has operated under a mandate from Congress to "promote effectively

the goals of maximum employment, stable prices, and moderate long term interest

rates" — what is now commonly referred to as the Fed's "dual mandate." If you can't

fight inflation, you can't have low unemployment. Powell and his Fed would have failed

at their dual mandate.

I remember the 1970’s well. Inflationary recessions are ugly for individuals, businesses

and traditional stock and bond investing.

The bottom line is we are on the path to The Great Reset. Debt will continue to climb,

and aging demographics will accelerate the stress on the Social Security, Medicare and

pension systems. It will present sometime this decade. It is unavoidable.

The immediate thing to watch is how Jay Powell and his Fed approach inflation. If they

bring it down, that may push out The Great Reset out to 2029/32. If they don’t, we’ll

reach The Great Reset sooner.

How we navigate the reset also depends on legislative leadership. I believe the election

campaign in 2028 will be the campaign about who can best manage the crisis. We have

no idea who we are going to elect to office in 2028. We have no idea who we are going

to elect in 2024. But whoever is in power, they're going to be facing a serious crisis. And

to be blunt, the country is split into two tribes today. One tribe would say, “Well, we're

going to increase income taxes and probably add a Value Added Tax and increase

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benefits.” The other tribe will try to reduce welfare and means test pension and

entitlement payments, along with raising taxes. I personally think a Value Added Tax is

the only way to get out of this. Which, by the way, is a tax on the middle class as much

or even more so than the rich.

The Great Reset is what happens at the end of long-term debt super cycles. The Great

Reset is about how we resolve the debt and underfunded entitlement challenges. I

believe it will be a combination of debt monitization, increased taxes and reduction in

benefits. But really, we don’t yet know.

My central point is the conditions we face increase the potential for extreme volatility.

Inflation and higher interest rates are a probable outcome. William White, former head

of the Bank for International Settlements (the central banker’s central bank) said at my

conference several years ago, “In the end, there will be inflation.” That certainly seems

to be the path central bankers are on. If so, higher interest rates and a repricing of the

global equity markets is a probable outcome.

Another potential outcome is a sovereign debt crisis where governments default on their

debts and restructure (read: reduce) promised entitlement benefits. An outcome that

risks an extended period of deflation, slow growth and potential depression. If so,

interest rates may stay lower for longer or may rise significantly due to the increased

default/credit risks. This too would be an unfavorable environment for equities.

A third outcome is governments find a way to restructure their obligations and they soft

land these very large challenges, the two tribes maintain trust, international

relationships work in partnership to protect their currencies (as the developed world is in

arguably worse debt/demographics/entitlement shape than the U.S.) and the outcome is

less extreme.

Can it be done? Can “We muddle through?” -- a phrase I coined years ago. I’m an

optimist but I believe the probabilities are low. The headwinds are enormous, and the

solution requires great leadership. I don’t see that in place today.

The Great Reset is unavoidable. We are flying into a storm. My message is to prepare

for increased volatility and the good news there is much you can do and there is time for

you to prepare.

What do investors do about this?

There is no perfect solution. You could go completely risk off and put all your money in

cash. The problem is you generate zero income, and your buying power would be eaten

away by inflation over the next decade. You could use ten percent out of the money put

options and limit your downside risk of loss to just ten percent. Like your homeowners

insurance there is a cost, but it will keep your wealth from burning down. For most, there

is a need to earn a return on capital–while keeping an eye on risk. Talk to an advisor

who truly knows how to utilize stock options. If you have any questions, talk to me and

my CMG team.

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For the past five or so years, I have been on a journey to develop a comprehensive set

of portfolio programs and strategies that fit my worldview and also reflect what I believe

are likely probabilities for the coming decade. I’ve said this coming decade presents

great opportunity––and serious risk. How do we capture that in a portfolio?

A few years ago, I merged my investment advisory firm into Steve Blumenthal’s firm,

CMG Capital Management Group. CMG is the SEC-registered investment adviser

founded in 1992. Steve developed a team of financial professionals and consultants that

are second to none. Those who know us know we are close friends. I serve as CMG’s

Chief Economist and co-portfolio manager of the CMG Mauldin Smart Core Strategy

and what we call the “CMG Mauldin Kitchen.” I am also an investment adviser

representative with CMG.

The CMG Mauldin Kitchen consists of investments that I, Steve and our research team

have sourced through our network. You can imagine I have a pretty deep network that

took years build and is rooted in trust.

Philosophically, we approach investment portfolio design in much the same manner:

cautiously, but with a sense of optimism. We have developed a series of what we think

of as “portfolio ingredients,” which can be adapted alongside other strategies to meet

individual investor needs. Internally, we have been referring to the rather large number

of strategies on our platform as our “kitchen.”

From one perspective, you want to be prepared for an inflationary regime and rising

interest rates that come with such periods. Certain assets fare well, most don’t. If you

are a retiree, you will want to own income-producing assets. The problem is neither

1.80% yielding 10-year Treasury Notes nor 2% yielding corporate bond funds will help

your portfolio. Especially in a high inflation, rising interest rate environment, which

means you earn negative real rates, and your bonds decline in value. Of course, rates

could go lower and your bonds could gain in value but there is just not much more room

to run in that trade.

Within our CMG Private Wealth Group, we have a certain way of thinking about wealth.

We call it “CORE and EXPLORE.” Our objective is to defend our CORE wealth so that

we can seek asymmetric return opportunities with our EXPLORE wealth.

For CORE investments we favor building portfolios that diversify to well-collateralized

short-term private credit, high dividend paying stocks that have management cultures

that reward investors by increasing the dividend payouts each year, and risk-managed

ETF trading strategies.

To give you a sense for some of the CORE investment opportunities we invested in last

year, following is a brief summary.

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CORE Investment Ideas:

Short-term Private Credit

• A 6% yielding two-year Bond – Collateralized with first lien short-term

construction loans

• A 7% yielding credit fund – Collateralized with pharmaceutical royalties (two-year

minimum hold, then quarterly liquidity)

• A 15% yielding short-duration credit/vendor insurance fund – Run by the former

co-head of an Ivy League endowment fund (one-year minimum hold)

• An 8% yielding five-year Bond - Collateralized with first lean short-term

construction loans

• A 7% yielding Corporate Lending Fund (monthly liquidity)

• A 5.25% yielding (historically, 64% tax deferred) Institutional Private Real Estate

securities. A multi-strategy, multi-manager, multi-sector approach.

Trading Strategies

• A Market Neutral, Multi-Disciplined, Trading Teams. Absolute return focus with

audited management track record back to 1990. Low to mid-teen return history

with nominal capital drawdowns.

• A Multi-Strategy Fund, Trading Teams. Absolute return focus with audited

management track record back to 2008.

• CMG Mauldin Smart Core – Allocations to a select group of experienced ETF

trading strategists. Management track record back to 2017. GIPS Verified.

• 3EDGE Total Return Strategy. Global allocation, risk management focus.

• Ned David Research Dynamic Allocation. ETF global allocation, risk

management focus.

• Greenrock Research High and Growing Dividend Stocks Portfolio

• CMG Beta Rotation. A high beta, low beta risk managed ETF trading strategy.

• CMG High and Growing Dividend ETF strategy, risk managed.

• Peak Dynamic Risk Hedged U.S. Growth

• Syntax Stratified Total Market Hedged ETF (market exposure, hedged with put

options)

• Ned Davis Research CMG Large Cap Long-Flat Strategy (managed risk)

• Ned Davis Research CMG Large Cap Long-Short Strategy (managed risk)

• Select other strategies in the CMG Mauldin Kitchen

The objective is to grow the CORE portion of your portfolio in the mid-to-high single

digits with a focus on downside risk mitigation. Preserve the CORE. This then enables

the EXPLORE.

For the EXPLORE portion, we see select investments and diversify to concentrated

positions that may range from 1% of overall net worth to 5%. Frankly, we are less

concerned about The Great Reset implications simply due to the upside potential of the

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EXPLORE investments we consider. We look for disruptive technologies in genomics,

biopharmaceuticals, healthcare, technology, battery technology, etc. We seek to be

aggressively risk-on with the portion of a portfolio allocated to EXPLORE with the goal

to meaningful enhance wealth.

EXPLORE Investments:

Late-stage Private Equity2

• A private equity investment in a bio-agriculture company that is pioneering the

way in nature identical gene edited productivity traits. Gene edited productivity

traits reduces needs for fungicides, herbicides and pesticides. All while being

non-GMO. The market is simply vast.

• A private equity investment in a biopharma company focused on Parkinson’s

Disease, Diabetes, Obesity and aging. Seeking to solve for unmet needs in large

markets.

• Select private equity funds - institutionally managed, experienced teams.

High Conviction (Best Ideas) Stock Portfolios

• ARK Invest Disruptive Stock portfolio – A highest conviction stock portfolio of

Cathie Wood and her team’s best ideas. Approximately 11 stocks. (Note that

Cathie Wood’s highest conviction stocks considerably outperformed her ETF. I

believe the potential for a serious bear market will give us a remarkable once-ina-

decade buying opportunity.)

• Kingsland Transformation Growth Stocks – A highest conviction portfolio of Art

Weise and his team at Spouting Rock’s best ideas.

• Gould Small Cap Growth Stocks – A highest conviction small cap trading

strategy with its roots in Investor Business Daily founder William O’Neil’s stock

selection and trading process.

2 Please note that certain private investments are limited to Accredited Investors or Qualified Clients,

under applicable securities laws and regulations. Please talk to your adviser to determine if you qualify to participate in such investments. Additionally, please be advised that private investments involve significant risk, including total loss of principal and capital invested.

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We are here to serve you. I recommend that you take a phone call from one of our

highly experienced representatives and let them familiarize you with what’s in the

Mauldin Kitchen. You may want to put some of your portfolio or all of your portfolio in.

That is your choice. We have access to what I believe are special niche opportunities

you won’t find at other advisory firms. Our goal is to help you and your family where we

can.

Your certain we will all get through this together analyst,

John Mauldin

Chief Economist and Co-Portfolio Manager

CMG Capital Management Group, Inc.

Important Disclosures follow on the next page.

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IMPORTANT DISCLOSURE INFORMATION

INVESTING INVOLVES RISK. PAST PERFORMANCE DOES NOT GUARANTEE OR

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This document is a general communication provided for informational purposes only. It

is educational in nature and not designed to be a recommendation for any specific

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Prior to making any investment or financial decisions, an investor should seek

individualized advice from a personal financial, legal, tax and other professional

advisors that take into account all of the particular facts and circumstances of an

investor's own situation.

Different types of investments involve varying degrees of risk. Therefore, it should not

be assumed that future performance of any specific investment or investment strategy

(including the investments and/or investment strategies recommended and/or

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Certain portions of the content may contain a discussion of, and/or provide access to,

opinions and/or recommendations of CMG (and those of other investment and noninvestment

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changing market conditions, such discussion may no longer be reflective of current

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construed as legal or accounting advice.

This presentation does not discuss, directly or indirectly, the amount of the profits or

losses, realized or unrealized, by any CMG client from any specific funds or securities.

In the event that CMG references performance results for an actual CMG portfolio, the

results are reported net of advisory fees and inclusive of dividends. The performance

referenced is that as determined and/or provided directly by the referenced funds and/or

publishers, have not been independently verified, and do not reflect the performance of

any specific CMG client. CMG clients may have experienced materially different

performance based upon various factors during the corresponding time periods.

In a rising interest rate environment, the value of fixed income securities generally

declines and conversely, in a falling interest rate environment, the value of fixed income

securities generally increases. High-yield securities may be subject to heightened

market, interest rate or credit risk and should not be purchased solely because of the

stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to

D or C (lowest). Investment-grade investments are those rated from highest down to

BBB- or Baa3.

Certain strategies invest primarily in exchange-traded funds (ETFs) or mutual funds that

are offered by prospectus only. Please carefully read each ETF’s or mutual fund’s

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In the event that there has been a change in an individual's investment objective or

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Please note: The views in this presentation are those of John Mauldin and do not

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