Sir John Templeton's Words Will Echo Through Economic Eternity

( If you don't know who he is, you're reading the wrong blog.)

Sir John Templeton’s Last Testament: Financial Chaos Will Last Many Years
Tuesday, 09 Mar 2010 06:48 PM

By: Christopher Ruddy
When Sir John Templeton passed away in July of 2008, we lost one of the greatest investment minds of our time.But with great lucidity, in June of 2005, Sir John penned a memorandum to friends and family that is uncanny and prophetic in its vision of what would happen to the U.S. and global economy.The first two words — so pithy yet so powerful — are bolded and highlighted on his original document. They read, simply: “Financial Chaos.”Recently, Sir John’s son, Dr. John Templeton, or “Jack” to his friends, shared with me the memo that has never seen public light.As Jack relates, his father wanted the memo to be widely circulated. Unfortunately, it was not; instead it was discovered in a file cabinet only after Sir John’s passing.Now, before you read Sir John’s memorandum below, let me share with you some background information, information that Sir John would have insisted you know.On two occasions Sir John invited me to his home-base in Lyford Cay, a small enclave of Americans and Europeans who live in Nassau in the Bahamas.I was among the last journalists to interview the man Money magazine described as “arguably the greatest global stock picker of the [20th] century.”Sir John had become famous, first, as a trendsetter in equity investing by becoming the foremost American expert in global investing, which he began in the 1940s.As he explained to me, just after graduating Yale, he was almost dumbfounded that Americans rarely invested abroad. For a long time, he recounted, it was almost considered unpatriotic for an American to buy foreign securities.He eventually launched the Templeton Funds for such global investing, which was later bought out by Franklin investments and is now called the Franklin Templeton Funds.Investors who took his advice did extraordinarily well. Though of very humble means, Templeton himself became a billionaire.When I met with Sir John for the last time, for the purposes of an interview that would appear in Newsmax’s Financial Intelligence Report, our investor newsletter, Sir John made a deal with me.He would offer his views on the stock market and investment advice if I were to make sure to include his views on spirituality and faith. I agreed.After officially retiring from the money management world, Sir John’s main focus was to advance spirituality to improve the human condition. His vehicle for doing so was his John Templeton Foundation, based in West Conshohocken, Pa., run by his son Jack, a former surgeon.The foundation is perhaps best known for its annual award, the Templeton Prize, described as honoring “a living person who has made an exceptional contribution to affirming life’s spiritual dimension, whether through insight, discovery, or practical works.”For Sir John, and his son Jack, faith and spirituality are not mutually exclusive with economic prosperity. They have argued, and the Templeton Foundation has continued to advance their belief, that religious values are basic and intrinsic to the ideas of human liberty and the free enterprise system.For sure, Sir John was a visionary in many ways. His wisdom gave him tremendous insights into the human condition and the practical effects of that condition on society and the economy as well.Sir John had accurately predicted the dot-com crash of 2000 and 2001. When I met him again for the last time in December of 2004, he was warning that the housing bubble would eventually crash, with home prices falling by as much as 50 percent or more from their highs in some markets.He predicted a fall-off of the stock market after that.Both predictions were not widely accepted at the time, yet they eventually came to pass.In his last memorandum on the markets and the economy, he elaborated on these same themes, warning of dire economic “chaos” — which he predicted would last many years.Still, he was optimistic on equity investments, specifically in globally diverse companies with high growth patterns and wide profit margins. He suggested such stocks would remain “valuable” for investors to preserve and grow one’s wealth.As you read this memo, please remember that Sir John has left an important legacy, not just here in his “Last Testament” to investors, but in his writings and in the important work of his foundation, so ably led by his son, Jack.The memo of Sir John Templeton follows, punctuation is his own:
John M. Templeton
Lyford Cay, Nassau, Bahamas
June 15, 2005
MEMORANDUM
Financial Chaos – probably in many nations in the next five years. The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.
Increasingly often, people ask my opinion on what is likely to happen financially. I am now thinking that the dangers are more numerous and larger than ever before in my lifetime. Quite likely, in the early months of 2005, the peak of prosperity is behind us.
In the past century, protection could be obtained by keeping your net worth in cash or government bonds. Now, the surplus capacities are so great that most currencies and bonds are likely to continue losing their purchasing power.
Mortgages and other forms of debts are over tenfold greater now than ever before 1970, which can cause manifold increases in bankruptcy auctions.
Surplus capacity, which leads to intense competition, has already shown devastating effects on companies who operate airlines and is now beginning to show in companies in ocean shipping and other activities. Also, the present surpluses of cash and liquid assets have pushed yields on bonds and mortgages almost to zero when adjusted for higher cost of living. Clearly, major corrections are likely in the next few years.
Most of the methods of universities and other schools which require residence have become hopelessly obsolete. Probably over half of the universities in the world will disappear quickly over the next thirty years.
Obsolescence is likely to have a devastating effect in a wide variety of human activities, especially in those where advancement is hindered by labor unions or other bureaucracies or by government regulations.
Increasing freedom of competition is likely to cause most established institutions to disappear with the next fifty years, especially in nations where there are limits on free competition.
Accelerating competition is likely to cause profit margins to continue to decrease and even become negative in various industries. Over tenfold more persons hopelessly indebted leads to multiplying bankruptcies not only for them but for many businesses that extend credit without collateral. Voters are likely to enact rescue subsidies, which transfer the debts to governments, such as Fannie May and Freddie Mac.
Research and discoveries and efficiency are likely to continue to accelerate. Probably, as quickly as fifty years, as much as ninety percent of education will be done by electronics.
Now, with almost one hundred independent nations on earth and rapid advancements in communication, the top one percent of people are likely to progress more rapidly than the others. Such top one percent may consist of those who are multi-millionaires and also, those who are innovators and also, those with top intellectual abilities. Comparisons show that prosperity flows toward those nations having most freedom of competition.
Especially, electronic computers are likely to become helpful in all human activities including even persons who have not yet learned to read.
Hopefully, many of you can help us to find published journals and websites and electronic search engines to help us benefit from accelerating research and discoveries.
Not yet have I found any better method to prosper during the future financial chaos, which is likely to last many years, than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations.