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Navigating Global Asset Allocation in the Age of Deflation and Credit Destruction The Sovereign Society Agora Financial Investment Symposium, Vancouver, Canada, July 23, 2009
What is The Sovereign Society? • Founded in 1997 by Robert Kephart • Seeks to Protect and Enrich The Sovereign Individual • Global Investing, Privacy, Asset Protection, Tax Planning and Financial Freedom • VIP Services in Currencies, Commodities and Bonds • International Network of Professionals • World-Class Offshore Conferences
Deflation is Here… • Focus on Credit, Real Estate, Employment and Consumer Spending for Market Bottom • Destruction of Credit Unprecedented since the Great Depression; Massive Loss of Wealth • U. S. Banking System Largely Insolvent • Key Credit Markets still Largely Dysfunctional • Banks NOT Lending, Despite TARP, PPIP • Domestic Consumption Collapse and Trends in Rising Savings Rates, Debt Reduction
U. S. Consumer is Finally Spent…
Is the Worst Over? • Fears of Great Depression II Averted • Government Nationalization of Banks, Massive Fiscal Spending, Soaring Deficits • Major and Emerging Markets GDP Contracting Sharply in 2009; IMF Assisting Nations • Process of Global De-Leveraging and Balance-Sheet Repair still Underway • Despite Recent “Green Shoots, ” a Cyclical Recovery will Not Occur in 2009 -2010 • Government Can’t Replace Organic Spending
Understanding Credit Deflation Reading the BUY and SELL Signals of Credit Short-term Credit Markets have Stabilized LIBOR and Ted Spread have Compressed Speculative and Investment-Grade Credit Spreads have Rallied since March • Fed still Assisting Fractured Credit Markets • Despite Q 2 Capital Raising, Banks still NOT Lending to Businesses and Consumers • Failed Government Bond Auctions in Europe • •
LIBOR Compressing…
But Interest Rates are Rising…
Lingering Credit Market Stress • How will Fed Exit Unorthodox Operations? • Commercial Real Estate loans, Credit Card Securitization Collapse, Foreclosures • What happened to PPIP? Toxic assets crisis • Companies still paying a premium to refinance • Junk bonds: $950 billion of refinancing (2014) • First post-WW II expansion without significant credit growth = sluggish recovery
Investor Risk • Without U. S. Consumer, who will Purchase Global Manufactured Goods? • Consumers Building Savings, Era of Frugality • Relationship Between Rising Savings and Corporate Earnings is Bearish • Failure of Fed to Withdraw Liquidity • Pressure to Cut Spending, Reduce Deficits • Government Regulations/Securities Laws • New World Order & Big Brother • Stocks NOT in a New Bull Market since March
TSI Macro View • Post-2008 Credit Crash not Identical to 1930 s Credit Deflation – but Strikingly Similar • Rising savings rates vs. domestic consumption • Failed or reduced Gov’t Bond Auctions • U. S. interest rates to stay low in 2009 -2010 • Sluggish credit growth vs. economic expansion • Massive insider selling since April in US • Not a typical post-WW II economic recovery
TSI Portfolio and Deflation Few Stock Picks since Q 3 2008 Stop-Losses and Trailing Stops in Sept/Oct 2008 TSI Chaos Portfolio +26% in 2008 Focus on Gold, Oil, Foreign Currencies Investment-Grade Debt, TIPS, Senior Canadian Bank Debt, Short-Term Treasury Bonds • Hussman Strategic Growth Fund (HSGFX) • Néstle, Diageo and Kraft Foods (free cash-flow) • • •
TSI 2009 Global Macro Forecast • Concerted Global Gov’t Spending to Boost Economic Growth, but NOT Indefinitely • Market will Require 2 nd Stimulus Package • Lack of Gov’t Resolve and Threat of Debt Super-Cycle ( The Last Inning? ) • Consumption Impaired by Surging Unemployment, Collapse in Asset Values • Big Bear Market Rally not Worth the Risk • “Bubble” in Junk Bond Market • Partial or Full Bank Nationalization by 2014
Major Risks • Central Banks Eventually Face a Huge Challenge to Unwind Fiscal & Monetary Stimulus • Inflation is the Endgame: Inflate or Die! • Next Dollar or Monetary Crisis? • Failure of Fed, Gov’t – Japan in the 1990 s? • Lack of Credit to Fuel Next Expansion • Gov’t Entitlement Spending – Dependency • Hocus-Pocus Creative Accounting (FASB) • Rising Civil Unrest, Crises and War (e. g. 1930 s)
Focus on Safety, Liquidity & Yield • Preserve Capital: Wait for Credit and Macro Environment to Improve Before Speculating • Open a European Private Bank Account • Cash Management Crucial in Credit Deflation (Boost Yield) • Diversify in Short-Term High Quality Debt • Ladder Corporate Bond Portfolio (1 -5 Years) • Avoid Government Bonds!
TSI Deflation Barometer • Unemployment Rate Must Stabilize • Residential Housing Prices Must Stabilize; Supply must be Absorbed • Domestic Consumption Must Rise • Bank Lending Must Grow • Toxic Assets and Bank Balance Sheets • Auto Sales Must Stabilize • Credit Spreads Must Narrow • U. S. Dollar Must Decline
Total Portfolio Performance for the 2 nd Half of 2009 • Free Link to Recent TSI Global Strategy: • www. sovereignsociety. com/vancouver <http: //www. sovereignsociety. com/vancouve r>
Eric’s Workshops Today “The Best High-Value Contrarian Speculations for 2009 -2010 in Credit, Stocks, Currencies and Hard Assets” Workshop I: 2 pm to 2. 40 pm Workshop II: 4. 10 pm to 4. 50 pm
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