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Navigating Global Asset Allocation in the Age of Deflation and Credit Destruction The Sovereign 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 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 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… U. S. Consumer is Finally Spent…

Is the Worst Over? • Fears of Great Depression II Averted • Government Nationalization 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 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… LIBOR Compressing…

But Interest Rates are Rising… But Interest Rates are Rising…

Lingering Credit Market Stress • How will Fed Exit Unorthodox Operations? • Commercial Real 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? • 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 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 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, 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 & 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 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; 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 Total Portfolio Performance for the 2 nd Half of 2009 • Free Link to Recent TSI Global Strategy: • www. sovereignsociety. com/vancouver

Eric’s Workshops Today “The Best High-Value Contrarian Speculations for 2009 -2010 in Credit, Stocks, 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