Transcript Navigating Global Asset Allocation in the Age of Deflation

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
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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 Q2 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 1930s 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
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Few Stock Picks since Q3 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 2nd 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 1990s?
• 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. 1930s)
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 2nd
Half of 2009
• Free Link to Recent TSI Global Strategy:
• www.sovereignsociety.com/vancouver
<http://www.sovereignsociety.com/vancouver
>
Eric’s Workshops Today
“The Best High-Value Contrarian Speculations
for 2009-2010 in Credit, Stocks, Currencies
and Hard Assets”
Workshop I: 2pm to 2.40pm
Workshop II: 4.10pm to 4.50pm