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