How to Profit Through the Coming Safe-Asset Slaughter How to Create Extreme Wealth in the Great Deflation of 2015 to 2021 Inflation and Deflation Coffee at Starbucks costs more. Gas costs more. Food at the grocery store costs more. At the same time, property prices are down more than 20% — they were down as much as 34% at one point — since 2006. Wages continue to retract. With so many people applying for jobs, no business will pay employees more than they must. Many businesses hiring people today are now paying new staff 25% less than they would have four years ago. Employment continues to languish with as many people leaving the workforce as getting new jobs. This underlying deflation is less obvious because we don’t go to the store to buy or sell a house every couple of days. If we did, we’d feel the pinch more painfully. After all, as humans, we’re more aware of what burns us every day and we’re blind to the effects of unseen events. It’s like cancer: If you’re lucky, you might see some early warning signs, but typically you don’t know it’s there until the damage is extensive. But the truth is that deflation is a sign of the cleansing and rebalancing of our economy: debt deleveraging, lowering the cost of living again, efficiency through business consolidation and better management. This is a necessary and natural stage in our economy after such a dramatic bubble boom. As the following chart shows, we have seen the greatest debt bubble in modern history. Every such debt bubble also sees asset prices from stocks to real-estate bubbles and then those bubbles deleverage in the years to follow. That destroys money and wealth, and creates fewer dollars chasing the same goods. That is the classic definition of deflation. It means that the price of almost everything comes down. 2 Deflation is inevitable… It followed every debt bubble in history in the 1870s, 1930s and now. That is precisely what the government and financial institutions are colluding to prevent. If this massive debt and asset bubble deflates, they are the ones that will be hit the hardest. They borrowed much of the money, made most of the loans or invested at high leverage in the asset bubble. The average American has already been hit pretty hard. In fact, deflation is part of the reason the government’s irresponsible monetary and fiscal behavior hasn’t resulted in run-away inflation... and why it never will. But the Fed is determined to hold back the tsunami. It has pumped more than $3 trillion “new” dollars into existence. There was QE1 from November 2008 to March 2010, which added $1.42 trillion to the economy. Then there was QE2, which dumped another $600 billion into the economy in the form of long-term U.S. Treasury bonds. And now we have QE3, which promises “unlimited” QE and is approaching another $1 trillion. And let’s not forget QE Lite, Operation Twist and QE Forever. Then there is the $7 trillion in budget deficits and $800 billion of the Troubled Asset Relief Program (TARP) — a fiscal stimulus program. All in all, it has taken about $2 trillion of stimulus a year for the last 5 years to keep the banking system from totally melting down like in the early 1930s after the last major debt bubble — $2 trillion to get an average 2% of real growth rate, or about $350 million a year. That’s a very bad deal! Both Ben Bernanke and Janet Yellen have sworn to keep interest to near-zero rates for years. But when all is said and done, these desperate moves are doomed to fail. 108 Million Reasons Why the Fed Can’t Win Between 1942 and 1968, the U.S. economy enjoyed a boom driven by the rise in spending from the Bob Hope generation. This turned into an inflationary bust from 1968 to 1982, when they stopped spending and the baby boomers were entering the workforce at great expense. The growth boom that followed saw the creation of the biggest bubbles in history as powerful computer and Internet technologies moved mainstream, while inflation and interest rates fell from rising productivity. And in 2008 we turned the corner again to head into a deflationary bust that will last until 2023. These booms and busts have nothing to do with oil, interest rates or trillion-dollar deficits… Bernanke, Obama or anything else except one thing… People. That’s it. It really is that simple. The rise and fall of our economy is all thanks to the 800lb gorilla in the room: consumers. When revolutionary changes in medicine and agriculture in the 1940s transformed our standards of living, our health, diets and our fortunes, we added 108 million more consumers to the economic pot through the massive baby-boom birth wave and the largest immigration wave in U.S. history. Over the last three decades, these baby boomers bought houses… then McMansions… then holiday homes in exotic places. They bought cars, SUVs, minivans and sports cars: one for the spouse, one for the weekends and one for each kid. 3 Home prices skyrocketed. Industry ramped up production. Businesses practically employed four people to do the job of one person. Everyone was living the American dream. Then one day we couldn’t anymore. In 2008 we ran out of money. We’d maxed out our credit cards and suddenly couldn’t balance the budget every month. This next chart shows how out-of-hand it all got. Everyone focuses on the now out-of-control $17 trillion government debt that has mushroomed from $5 trillion in just 2000. But as you can see, the private sector accumulated far more debt since the 1980s boom started. At the peak of the debt bubble in 2008, private debt racked up $42 trillion, which includes $14.2 trillion of consumer debt — mostly mortgages. Then we hit a wall. A slight increase in interest rates and millions of Americans could no longer meet their monthly mortgage repayments. Then they could no longer make their credit card payments. Then they could barely get food in the house. At the same time the wheels were coming off, the leading edge of 108 million baby boomers began to prepare for retirement with greater urgency. All of this set into motion a shrinking of the money supply. It also doomed the Fed’s stimulus plans. Think of the economy as a bucket. As a new, larger generation grows up, earning more and spending more, it will fill up that bucket. Consumers borrow more to buy homes, cars and furniture. This increases the economy and the money supply. Then the Fed lowers interest rates every time we have a crisis, and that encourages people to borrow even more. That’s how you get a debt bubble. As the economy continues to grow and interest rates continue to fall from rising productivity, speculation increases and asset bubbles come — through stocks, real estate and commodities. When times turn deflationary — when people stop spending money at their disposal and start paying back their debt — suddenly the bucket has holes in it. The more people save and pay down debt, the more holes there are. The more the economy falls, the more debt deleverages and the more asset prices 4 fall. This creates a deflation spiral like the 1930s, unless governments step in and inflate massively to offset such natural deflation. That’s what’s happening now. As consumers, we are doing everything in our power to free ourselves of debt and to save for retirement. Every time one of us pays off our car, mortgage or credit card, we put another hole in the bucket. When someone puts cash into a savings account, another hole appears. The Fed knows this. It’s desperate to discourage savers. That’s why it maintains its ridiculously low interestrate policy. Consumers are fighting a protracted battle with the government. They want us to spend with abandon again. We’re not buying it. Because at the end of the day, we don’t do what the government wants us to do. We do what’s best for ourselves and our families. When we buy a new car, it’s not because the government says: “Unemployment levels in the automobile industry are unacceptably low.” We do it because our old car is now too small for all our teenage kids and the dog, or because we need a more fuel-efficient car so we can cut down our gas bill, or because we know our loved ones would be safer in a better car. And that’s why the government is checkmated. No matter how much money the Fed floods into the system, it’s not going to make consumers spend more. As demand dwindles, prices come down. And in a deflationary period like that, the dollar gains value. That means that the first step you should take now, to survive and prosper in the years ahead, is to hoard your dollars… The Dollar Will Come Out on Top in This Shakeout In deflationary times, cash is king. That’s why, contrary to everything you might be hearing, the U.S. dollar (and dollar-based assets) will be the best currency to own in the years ahead. The last time the markets crashed in 2008, the dollar rallied 21% in just four months. It was one of the few things that soared when almost everything else plummeted. It will do so again for two simple reasons: 1. Fewer dollars have greater worth, as we’ve already discussed. 2. There is simply nothing out there that can replace the dollar, for now. The dollar is the most liquid currency in the world. It’s present in 85% of all transactions in the global foreign exchange market, which has a daily volume of $4 trillion. No other currency has the same volume or liquidity. Yes, there is a large, vociferous group of analysts and investors who believe the dollar’s days as a reserve currency are numbered, and they may be right. But not for at least a decade. The reality is that there is nothing with which to replace the dollar anytime soon. Take gold, for example… Gold Will Never be a Currency: A currency should have two attributes: It should be a storehouse of 5 value and it should be able to serve as a unit of exchange. It is the former — the storehouse of value — that partly drives gold-bugs to hoard the precious metal. But, gold could never serve as a unit of exchange. There are simply too many products and services available and too little gold to go around. It would be impossible to find the right amount of gold to exchange for, say, a haircut or a candy bar. What would need to happen instead is the issuance of notes backed by gold, much like the dollar before 1933. But that won’t happen because it would move the power of the purse from the government to the holders of capital and the rest of the world would overrun the currency. Fiat currencies allow governments to take value from their citizens at will. What about China’s efforts to replace the dollar? China’s About to go Ka-Boom: China may protest loudly against the dollar and one day it may topple the world’s reserve currency, but right now, it is about to implode. The real-estate and infrastructure bubble that China is inflating is the greatest in modern history. A collapse is inevitable — which will likely start in 2014. Houses are being built twice as fast as new households are being formed. Upper middle-class citizens are buying up dozens of condos and apartments in a speculator’s frenzy as they save 50% to 70% of their incomes, and greatly prefer real estate over stocks and bonds. In China’s cities, 24% of houses are not using electricity, which means they are vacant! The country has several huge ghost towns. For example, Ordos has the capacity to hold one million people. Everything’s there: streetlights, roads, apartments, shopping centers, offices and houses — but there’s only 70,000 residents. On top of that, some of the most expensive real estate in the world is in major Chinese cities like Shanghai, Beijing and Tienzhen. The problem is that Chinese consumers are not driving this economic boom — the Chinese government is. The people on the ground are actually spending less and less. Personal household consumption as a percentage of Gross Domestic Product (GDP) has dropped from a high of around 70% (in the 1960s) to as little as 37% (in 2010). And Chinese manufacturing is slowing down as global trade rapidly contracts. There is no doubt in our minds: China’s infrastructure bubble will implode soon. When it does, not only will the yuan weaken, the fear this collapse will create will drive even more investors into the dollar, thus pushing the dollar up. The euro won’t dethrone the buck either… The Euro is a Much Uglier Sister: The crisis in Europe is far from over. Greece is broke and it’s not the only country in the euro zone in that position. Spain is in deep trouble. Italy is not in much better shape. All of this is dragging the euro zone down. Although it is one of the world’s largest currencies and has advanced recently, that improvement was the result of aggressive money printing by the U.S. and Japan. The fact of the matter is that the euro is in a rapidly destabilizing position. Germany has been running strong trade surpluses, and many other countries are improving due to the austerity that reduces wages and product costs. Ultimately, the euro offers no threat to the dollar’s reserve status. Neither does the yen… 6 The Yen is Long in the Tooth: Japan is a dying country. Its demographic trends are sharply negative. Fewer Japanese are having children and the population is aging rapidly. It has also been unable to pull itself out of the deflationary cycle that started more than 20 years ago. That’s why Japan came up with the largest stimulus program of any nation compared to its GDP. Its only hope is to push down its currency and increase its exports — like other countries won’t react to that? The last thing Japan wants right now is a strong currency because that would just put more pressure on an already struggling economy. Mighty Switzerland has Gone Soft: The Swiss franc, as strong a currency as it is, also has no hope of unseating the dollar as the world’s reserve currency. It simply lacks the required liquidity. In 2011, it strengthened against all major currencies. This led to a stampede into the currency, so its value shot higher. Of course, this pushed prices in Switzerland up as well. At the end of that summer, a Big Mac in Switzerland cost the equivalent of $17. The Swiss government could not tolerate such a strong currency. No country wants its goods and services so expensive that no one can afford to buy them. Especially not Switzerland, where exports comprise more than 53% of GDP. The stories are the same with the Australian and Canadian dollars. There is simply not enough of each currency to go around. This isn’t just theory. Look at the dollar index in the chart below. The dollar actually fell 58% in the great boom — precisely because we created that $42 trillion in debt — and ran constant trade deficits. The point is that we debased the dollar in the boom. As the economy deflates ahead, the dollar will become more valuable just as it did in late 2008 when it spiked and everything else, including most other currencies, went down. The dollar is still higher than it was at the beginning of this crisis in early 2008, when gold bugs said that money printing would kill the dollar. But everyone else is now printing money and our trade deficit is falling. The bottom line is that as deflation shakes up the global economy more violently, the dollar will regain its strength. That’s why our Boom & Bust Portfolio Manager Adam O’Dell recommends you buy the PowerShares DP USD Bull Fund (NYSE: UUP) up to $23. 7 UUP shorts the dollar against six major currencies: 1. The euro 2. Japanese yen 3. British pound 4. Canadian dollar 5. Swedish krona 6. The Swiss franc Action to take: Buy the PowerShares DB USD Bull Fund (NYSE:UUP) up to $23. Another way to benefit from the strengthening dollar is to sock away what you can. That’s why Adam suggests you put cash into an EverBank 5-year Yield Pledge certificate of deposit (CD)… How to Get 7 Times More Interest on Your Dollars Adam believes EverBank’s Yield Pledge CDs are one of the safest investment vehicles in the market right now. In fact, Bankrate.com ranked this particular CD among the 100 highest earners for 13 years in a row. With a one-year term, you earn three times more interest on your savings than the national average. With a five-year term, you could earn as much as seven times more interest on your savings. That’s significant. If your company decided to increase your two weeks allotted vacation by seven times, you’d have three months and eight days leisure time at your disposal. Unfortunately, your boss isn’t about to do that. But with EverBank’s Yield Pledge CD, you get to experience the power of up to seven times more interest. And it’s quick and easy to buy this CD. All you need is a minimum deposit of $1,500. Then decide how long you want to hold it — your options are three months, six months, nine months, one year, 1.5 years, two years, 2.5 years, three years, four years and five years. Obviously, the longer-term accounts offer the highest interest rates. Visit EverBank.com to open your account. Make sure you have your Social Security number, residential address details and employment information handy. This CD is a quick, easy and safe way to grow your cash during the deflationary shakeout ahead. Action to take: Open an EverBank 5-year High Yield Certificate of Deposit. Buy These Big Shorts For those of you with an appetite for more risk, Adam has found a third way for you to get richer during the years ahead. He recommends you go short three crucial sectors of the market: real estate, financials and the S&P 500. When markets crashed in 2008, most investors watched in horror as half the value of their portfolios 8 simply disappeared. But at the same time, some of the smarter investors enjoyed gains of 15%, 69% and 104% by shorting the market. Now, during the coming global depression, you can do the same. And Adam believes ProShares is the best way to play the markets in this way. The company is the world’s largest manager of leveraged and inverse funds. With its 121 ETFs, you gain exposure to U.S. and foreign equities, fixed-income commodities, currency and volatility benchmarks. There are two particular ProShares ETFs Adam believes you should look at. The first shorts the realestate market. Not only are baby boomers no longer in the market for large, family homes, but millions of Americans are trapped in houses that are worth less than the mortgages they owe. Or their credit records are still recovering from their forced defaults. There’s also the deluge of foreclosures on bank books. When these hit the market —when the stimulus fails and the economy finally slows down — property prices will take a second dive. And that’s just in the private-property market. The commercial-property market is heading for much worse. Leading up to 2014, $800 billion of the commercial sector’s mortgage debt will come due. Already, about two-thirds of this sector is under water. There’s little hope of its holders ever paying back the huge sums they owe. The bottom line is this: There is much further to go in the property sector’s correction (with the exception of one or two isolated segments). That’s why ProShares Short Real Estate (NYSE: REK) is a good stock to consider. Then there’s the financial sector… “We’ve Taken the Pulse… It’s Racing.” Sotheby’s (NYSE: BID) — the 269-year-old, originally-British auction house — is currently riding high atop a euphoric wave of new-money Chinese millionaires who flourished amidst the country’s state-sponsored build-and-urbanize program. Now these cash-rich buyers simply can’t satiate their appetite for high-priced art. A Hong-Kong dealer captures the logic-defying euphoria well: “They don’t just want to collect and enjoy, they want to be No. 1.” Another dealer says: “We haven’t seen the room so… buoyant… for awhile!” And Sotheby Asia’s own Chairman, Patti Wong, says: “We’ve taken the pulse of the Asian art market… it’s racing, and we are racing with it.” China isn’t the first example of newfound wealth blowing bubbles in the fine art market. One look at Sotheby’s stock price tells the story. Art markets thrive on the concentrated wealth created during above-average economic boom periods. 9 The players are different. Yet, the pattern’s the same. The point is this: Sotheby’s stock price is a direct link… a finger on the pulse, if you will… to the bubbliest pockets of unsustainable wealth creation in the world. And, thanks to its track record of jaw-dropping sharp plunges, Sotheby’s stock could be the ideal “global collapse” trade. While it’s no sure bet, for sure, a bearish trade on Sotheby’s has the potential to generate a 23x return. That’s turning $1,000 into $23,000! Here’s how to play it… At a current price of $52, Sotheby’s stock is just 15% from its all-time 2007 high. So it’s a good play to purchase put options that expire in January 2015. Specifically, put options with a $30-strike price This stands to be the best way to rake in windfall profits when China’s overinflated bubble economy receives the party-ending prick. Action to take: Buy to open January 17, 2015, $30-strike put options on Sotheby’s (NYSE: BID) up to $2 per contract. The Dow Will Dive Toward 3,300 The Dow will dive to 3,300 by 2023 after sinking to somewhere in the neighborhood of 5,000 to 5,600 between early 2015 and late 2016. The looming bank crisis and the ongoing euro-zone crisis are only two of the reasons. The driving force behind the deflationary shakeout remains simple: people will spend less during the years ahead. The less they buy, the less money companies can make. The less money companies make, the fewer people they need to employ. The more unemployed, the less money there is to spend. Look at the pattern of the Dow in the chart below. It’s called a megaphone pattern: higher highs and lower lows until the whole bubble finally bursts. When such a pattern approaches its final “E–wave” top of the last bubble, it typically either peaks below the top of the upper trend line, as it did in 1972, or in this case — it has already hit the top of the trend line — it will push above the trend line before peaking. Traders don’t want such a top to look too obvious. 10 The first crash from around early 2014 (probably around 16,700 to 17,000 on the Dow) is likely to bottom between early 2015 and late 2016 at or just below the bottom 5,000 to 5,600 trend line. As demographic trends continue to weaken, the ultimate low in the Dow is likely to be between 3,300 and 3,800 more around late 2019 or early 2020. But demographic trends won’t turn back up until 2023 or 2024, so the market isn’t likely to make a lot of progress until after that. Between now and 2023, millions of businesses will go bust. Only the strongest, most adaptable consumer companies will emerge to lead the way into the next boom. That’s why the ProShares Short S&P 500 could help you profit from this mega consumer spending shift. With these weapons in your portfolio, you’re on your way to creating extreme wealth as the smartest investors, like Joseph Kennedy did in the Great Depression. Note: The recommendations in this report do not form part of the official Boom and Bust portfolios. We do not track these plays. 11 Publisher.............................. Shannon Sands Editors.................................. Harry Dent and Rodney Johnson Managing Editor.................. Mark S. Smith Portfolio Editor..................... Adam O’Dell Graphic Designer................. Jeff Weeks Legal Notice: This work is based on what we’ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It’s your money and your responsibility. Nothing herein should be considered personalized investment advice. 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