By Catherine Austin Fitts
Our theme for 2015 is “A Free & Inspired Life.”
The world is changing.
I described those changes in last year’s Annual Wrap Up as the shift from Global 2.0 to Global 3.0. If you have not heard or read them, I recommend a review of the four web presentations we published with our annual and quarterly Wrap Ups last year as excellent background for what we present in this Wrap Up of 2014.
The change underway – and the volatility associated with it – is accelerating. As communicated by our 2014 theme, “Break Away,” it makes little sense to wait for the world to return us to a prior comfort zone.
To navigate this environment, it is essential to have good maps. There is no point sailing out across the ocean unless you have the tools necessary to find your destination and to avoid the rocks and pirates.
This Wrap Up was created to help you build such a map – to create a framework of what is happening that will make sense out of the rush of events – of both what happened in 2014 and what is coming up in 2015.
We live on a large planet and there is a lot going on. It’s a complex place. Much of what we need to know is hidden – indeed obtaining traditionally available statistics is growing harder each year. Uncertainty is increasing this complexity. Our goal with the web presentations that accompany each Wrap Up is to make that complexity more accessible.
Before diving in, I would like to introduce some of the most important ideas you’ll encounter in this Wrap Up.
The Global Rebalancing
First, the global economy is rebalancing in a process begun decades ago. Current GDP per capita within the economies of the G-20 range from approximately $4,000 in India to $52,000 in the United States. This is a very wide range. Equity market valuations in terms of market capitalization as a percent of GDP or P/E ratios also vary widely.
This economic divergence will continue to shrink. However, the process will be chaotic and organic. The pendulum will swing back and forth, back and forth. Things will go wrong…and there is some chance they could go very wrong. There will be surprises, good and bad. Someday, the annual GDP per capita in India and the United States will be drawn into parity.
As that pendulum swings back and forth, we are treated to an outpouring of often angry, highly imbalanced (even extreme), sometimes whacky, financial and political commentary positing all sorts of dire or ridiculous scenarios. Uncertainty and lack of hard data make us prone to listen to too many of these reports. During 2014, I became very concerned about the time wasted and mistakes made as a result of our subscribers paying attention to such commentators.
The reality is that the rebalancing has begun and it will ultimately be completed. But, we just don’t know how long it will take and whether or not our global population will be better off for it. It’s the age old Tina Turner question, “We can do this nice or rough.”
The rebalancing process is putting extreme pressures on the Bretton Woods system that began after World War II.
When the United States emerged victorious from the war, the terms it dictated to the world were not an occupation of territory (although one could argue that US military personnel in Germany and Japan to this day constitute an occupation) but rather to control the “flow” of capital and commerce. The US agreed to police the global sea lanes and trade routes and to provide the reserve currency. As an incentive to participate, the US then opened more of its domestic markets to global goods. The US consumer – at the time, part of the largest consumer market in the world – was the attractor. The resulting flow of imports and exports grew as national economies organized around the assurance of this global trade system.
As a subscriber remarked about the Bretton Wood’s system, “Oh I get it, it’s the Google model. Everyone uses that platform because it’s free, but the next thing you know your whole flow is moving across their infrastructure and you’re locked in.”
If you look at the hot spots around the world, you’ll see the United States trying to maintain control of the flow:
- The trade moving through pipelines and railroads between a rising Asia and Europe.
- Maritime trade through the South China Sea as China begins to assert more muscle and to squabble with its neighbors.
- The digital and payment flows through ocean cables and global satellite systems and the payment and clearance systems that operate through them.
Part of this effort is to maintain primacy or to win at economic warfare. Some, however, is to prevent an open model from breaking down into global warlords and fiefdoms that could threaten the fundamental economics of the more open model. For many participants, the question is which is worse: the risk of breakdown or the cost extracted by the US for maintaining and dominating the system.
One of the most telling signs in the global economy is the steps that the Anglo-American empire is taking to become more internally self-sufficient, including energy self-sufficient. They are prepared for a long-term unraveling.
But, life goes on. While the diminution of one system pulls us apart, other systems draw us together. And one of those systems is the global equity market.
Global Equity Markets
The development of liquid equity markets in the emerging markets is a relatively new phenomenon. Most equity markets outside the G-7 are still relatively illiquid. However, they are growing — and that growth has just begun. The development of exchange traded funds serves as a bridging mechanism which allows European and North American investors to participate in and monitor emerging equity markets on a more liquid basis. An investor in the G-7 can buy and sell a broad index in equity markets of each of the G-20 nations as well as in many other emerging and frontier market nations.
As things come apart in Global 2.0, there is a “giant sucking sound” of those assets being reorganized into:
- companies that are publicly traded on an exchange
- companies whose investors intend to take public some day
- companies whose investors intend to sell to a publicly traded company
This is the sound of Global 3.0 rising.
The flow of global capital into larger and deeper equity markets as more global assets are shifted into ownership by new and existing companies will continue in an ebb and flow – despite tensions, dirty tricks and wars. Over the last 25 years, the market capitalization of listed companies has grown from $11 trillion to $70 trillion – or by approximately 650%. While the United States is playing dirty tricks on China in hot spots in the Middle East, Alibaba is raising billions of dollars from investors in US markets in the largest IPO in history. Look for the global equity markets to grow by another $60 trillion again over the next 10-15 years.
This is part of Global 3.0 pulling things together in a new way – despite the geopolitical unraveling. I discuss this in our big theme for this year’s Wrap Up: Planet Equity.
Towards a Global Currency
Another important development is the continued build-out of the hardware and software infrastructure for a global currency system.
In this system, everyone will need a smart phone. Then they’ll need affordable mobile payment systems that they can trust. Then they’ll need those systems to feed into banking and clearance systems they trust and which trust each other. And those systems will have to operate across hardware on land, seas and in the skies which are reliable. And of course, an “internet of things” helps, as well.
This is a tall order. And the struggle to control the flow and to disrupt that flow – that’s the Cyberhacking story – will create plenty of challenges. It is amazing to watch the speed, however, with which thousands of companies, entrepreneurs and investors are racing to build the infrastructure out.
The US effort was moving too slowly when the injection of Edward Snowden upon the world stage focused the BRICS nations on their dangerous dependency on US systems. Suddenly, we see Russia, China and Brazil moving to provide for independent Internet, credit cards and settlement systems, to shift into domestic software and cloud companies and to cooperate in a new development bank.
Given the protections that Snowden and Glen Greenwald have enjoyed relative to other whistleblowers and reporters, my assessment is that global forces did not want to depend on the US government, banks and social media companies to build-out the global currency. It appears that Mr. Global wants something more redundant, more powerful, and more innovative … and he wants it to happen much faster. The US team needed a little more competition to quicken the pace.
This is why I often say that Edward Snowden and Vladimir Putin are the “teaser ponies” of the global currency system.
As the Google wallet has fizzled, the primary bet is now on Apple Pay, which is the payment system to watch this year. Facebook with 1.3 billion users has a population that is still smaller than China’s, but not by much.
Why Re-Balance?
As we watch the evolution of the global currency and equity systems, it is worth revisiting the fundamental reasons for the rebalancing of the global society. Why did the G-7 decide to do so?
One reason was that the G-7 nations faced a demographic winter. If they proceeded to use their accumulated retirement capital to ensure a comfortable retirement for the boomer generation, their futures could be compromised. This is important to understand, as we will be feeling the increasing impact of a demographic winter this year. It is one of the reasons why there is a push for the immigration of young people into the United States and Europe.
Another reason was that maintaining the economic imbalance relative to the emerging markets required a high degree of covert force – and this was wearing thin. The trade-off was clear: in exchange for allowing the West to take a significant equity position and by agreeing to subsidize more years of false prosperity for Western consumers, the emerging markets received investments and trade support that allowed them to develop and grow.
Another reason was communications technology. Once you let the communication technology out of the bag, a rebalancing is, to a certain extent, a fait accompli. If India’s GDP per capita is $4,000, and the US GDP per capita is $52,000, then an entrepreneur, company or investor can make money closing the gap. The divergence represents a potential arbitrage. And arbitrage is a flashing economic sign that says, “Profit Potential Here.”
However, there are other reasons. If our civilization is going to evolve, we must integrate more advanced technology across the board – including breakthrough energy technology – and we must find and colonize additional planets. That means we must evolve into a society that can trade successfully across multiple cultures, economies … and even planets. Ultimately, that is going to require a global currency that can function at low cost on a reliable infrastructure. In addition, new energy and other technology is much better served by a financial system grounded in global equity investment rather than grounded primarily in debt and derivatives
The people leading the globalization process have had a very profitable run printing currency and debt and leveraging it with derivatives. That process is not yet over, particularly given the invisible weaponry and covert means by which they can keep the “central banking-warfare” system going.
However, ultimately, everything comes back to what is real. And that requires a global system in which both the leadership and the general population are incentivized to treasure and optimize that which is real.
Contemplating the financial system on this scale brings us back to the question of what is really going on here on Earth. Essentially, our financial system is a component of our governance systems. Hence, it is absurd to propose serious reforms to the financial system independent of an understanding of who governs and the process by which they govern. The fact is that we don’t know.
This raises the question of what is really happening with the ever-growing percentage of global GDP coming from non-transparent cash flows and the investment and expenditure of those funds in advanced technology and weaponry and in space exploration.
The importance of these questions was behind the extraordinary effort in producing a series of presentations at last summer’s Secret Space Program. If you have not watched these presentations, I strongly recommend them to you. This Wrap Up will make more sense to you if you have watched them. They are available here.
Dependent, Victim or Free and Inspired?
One of the most frustrating aspects of my life during 2014 was trying to function in a world in which sophisticated investors and financial commentators tried to explain the financial markets within the “official reality,” ignoring non-transparent cash flows and invisible realities.
How many times have we heard that the financial markets are trading without any grounding in fundamentals? I disagree. I think the markets are trading without grounding in the fundamentals of an “official reality.” They are, indeed, trading on the fundamentals – much of which are hidden behind a wall of denial and secrecy.
Sound fundamental analysis requires a complete understanding of reality.
The financial and investment community will be forced during 2015 to grapple with evolving investment models for Planet Earth, as the central banking-warfare model runs its course and the Bretton Woods system unravels. It will also be challenged to shift to models for investment analysis, allocations and strategies that are based in reality.
This change is a paradigm shift of enormous proportion. Many will prefer to simply live their lives while blindly trusting the establishment with their investing assets through vehicles such as index funds. Or to blame the establishment for all that is wrong with the world while trying to manage their assets in a system that does match their outdated paradigms and models.
My preference is to live neither as dependent nor victim, but rather to look reality squarely in the face and use the resulting intelligence to live a free and inspired life. This includes building wealth in changing times.
On behalf of the Solari Report team, I hope that this Wrap Up and our offerings in 2015 support you in doing the same!
Money Maps of the World
It is simply remarkable how much financial commentary goes on these days without a fundamental grounding in the basic statistics of population, geography, natural resources, economy and military. How could we provide a simple primer that would help subscribers filter fact from fiction? We thought a page of “money maps” for (14) nations in the G-20 would help you power up the “geo” in your geopolitical discussions. As more and more investment managers and companies begin to assess allocations between regions based on an area’s percent of global GDP, a grounding in vital statistics is essential in a world where we are “trading places.”
Planet Equity
In a recent online survey asking for votes on the top story of 2014, I voted for the Alibaba IPO. After submitting my vote, I learned that 2% of the voters agreed with me. The vast majority voted for stories I considered fabricated or irrelevant to the trends that are and will be shaping our lives in 2015.
I think the Alibaba IPO is the most important story of the year. It speaks to Planet Equity – the power of the equity markets as they grow and create global financial interdependence. We are investing in each other. We are creating a world where we can profit from each others success.
Stories & Trends
Alibaba and the growth of Planet Equity are my pick for top story and trend of 2014. Here are my choices for next twelve top stories and trends.
These are stories that speak to the powerful trends that drove events during 2014 and will be doing so for years to come. They were not the stories that got the most attention – those were often stories crafted to manipulate, mislead and distract you from understanding the real story and the deeper trends.
Financial Market Roundup
The big story in financial markets in 2014 was the remarkable strength of the US dollar, US stock market and the US Treasury market.
Outside the US, equity markets were under pressure with European and emerging market indices down for the year. Poor performance in the emerging markets reflected the global slowdown as well as lower commodity prices.
The most dramatic price drops, however, came in the oil markets as the US followed sanctions against Russia by playing the oil card…again.
2015: Get Ready, Get Ready, Get Ready!!!
This is going to be a hard year for many and an amazing year for some. Creative destruction will be growing in the economy as Global 3.0 rises and the unraveling and reorganization of the global political order continues.
Once you have had a chance to digest the insights in the first five parts of this Wrap Up, here are some suggestions to energize your path forward.
1. DO A BACKCASTING
A backcasting is a planning approach in which a desirable future is created. Then planning works backwards from the future to identify the actions that connect it to the present. You define how you successfully achieved your goals, inspired by the assumption that you will succeed.
While a map of the world around you is invaluable, the most valuable asset you can have is a coherent picture of your purpose and how you will live the life you wish to create.
The flow of news around us is depressing. The number of people around us who are uncivil or who will waste our time is growing. The right vision attracts – and that attraction is more powerful than the negative things happening.
I found doing a backcasting this year to be invaluable, particularly when I held myself to the standard of a vision for my life that was “free and inspired.” Ultimately, it helped me refresh and reaffirm my existing purpose. To do so, I reduced my commitments so I could focus on producing the Solari Report and serving my investment advisory clients.
For some inspiration, check out Jon Rappaport’s presentation at the Secret Space Program, the audio presentations for the Free & Inspired Workshop and the Solari Report with Jon “2015: Free & Inspired” which we will publish on January 22nd.
Links
2. SCENARIO PLANNING, PLEASE!
The future emerges in an organic process. We have insufficient information about what is happening and why. In such an uncertain environment, it is essential to keep an open mind about what might happen. Expect the unexpected. Despite what goes wrong, remain willing for the positive to emerge.
For managing my time and money, I use scenarios with estimates of probabilities. (See our Building Wealth collection for more on scenario design).
Ignore gurus and “insiders” with highly specific predictions of the future. Predicting the future is prophecy. There is no more dangerous approach than getting locked into a fixed view of the future. Use planning time to explore primary trends and multiple future scenarios. Prepare emotionally and mentally for a variety of feasible scenarios to come true. Within the resources you have available, prepare financially, too. Identify the opportunities and risks in all of your reasonable scenarios. Think about wildcards.
This permits you to respond opportunistically as events in the world and markets evolve. You understand the primary trends. You understand what indicators to watch and why.
My scenarios for 2015 are as follows:
Slow Burn:
In last year’s Wrap Up, I said the probability of the slow burn continuing in 2014 was 80%. That is what happened.
This year I am breaking the slow burn into two scenarios. Geopolitical tensions have increased the chances of hiccups in the financial markets. Those hiccups are more likely to provide investment opportunities than losses for investors who stick with the primary trends. However, that will require a long-term perspective – something I hope this Annual Wrap Up helps to provide.
The Volatile & Violent Slow Burn:
The fights over natural resources are growing. Increased covert economic warfare is getting nastier. In this environment, powerful players are way too volatile and violent for life to feel like the slow burn of the last decade. Compounding the volatility, creative destruction is dramatically eroding the value of some companies while producing huge values on others overnight. (Uber, anyone?)
Be prepared for the US Dollar Index to rise by another 10%-25%, putting numerous global dollar borrowers over a barrel. If the Fed raises interest rates, the pressures in the bond market will be extraordinary with liquidity problems and rising defaults (there is a reason why Bill Gross ran away from home, spewing justifications as he ditched the risks of managing the largest bond fund in the world).
The implosion of systems, operations and people around us as the cash flows shift out of Global 2.0 have the potential to waste our time and create operational and financial risk if we are not careful. Example: you run Target and you are hacked – now you are crisis manager rather than building a profitable company.
Events will feel scary, but they will provide opportunities to shift assets into quality global equities as well as some commodities. Successfully defining quality will not be easy – because quality includes Global 3.0 skills and resources.
A lot could fall apart, starting with relationships in the European Union, the Ukraine and the US relationships with a variety of allies in NATO and around the world. US leadership will not inspire confidence at home or abroad. Americans will worry a lot about bank deposit insurance and the reliability of their pension funds and social security, but while individual corporate and municipal pension funds may experience difficulty (Examples: American Airlines and Detroit) a widespread compromise is unlikely in 2015.
For 2015, I am assuming a 50% likelihood of a Volatile & Violent Slow Burn.
North American Renaissance Slow Burn:
In this scenario, energy self-sufficiency and rebuilding the industrial base in combination with its geographic advantages permit the United States to allow the global unraveling to work to its financial and economic advantage.
Violent covert operations may be engineering events around the world (killing journalists in Paris, downing airplanes leaving Malaysia, Ebola outbreaks in Africa) but these actions will be limited in North America.
Many consumers benefit from deflationary forces – low-cost imports, lower energy prices and continued low commodity prices which delay more price increases of essential goods and services. New technology will add enormous productivity – although the benefits will accrue to shareholders and labor will experience continued unemployment. Immigration will address shortages of skilled labor, replenish intellectual capital and keep the “demographic winter” at bay.
Divergence in the domestic economy will continue. The economy will be strong in areas enjoying Global 3.0 reinvestment and technology and weak elsewhere. The areas left behind will continue to live in an economic depression kept afloat by government subsidies.
US weaponry and military standing will make it possible for the US to manage the Treasury and the derivatives markets without serious public incident. Where possible, the US government will use its relative financial security to ease up on the domestic and international lawlessness that has so seriously compromised its authority and image.
Financial repression will continue to ensure successful management of retirement liabilities. It will be offset by an endless series of media stories regarding:
- continued strength in the US stock markets (corporate profits will be protected despite the impact of a rising dollar on exports and reporting of foreign income)
- the accomplishments of American technology, and
- the success of young people and immigrants.
There will be no renaissance for the boomer generation and low income Americans. The squeeze will be relentless for those who do not adjust to the new environment. The targeting of low-income people will continue to support a shift of government subsidies and housing to support immigrants and to ensure continued Republican success at the polls.
One of the tensions in this scenario will be between, on one hand, the breakaway civilization and the hidden facilities and governmental operations financed with the black budget and, on the other hand, the overt economy. How will Congress reengineer the federal budget in the face of the secrecy? This is one of the reasons that the long-term continuation of the United States as a unified political entity will continue to be questioned during 2015, renaissance or no renaissance.
Finally, the economies of the US, Mexico and Canada will continue to integrate rapidly, financed in part by expanding access to US street drug markets by the Mexican drug cartels.
For 2015, I give the North American Renaissance scenario a 40% chance.
While this scenario may feel safer to some, it presents fewer global investment opportunities than the volatile and violent slow burn – which is one of the reasons that volatile and violent is more likely to happen for now.
Don’t be surprised if the areas in North America receiving 3.0 investments are in the North American Renaissance Slow Burn while everyone else feels that they are in the Volatile and Violent Slow Burn.
2008 Redux:
The financial coup is over and the majority of the civil and criminal liabilities have been extinguished. This has left a variety of investment interests in a very strong position. There is no reason why we would face a near collapse or collapse unless it is desired or the economic warfare gets out of hand. However, in that case, war is the likely scenario.
Figure a 1% chance of a repeat of the last financial crisis.
World War III or Environmental Disaster:
A globally devastating war is not in anyone’s interest. Neither is an environmental disaster that could destroy the viability of a large part of the planet. However, the proliferation of weaponry and the tensions in a world where markets increasingly adjust through violence (banker deaths) rather than price means that a nuclear war or significant EMP attack could happen as unraveling accelerates. While I have no idea what the risks of devastating solar flares, space weather or weird weather are, the fact that there has been a trillion dollar global spraying program since the mid-90’s has me concerned.
I give this scenario an 8% probability.
The significant investment in finding viable planets and colonizing Mars indicates that the G-7 leadership appreciates that an 8% chance over a sufficient number of years can grow into an unacceptable risk.
While the probabilities of war or global disaster are not high in 2015, the chances of an interruption in services in local areas is high (power outages, weird weather). So, don’t laugh at the preppers. You want to have resiliency in your personal arrangements and disaster recovery plans for your home and business. Whether addressing disaster recovery, cyberhacking, fire and theft or increased regulatory enforcement, please keep excellent, multiple copies of your financial records.
Transformation:
A transformation in global spiritual and cultural consciousness could shift our entire outlook.
I give this scenario a 1% probability in 2015 but its likelihood will rise as the global unraveling of the current order continues.
Keep praying!
I encourage you to invent your own scenarios and welcome you to post at the blog.How do these scenarios translate into expectations for the financial markets?
US Stock Market:
There is a good chance that the US stock market will continue to be strong, but it is unlikely to match the 2013-4 performance. Corporate profits are stretched thin, and P/Es have received significant support from buybacks and balance sheet engineering’s. If the Fed raises interest rates this year, the US equity markets should not have a problem digesting them as long as the rise is gradual. A 10-25% correction is long overdue, so don’t be surprised if it appears in 2015.
International Equity Markets:
Opportunities in the other G-7 and emerging markets will likely be spotty until the dollar reaches a top. At that point, there may be significant opportunities to shift to markets with lower P/E’s and greater long term earnings and dividend growth potential.
Bank Deposits:
As a practical matter, I am not concerned about the viability of the FDIC system. I think the chances of interest rates rising sufficiently to give savers a reasonable return are still remote in 2015.
Housing:
In areas enjoying foreign investment or Global 3.0 investment, housing prices are going to continue to rise. Make sure you do not get shut out of the market by waiting if you want to own a home.
Precious Metals:
My comments are going to sound just like last year’s January Precious Metals Report.
Articles
If the dollar rises, gold and silver will continue to be under pressure. If the gold price breaks below the $1,100 line it could drop as low as $700. That probably will not happen as physical demand in Asia and geopolitical instability has the gold pricing hugging a $1,200 floor. This physical demand is the reason why I believe the primary trend will reassert – but that could take a while. In the meantime, hold your core position but the chances of attractive investments in 2015 are currently small. If the volatile and violent slow burn gets violent enough, that could change.
3. ADDRESS THE RISKS
For those who live in the United States, we are managing serious risks that need to be addressed now on an ongoing basis. Each person’s circumstance is different, so adjust accordingly. Some of these risks will translate to the other G-7 nations.
• Health Care
The health care system is diverging in quality and subject to increased regulatory controls that result in the promotion of therapies that may not be cost effective or ideal. You are going to need to be proactive to assume responsibility for your own health, invest in building up your immune system and removing toxicity and ensure that you have relationships with medical providers that you can trust. I continue to research medical tourism for options abroad.
Solari Reports
• Education
The US K-12 public education system is not preparing your children to compete in a global marketplace. You need to make alternative arrangements for children and grandchildren. If you can’t, you need to aggressively protect them from what you believe to be unnecessary vaccine and other programs while ensuring they receive a real education at night or on weekends. Whenever possible, arrange opportunities for them to travel and live abroad and learn other languages. Also make sure that they learn practical skills: how to fix a car, household repairs, how to make and build things, not to mention financial literacy.
Do whatever it takes to avoid student loans. From the time a child is born, organize christmas and birthday presents to be contributed to a 529 plan or a savings vehicle. Have children live at home or work part-time. Teach them to save and invest.
• Software and Hardware
Trying to create privacy in this world is next to impossible. Nevertheless, appreciate that many information and communication systems are deeply compromised and do the best you can to protect your information and financial account access from identity theft and other forms of compromise.
• Mobile Payment Systems
Ditto for mobile payment systems: be very careful. It’s OK if they steal your Starbuck’s card, but not if they gain access to your bank account.
• Fresh Food and Water
Check out my list under stories and trends. Get radical about ensuring your access to fresh food and quality food at affordable prices. This is the most important aspect of your health care.
• Environmental Pollution
My two cents is that I am on a detox program that never ends.
• Wildcards: 1-3 Months without Mr. Global
Have provisions and a plan for living for 1-3 months without power or well-stocked grocery stores. Keep redundant copies of financial records in safe places. Katrina can happen.
• There is No Away
Your problems are not likely to be solved by going far away to a new place where you are a stranger. Yes, there are thousands of lovely places in the world, including ones where you can live at low cost in a healthier environment. They may work for you. But be very careful about assuming foreign lands can solve the problem and do your due diligence of potential destinations carefully. The aspects of Mr. Global’s plans that we do not like are, in fact, global and as tensions rise, Americans may not always be welcome.
• Filter, Filter, Filter
Take greater care with your associations: people, vendors, partners as wall as your sources of information. The times require much greater discernment in all things.
Vision 2020
Our workshop resulted in the Solari Report team creating a Vision 2020 to serve our subscribers and readers in the process of living a free and inspired life as they define that to be.
Here are some of the things we are doing this year that we hope will serve you well.
At last! We are launching our new blog in the 1st Quarter. Look for upgrades in the ease and performance of subscription software and a more mobile ready platform.
When we launch the new blog, we will also launch a Solari Report Twitter feed. Subscribers want updates and comments on market developments during the week and a twitter feed will give you this option.
We will continue our Crowdfunding Series, focusing on legal, tax and risk issues. We think that circulating equity capital in small amounts is invaluable to rebuilding an economy that works for all of us.
We will do a greater number of lunches and 1 day workshops this year. We heard the message loud and clear – you want opportunities to meet each other.
I am headed to Asia in the spring and Europe in the fall. The demands of Sea Lane Advisory were making it difficult for me to travel abroad. Consequently, I closed the company at year end. To understand Planet Equity, I must see and feel it unfold. This will permit me greater latitude to focus the Solari Report on fundamental analysis and the global due diligence essential for sound investment strategy. The development of sound investment policies and strategies for households and institutional managers alike is critical to the creation of a richer, healthier and happier world.
What I heard from subscribers at our “Free & Inspired” Workshop, is that you want support in understanding and overcoming the obstacles we face:
- How do we find good information and filter out disinformation?
- How do we filter people and ensure that your personal and professional relationships are successful?
- How do we deal with an increasing number of dysfunctional organizations and people?
- How do we generate an independent cash flow doing something we love?
- How do we preserve the highest and best parts of Western civilization and ensure that it is available to nurture us and the next generations?
Our challenge is to continue to find the best guests and information sources to help you do so.
We also are committed to helping the younger generations. As we watch the large financial institutions begin intense marketing campaigns targeted at young people, we believe it is essential that they have access to the knowledge they need to understand the world around them and the “real deal” on the financial system.
Last but not least, we are saving time for the unexpected. Who knows what the year will bring?
Best Books for 2015
Here are my top picks for books that inform you and support your efforts at building health and wealth in 2015.
The Global Economy
The Oil Card: Global Economic Warfare in the 21st Century
by James R. Norman
Read this book and listen to our interviews with the Jim Norman. You will not understand the economy until you do.
Unbalanced: The Codependency of America and China
by Stephen Roach
This is my top pick for understanding the rebalancing of the global economy.
Investment
The Intelligent Investor: The Definitive Book of Value Investing
by Benjamin Graham and Jason Sweig
This is the classic. If you are going to invest in equities, it’s where you should start.
The Little Book of Behavioral Investing
by James Montier
Montier unpacks the facts about what works and what does not and how to keep your emotions from losing you money.
Intermarket Analysis: Profiting from Global Market Relationships
by John J. Murphy
It is one thing to monitor a market. It is another thing to watch and understand many markets together. John Murphy helps you understand relationships in the global financial and commodities markets.
Building Wealth
Family Wealth – Keeping It in the Family
by James E. Hughes
Geopolitics
Covert Wars and Breakaway Civilizations: The Secret Space Program, Celestial Psyops and Hidden Conflicts
by Dr. Joseph P. Farrell
UFOS for the 21st Century Mind
by Richard Dolan
Who’s in charge? Dolan and Farrell are two of the best minds on the planet to help you sort out the unanswered questions of covert finance and operations. Farrell’s books will take you back in history as well.
History
Trading with the Enemy
by Charles Higham
Higham will show you the footprints of Mr. Global back during WWII.
Culture
The Secret of Secret Societies
by Jon Rappoport
Jon is one of the very few people who understands secret societies – outside of the secret societies.
Dealing with Real Trouble
The Art of War
by Sun Tzu (translation by Thomas Cleary)
Deep Survival: Who Lives, Who Dies, and Why
by Lawrence Gonzales
Towards a Global Investment Model
The Evolution of Cooperation
by Robert Axelrod
The Presence of the Past
by Ruppert Sheldrake
The Field
by Lynne McTaggert
Understanding Your Local Community
A Comprehensive Annual Financial Report for your state and local county or municipality; US Budget (or the equivalent in your country)
Personal Strategies
Handbook for a New Paradigm, Embracing the Rainbow, Becoming
(all anonymous)
And the Winners Are…
For all the years that I have enjoyed visiting San Francisco, I never thought I would see the day when the people of that fine city would deeply respect and admire a good ole Southern boy.
Madison Bumgarner has changed all of that with his astonishing performance in this years World Series, helping to lead the San Francisco Giants to his third World Series win as a member of the team. In addition to being named Hero of the Year on the Solari Report, he was named the Most Valuable Player of the 2014 World Series, the 2014 Babe Ruth Award winner, the 2014 Sports Illustrated Sportsman of the Year and the 2014 Associated Press Male Athlete of the Year.
Madison has reminded sports fans everywhere that the heartland of America is filled with people of few words and lots of hard work, talent and character. He’s our hero!
Madison Bumgarner on Wikipedia
MOVIE OF THE YEAR
We choose movies that speak to the times. They were not necessarily published during the year.
In 2014, millions of people around the developed world struggled with the notion that their privacy is gone – invaded by intelligence operations and social media companies armed with super computers and artificial intelligence.
German film director Florian Maria Georg Christian Graf Henckel von Donnersmarck’s The Lives of Others takes us into the world of East Germany in the 1980s and helps us imagine the troubling and human reality of the police state. I have lived a very similar situation in America. This is a brilliant, insightful movie on the politics and tactics of control and manipulation and the power of humanity to overcome the forces of darkness. It has numerous insights to help you understand and navigate the world we live in now.
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The Lives of Others on Wikipedia
DOCUMENTARY
In the 1970s, Chilean-French director Alejandro Jodorowsky acquired the film rights to Frank Herbert’s science fiction classic Dune and invested heavily in the pre-production treatments of a story designed to promote the ideas of the personal power of the individual. Hollywood balked at the message and the length. However, the materials developed then found their way into a score of Hollywood Sci-Fi classics. This enchanting director and his story will remind you why the Internet, digital technology and the tools they help create, like crowdfunding, Netflix and Vimeo, can open up significant talent that has been kept off line.
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Jodorowsky’s Dune on Wikipedia
Let’s Go to the Movies … A Solari Report History:
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Closing & Credits
Thus ends our 2014 Annual Wrap Up. Stay tuned for the 1st Quarter Wrap Up. I am sure we will have a lot to discuss.
Our greatest resource is your continued financial, intellectual and moral support. On behalf of the entire Solari Report team, I want to thank you for making it possible for us to do what we do. Thank you for the steady stream of feedback and ideas. Let us know your questions and concerns. Let us know how we can do an excellent job of serving you in 2015.
What can we do to help you live a free and inspired life?
CREDITS
(In Alphabetical Order)
Nothing is more important than excellence in information and analysis. In addition to the Solari team we have numerous members of our network who have been generous with their insights, analysis and time. We wish to thank them for their contribution to our understanding and to the 2014 Annual Wrap Up
Carolyn Betts – Carolyn’s growing series on crowdfunding is a legal and regulatory tour de force. There is nothing like it online. This series can save entrepreneurs and their attorneys a great deal of time and money sorting out the issues and pathways to raise capital.
Dr. Joseph Farrell – There is a reason why the investment community spends a fortune supporting great scholarship. Intelligence is the edge. Joseph’s writings, his website and his many discussions with me have brought all of us an integration of history, science and technology that is breathtaking.
Ben Lizardi – Ben Lizardi is one of the most gifted entrepreneurs I have ever known. His strategic insight, integrity keeps me on track and his graphic and artistic skills help us communicate the right things with humor and grace each week.
Jim Norman – To understand the economy, you must understand the Oil Card. Jim is the guy who figured it out and he explains it in a way that anyone can understand.
Rambus – Rambus Chartology has supported me with technical analysis throughout the year and has graciously allowed the Solari Report to republish subscriber only charts.
Jon Rappoport – Jon’s intellectual fearlessness keeps the matrix out of my mind all year long. He is the ultimate in New World Order intellectual pest control. The Ebola Shriek-O-Meter fizzles out in his presence.
Franklin Sanders – Franklin never gives up making life work outside the matrix – precious metals, farming, community – and helping others – even the poorest and most lost among us – do the same.
Court Skinner – I once said that the good thing about corruption in America is that it means the Solari Report has the benefit of Court’s insight and analysis, particularly on engineering and technology questions. Without corruption, Court would no doubt be a Senator or running some big company.
Jeroen Van Straten – Jeroen and his team put on the two Breakthrough Energy conferences in 2012 and 2013 and the Secret Space Program this year. These have been invaluable opportunities to hear and speak to some of the most intelligent thinkers I know.
Anne Williamson – Anne’s understanding of the Russian economy and experience in the 1990s changed my life and world view in the fall of 2001. She joined us on the Solari Report to provide rich context for what is going on in the Ukraine – and blew more than a few minds.
And of course a word of thanks to the many remarkable guests who have joined us on the Solari Report.
Planet Equity
“If you want to grow, find a good opportunity. Today, if you want to be a great company, think about what social problem you could solve.”
~ Jack Ma
The dominant theme in the 2014 Wrap Up is the growth of global equity markets.
ALIBABA LAUNCHES THE LARGEST IPO EVER
In a recent online survey asking for votes on the top story of 2014, I voted for the Alibaba IPO.
After submitting my vote, I learned that 2% of the voters agreed with me. The vast majority voted for stories I considered fabricated or irrelevant to the trends that are and will be shaping our lives in 2015.
I think the Alibaba IPO is the most important story of the year. It speaks to Planet Equity – the power of the equity markets as they grow and create global financial interdependence. We are investing in each other. We are creating a world where we can profit from each others’ success.
Commentary
English teacher Jack Ma started Alibaba in the mid-1990’s in his living room in China. Twenty years later he launched the largest IPO in the history of the world for a company that has a market valuation which is larger than the GDP of many countries. Alibaba’s story speaks to the growth of Asia, of the online market exploding in size with smartphones and mobile payment systems, and of the access and liquidity these developments offer millions of small businesses and consumers.
In the process, despite running what is now one of the largest companies in the world, Jack Ma spoke to a global media audience and to the largest, most influential investors in the world about the importance of serving the dreams and aspirations of the little guy.
While Alibaba was launching its IPO, Apple was growing even larger. The year ended with commentators asking if 2015 would be the year in which Apple became the first $1 trillion company. With the US having high hopes for Apple Pay, the race is on. Here is the listing from Wikipedia of the largest companies in the world:
GLOBAL STOCK MARKETS ARE GROWING
The global equity markets have grown by $60 trillion in the last twenty-five years, from approximately $11 trillion to $70 trillion.
Some of this growth has come from the debasement of global currencies. As more money is printed, the value of stocks go up while the currency in which they are denominated has a lower value, not because corporate profits have risen or companies are worth more. Indeed, one of the reasons that predictions of hyperinflation (as a result of expansionary monetary policy) have not come to pass is that this securitization process is soaking up a great deal of excess liquidity.
In the developed world, growth in equity markets has come from companies assuming ownership of a larger portion of assets and operations. The more dramatic growth has been in the emerging markets where countries have developed new securities markets, including stock exchanges. These exchanges have facilitated the flow of capital into the creation and growth of companies, and the shift of investment capital from West to East. This has contributed to a greater percent of GDP in their areas being represented in the equity markets – as well as contributing to growth in GDP as liquid capital becomes available to more businesses and entrepreneurs.
According to the World Federation of Exchanges, its member exchanges (which unfortunately no longer include the London Exchange, which also owns the Italian Bourse) now have listings for a total of 44,326 companies:
- 24, 265 companies are on Asian exchanges with a market capitalization of $20.6 trillion;
- 10,320 are on exchanges in the Americas with a market capitalization of $30.6 trillion;
- 9,741 are on European, Middle Eastern and African Exchanges with a market capitalization of $12.9 trillion;
New company listings in 2014 were highest in Asia with (903) new listings, compared to (317) in the Americas and (134) in Europe, the Middle East & Africa.
In the United States, private equity, mergers and equities constrained the growth of new listings in 2014 while stock buybacks continued to shrink the outstanding float for many existing companies.
The value of outstanding Exchange Traded Funds has now reached $1 trillion globally, and most of that is in the United States. This has made it possible for American investors to access a broad index of stocks traded on emerging market exchanges, typically by country. A retail investor can invest in an index of the Indonesia or Brazil markets, including many stocks not listed on the US exchanges, through an ETF and pay US discount firm commissions.
This process of representing a growing portion of global assets, corporate income flows and country GDP in liquid equity markets is a significant development.
In one sense it is the “securitization of everything.” At the root, it represents a shift from a world run by sovereign governments to a world where a greater portion of the economy is run by companies and their investors. But the shift is messy. Much of the more baffling, even unpleasant things going on around us is the result of companies aggressively vying for markets and earnings, at times in destructive ways, as rising stock prices increase their incentives to grow profits.
You can hear some of the discomfort with this process from leaders, such as Vladimir Putin, who prefer their country to be governed by a sovereign government as opposed to being picked over by corporate interests as they were in the “global supermarket sweepstakes” of the 1990’s.
Then there are times that companies are the voice speaking on behalf of cooperation – Russian sanctions harm their business and policies that squeeze the middle class shrink their consumer base and profits.
Companies trade in the equity markets for a multiple of their net income – the price earnings ratio or P/E. If a company makes a dollar and its stock is valued at $20 dollars, we say that its P/E ratio is 20X. For every dollar of additional net income, shareholder value increases by $20. So if I buy a stock and double the companies earnings, the value of my stock is likely to double. My profits from the increased value are capital gains.
Capital gains on stocks and real estate are the single largest source of political contributions in the United States.
Politicians do things that cause a company’s profits to go up. Grateful investors then send the politicians campaign contributions with a percent of their profits. I describe a case study of how this system works in Dillon, Read & the Aristocracy of Stock Profits (http://dunwalke.com)
DEBT OR EQUITY?
As economies in the developed world have matured, they have relied on increasing amounts of government debt. Currently, emerging markets are growing globally, so it is not surprising that they rely more heavily on equity.
WILL YOUNG PEOPLE INVEST IN EQUITIES?
One of the most important questions impacting projections of financial markets is whether participation in equity ownership will continue to grow. First, US households have traditionally invested in the equity markets.
However, as government fiscal and monetary policies have shifted savings out of households and into corporations, the question is whether households will have sufficient assets to invest in equities. One variable driving the consolidation of wealth may be a forced consolidation of capital to provide continued availability of savings and investment into capital pools, including equity, to ensure that US companies have access to sufficient capital to dominate globally.
Recent polls indicate that the 2006-2010 financial crisis and bailouts left many young Americans appropriately alienated from large banks and financial markets. Starting in 2014, a major effort is underway on the part of US financial institutions to rekindle their interest in investing. We are seeing media designed to encourage young people to invest.
The Young Investor
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We are also seeing software technology being used to organize investment vehicles which appeal to the Millennial Generation. For example, Motif Investing is an online broker based in Silicon Valley that invites you to create or invest in exchange traded funds organized around a trend in the economy — a “motif.” Here were the (15) best performing motifs for 2014 (please note we don’t show the worst performing (15) motifs!).
The technological developments that will make equity investment most accessible to the next generations are ongoing innovations in human-computing interfaces. Just as Amazon.com makes it far too easy for me to buy books with one click, smartphone apps for brokerage firms will also make it possible for the global online market to buy with a single click.
However, financial institutions will not stop there. Note Fidelity’s launch this year of its ‘StockCity.’
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Fidelity Launches ‘StockCity’ to Lure Millennials
WILL A GROWING GLOBAL MIDDLE CLASS AND ONLINE MARKET INVEST IN EQUITIES?
While the ongoing participation rates in the G-7 nations will have a significant impact, the big question is whether the growing global middle class – hundreds of millions of people who have never invested in the equity markets – begin to invest in the securities markets. We are watching the growth of the online Asian market overtake the US and European consumer markets in numbers – and someday in size. Can and will it do the same to the flow of savings and investments? The move towards global parity says that this is likely. The potential for a rising middle class to shift a portion of their growing capital from bank deposits and real estate into mutual funds and liquid securities represents a major opportunity for the financial markets.
While households in the emerging markets own a relatively small portion of equity investments, emerging market institutions have been closing the gap with institutional investment.
In June 2014, the think-tank OMFIF published a survey of global central banks, sovereign wealth funds and public pension funds which reported that public institutions owned $29.1 trillion of the estimated $130 trillion in cross-border assets. This includes $13 trillion held by (157) central banks (reported before the recent increases from quantitative easing), $9.5 trillion held by (156) public pension funds and $6.5 trillion by (87) sovereign wealth funds. OMFIF reported a broad-based shift of central bank assets into the equity markets. China’s central bank with $3.9 trillion in assets has now become the world’s largest public investor in equities.
Many emerging market countries do not have pension fund systems. To the extent that they adopt them, such arrangements may also create a volume of equity investment as those countries grow.
HOW MUCH MORE GROWTH?
Global rebalancing of the economy means global rebalancing of the equity markets. And that means equity markets have more growing to do. Many variables can drive the short and intermediate swings. The unraveling of the Bretton Woods system and geopolitical tensions can slow things down, creating significant losses for some and windfall profits for others. Wars and environmental disasters can stop and reverse the process for a time.
One of the big variables is the general level of P/E ratios. The S&P 500 P/E ratio is above the historical mean. However it is far below the high in the P/E ratio of the roaring 20’s or the Internet stock boom – both were periods of explosive growth from new technology married with “pump and dump” antics of the Western financial system.
On one hand, I could argue that the introduction of mobile payment systems and the integration of digital technology into our infrastructure along with dramatic improvements in the human-computing interface could send P/Es much higher. On the other hand, a growing population stripping natural resources and experiencing weird weather which compromises the global harvests could find itself mired in an ugly competition for natural resources and capital. Higher interest rates causing high defaults of debt and derivatives could send both corporate earnings and P/Es much lower.
The Anglo-American alliance has been the dominant player in the global financial markets for a century or more. While the Bretton Woods model is a large flow model, it is arguable that the global financial markets constitute an even more powerful one. The power to convert $1 of profits into $10-100 of shareholders value, and lever it with debt and derivatives, is the goose that laid the golden egg. It attracts – and attraction is a more powerful economic engine than physical and military force. China’s conversion to markets has proven this yet again.
In theory, global equity markets have the potential to organize capital into a system that encourages us to allocate capital to the productive among us (and to those who have a vested interest in their success) without regard to social status, race, color, creed or nationality. That power depends, however, on a common commitment to the rule of law which creates and maintains the trust which is the basis for liquidity and leverage in the system. A shared belief in the rule of law is the basis of the goose that lays the golden egg.
When there is law, $1 in profits can create many multiples of that in equity value. When there is no law, $1 in profits can create little or no equity value as the only value is today’s cash flow and what you can protect with a gun or standing army that day.
This is not an inconsequential point. The financial coup d’etat engineered by US financial institutions came close to destroying confidence in the financial markets. It was preserved by a thread as the US Treasury and Federal Reserve provided trillions to replenish the funds stolen from global investors with fraudulent securities and related derivatives. Millions of investors took permanent losses. There are still trillions in fraudulently issued bonds and stocks floating around the global financial system. High frequency trading, naked short selling and other institutionalized practices that generate enormous profits “above the law” continue. The dark pools grow.
The mass media has been promoting an endless flow of lies and false realities for years to ensure that the Anglo-American institutions can combine the benefits of non-transparency, money laundering (organized crime) and tactics of financial and economic warfare (the oil card) with the financial leverage of liquid markets. We have arrived at a highly Orwellian state where the financial markets make no sense to even the most sophisticated investor because the national security state requires secrecy to effect its manipulations.
Also eroding trust in the US system are regulations to minimize liquidity at the local level. Small business owners are told that they cannot raise equity capital by using crowdfunding or online systems due to possible fraud. But, they are encouraged to spend their life savings on lottery tickets every day. As a result, small investors leave their money in the bank where it is channeled into US Treasury securities (with no real return to the investor) or in a brokerage account which ensures that their equity investment flows through Wall Street.
If recent surveys of the Millennials are true, US politicians and bankers have come dangerously close to killing the goose that laid the golden egg. Whether due to lawlessness at home or lawlessness abroad, the US has a credibility problem that cannot be solved with dazzling software and expensive marketing campaigns.
However, a failure of US political and investment leadership will not prevent the growth of the global equity markets. It may simply move the mantle of leadership to the country or international consortium with sufficient integrity and infrastructure to manage it, likely fueled by the demographics of a growing global middle class.
The evolution of leadership in the equity markets is intimately tied to the governance of the global currency. In 2015, there will be no more interesting sport on the planet than the competition between global factions vying for a seat at the table.
