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S T R AT E G I C I N V E S T M E N T
April 2013
The Neuroeconomics of Denial
Why Most Investors are Blind to Hints of a Coming Collapse
“Yet it’s clear that there are physical limits to our minds. The consensus on short-term memory,
for example, is that most people are limited to retaining just seven items at once, or seven
chunks of data — a physical limitation, hard wired into our brains. What if we were similarly
hard-wired to effectively manage a limited number of personal relationships? It seems plausible.
If memory has a corresponding physical capacity, why wouldn’t other functions of the brain?”
—Mark Sisson, Are Humans Hard Wired For A Limited Social Circle?
By James Dale Davidson
This month, I interrupt my analysis of the danger of a coming Dark Age to delve into
the interesting question of why everyone does not see this catastrophe looming on the
horizon. Why, indeed?
You may even be wondering why it could be useful to you to entertain my unsanctioned vision of a bleak future when it seems so remote from anything that would interest CNBC.
For that matter, I can almost assure you that any member of the editorial board of the
New York Times would gladly tell you that my warning of a coming collapse is preposterous.
With all the wealth of sources available in the Information Age, is it not wrong-headed of me to propose that
the mainstream view could be dangerously wrong?
Let’s take up that question. The answer lies not in some peculiar defect of information technology. Rather,
it has its origins in prehistory — during the Hunter-Gatherer
stage that our ancestors survived before agriculture originated
Inside this Month’s Issue…
some 10,000 years ago.
Let me explain.
The human experience is iroughly 250,000 years old. Anthropologists believe that anatomically modern humans initially
lived in tight-knit groups of about 150 individuals. However,
that seemed to be no more than a random generalization pieced
together from excavations of archaeological sites and observation
of current Hunter-Gatherer groups — until a little over 20 years
ago. Then in 1992, Robin Dunbar, a British anthropologist, had
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Debt That Will
Never be Repaid.............. Pg. 3
Decay of America’s Middle
Class................................ Pg. 4
Francification of America... Pg. 7
Boost your Portfolio
by 200%......................... Pg. 8
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STRATEGIC INVESTMENT
a penetrating insight into the physical basis of the
coincidence that primal human tribes were limited
to no more than 150 individuals. Dunbar theorized
that the number of members in primitive human
groups, like the number of members in non-human
primate “grooming cliques,” is determined by the
size of the neocortex region (which is involved in
spatial reasoning and conscious thought) of the brain.
By extrapolating from the size of the neocortex for 36
separate species of monkeys and apes, Dunbar could
accurately predict the average group size for each
of these species. Applying these same extrapolation
techniques to humans, he calculated that the maximum “mean group size” for humans was 150, with
an “intimate circle size” of 12.
Consider the comment quoted from Mark Sisson
at the top of this article. Sisson is an expert on the
primal dimensions of modern life. He points to
the well-supported view about the limitations of
short-term memory. This underscores why I am
able to predict with a high degree of confidence
that your telephone number will have seven variable
digits, rather than 17 or 71. Even if you possess an
extraordinary, photographic memory that would
permit you to recall a 71 digit phone number, your
neighbors and others who would be called upon to
reach you are in all probability limited to seven digits. That’s why almost all telephone numbers on the
globe are limited to seven digits. When they stretch
to 10 or 11 digits, it is invariably with the addition of area codes and country designations to the
unique seven-digit number.
Neuroscientists have other notions about the carryover effects of primal life on contemporary humans.
One of these, as we explore below, is not only that
the structure of our brains informs the size of the
primal human tribe, but it also helps determine our
attitudes toward shared perceptions and our willingness to think for ourselves.
Let’s face it. Fred Flintstone would not have been
able to kill a mastodon on his own. And if he had,
through some lucky quirk, he would hardly have
been able to carry it home by himself. For a quarter
of a million years or more, the survival of our ancestors depended upon close cooperation within a tight2
knit tribal group of 150 or fewer persons.
Under those conditions, independent or iconoclastic
thinking may have been a threat to survival. So at a
minimum, we are probably descended from 10,000
to 12,000 generations of anatomically modern human beings for whom thinking independently had
negative survival value.
Little wonder then, that people today show a strong
disposition to trim their opinions to match those
of the group. In the bad old days, when survival depended upon hunting mega fauna with a close-knit
tribe, having hunters along who thought for themselves could well have led them to act independently
at crucial junctures, and thus jeopardize the hunt.
Fast-forward to today, and that could go a long way
towards explaining why only a fraction of the educated population of North America (or anywhere else
for that matter) is prepared to think for themselves,
even where matters of grave importance are involved.
A man who points towards the explanation for this is
Gregory Berns, an economist and neuroscientist who
holds the Distinguished Chair of Neuroeconomics in
the Department of Psychiatry in the Medical School,
Emory University in Atlanta, Georgia.(“Neuroeconomics” is the study of how neurobiology places
constraints on the decisions people make). Dr. Berns
is the author of Iconoclast, a book that suggests that
the wiring of most people’s brains keeps them from
thinking independently.
According to Dr. Berns, iconoclastic thinking is a
minority trait. Most people were born to gravitate
toward team thinking. The brain is hard-wired to
conform. He points to a study in which isolated individuals tested on their own determined the correct
answer to a question 86% of the time. But when put
into a group and told that the group had come to the
wrong answer to that question, almost a third of the
subjects (31%) abandoned the correct answer in order to conform with the prevailing group opinion.
Or to put it another way, the percentage coming to
the wrong answer more than doubled — from 14%
to 41%.
This interesting experiment shows more than it might
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seem on first look. The point is that most people’s
brains are wired to prefer conforming conclusions.
Presumably, the degree to which the group-think
impulse expresses itself depends upon the nature of
the group and what is being tested in any given circumstance.
Consider the neuroeconomic dilemma of the citizen
contemplating the possible trajectory of the national
economy over the next two decades.
What does he know?
He certainly knows the prevailing dogma that the
United States is the richest, most successful country
on earth. He has a choice between formulating a
conforming opinion or veering off in an independent direction — which almost inevitably requires
a considerable effort of iconoclastic research and
thinking for yourself. This is exactly the setting
where the hard-wired bias toward being a team player is most likely to inform expectations.
As a matter of interest, the unwelcome revelations
from accountants and actuaries plumbing the books
of the U.S. government seem to have had virtually
no impact on popular opinion. This is completely
contrary to the effect they should have.
A Debt That Will Never be Repaid
Too often, ordinary citizens tend to ignore the logic
of double-entry bookkeeping.
In pure logic, the revelation that the U.S. government
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has unfunded liabilities and debts with a present value
of somewhere between $90 trillion and $220 trillion
(or almost 1,500% of GDP) implies that Americans,
depending upon their specific dealings with the U.S.
treasury, could be not the richest people on the globe,
but more likely the poorest.
Again, I’m reminded of the charming story that
Donald Trump told of himself. A couple of decades ago during the savings and loan crisis,
Trump was walking with his girlfriend of the moment on the Upper East Side of New York when
the couple encountered a tattered street person
begging for alms. Trump shocked his companion
by telling her that the street person was worth $1
billion more than he.
“But he doesn’t look as though he has a penny,” she
protested. “He doesn’t.” Trump replied.
I am convinced that the neural bias toward conforming opinion goes far towards explaining the apparent
oblivion of the majority of Americans to the dire fiscal
prospects of the U.S. I also think it helps explain the
alacrity with which the public seems to accept blatant
lies about current economic performance, particularly
those that hinge on the mismeasurement and underreporting of inflation.
Accept it. The U.S. government has been lying to
you for decades.
The government and politicians have proven adept at
hijacking an in-born inclination to conform your thinking to that of the small tribal group.
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STRATEGIC INVESTMENT
In effect, politicians use your primal inclination to
trim your opinions to those of the group to manipulate your perceptions of the economy in ways that
jeopardize your future.
This was underscored by recent news reports that
politicians in both major parties involved in chronic
wrangles over the yawning federal deficit, have concurred on steps to save future trillions by further fiddling inflation adjustments on Social Security, and
federal pensions. Already, total federal outlays for Social Security are only half what they would have been
if inflation were still reported by the same methodology used during the Carter Administration.
In effect, the political establishment has agreed that
they can correct what ails the country by compounding the remorseless lies they have already told you.
Don’t believe them. Now, more than ever, it is time
to think for yourself.
Contrary to the institutionalized pretense of the
government, and their lackeys among the Keynesian economists, decades of remorseless government
spending out of an empty pocket have impoverished Americans and left most people facing a future they cannot afford.
A major explanation for Obama’s re-election in the
face of plunging real income is the simple fact that the
United States has been so thoroughly impoverished
that the only prospect for most of the former middle
class facing the future is more income redistribution.
The Inflation Fraud
With real wages plunging, it doesn’t take a crystal
ball to see that most Americans have very little prospect of enjoying a better life if they must pay for it
from their own resources.
Why does understated inflation matter so much? Two
reasons. Because it not only disguises the collapse in
living standards in the United States, it also overstates
the appearance of economic growth. If the economy
grows by 4% in nominal dollar terms, and inflation
is 2% then real growth is 2%, a generally encouraging result that leads people to hope that they will live
better in the future than they do now.
Consider this frightening fact: fully 54% of U.S. retirees have less than $25,000 in savings. This amounts
to less than their projected out-of-pocket costs for
Medicare alone. According to the Employment Benefit
Research Institute, Social Security is ”the only source
of income for one-quarter of current retirees, and the
primary source for nearly three-quarters. That dependence will only grow for baby boomers.”
On the other hand, if nominal growth is 4% but inflation is really 9.6%, then real growth is negative. The
economy is not growing at all but declining in real terms.
Do you wonder why politicians shy away from reducing the unfunded burden of entitlements? Don’t.
Rightly understood, the real performance of the
American economy has been dismal over the four
decades since Richard Nixon trashed the gold reserve standard.
Even the appearance of higher incomes is largely an
illusion.
It is rooted in the big lie that inflation is far lower than
it actually is. While February year-to-year inflation
was reported at 2% by the U.S. government using an
intentionally inaccurate methodology, a more honest year-over-year calculation is 9.6%. That is the rate
4
reported by Shadow Government Statistics (1990Base) using a more accurate methodology as formerly
employed by the U.S. government before our leaders
launched a concerted program of lies and misrepresentation of the dismal facts about the economy.
The inflation lobby has managed to create a situation where the vast majority of Americans have no
hope of retirement. And this did not begin with the
collapse of Lehman Brothers and the bursting of the
housing bubble.
The Slow Decay of America’s
Middle Class
Let’s face it, the American middle class is practically
kaput. The mean American family has only about
$50,000 in savings. And that number is skewed to
the upside by the increasingly atypical top 10%.
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STRATEGIC INVESTMENT
You almost have to be in the top 10% of the income
distribution in the U.S. to live a decent life today.
And even that is likely to go away as Obama raises
taxes on “the rich” to predatory levels. But whether
you’re a retiree hoping to supplement your income,
a wild optimist hoping to retire, or a younger, productive person facing the prospect that much higher
taxation and runaway inflation will deprive you of
anything you are able to earn, it is time to transcend
denial and take a cold, hard look at the situation
you face. If you do, you’ll see that there is practically
no chance for you to enjoy prosperity in the future
by going along with the gag.
In historic terms, the situation you face is probably
as hopeless as that of the Roman middle-class starting from the time of Diocletian when the decision
was made, as described by The Cambridge Ancient
History, “to squeeze the population to the last drop.”
A ruinous decline in living standards lies ahead in
the United States, another case of the decline and
fall of a great power that remorselessly overspent the
available resources, relying upon predatory taxation
and concerted inflation to preserve the state at the
expense of the people.
Notwithstanding the pronounced cognitive bias
of most people to conform to “group think” and
go along with the gag, there is a limit to the malleability of the public when a bankrupt government is
dragging its citizens along into bankruptcy as well.
No one knows where the inflection point lies when
the government will choose even more overtly despotic forms of repression and control. But I doubt that
we’re talking about something as far away as 2084.
Why Financial Repression
Won’t Work
You have heard much in the past four years about
“financial repression,” the government policy of
holding interest rates far below the rate of inflation.
This deprives you as a saver of income you would
otherwise have received.
Financial repression may keep your bank account
empty but it pays big dividends for the government.
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Economist Carmen Reinhart argues that financial
repression in the U.S. and Great Britain after World
War II had the effect of liquidating debt equal to
from 3% to 4% of GDP on average each year.
At least, that was the experience then, long before
the federal government began incurring GAAP deficits (which factors in the cost of liabilities promised
like Social Security) of up to $6.9 trillion a year
(42% of GDP) as it did last year. Reinhardt’s calculation actually does not show that mildly negative
interest rates will liquidate debt and liabilities when
they are accumulating at present rates. After World
War II, government deficits narrowed sharply.
To keep abreast of the deterioration of the U.S. government’s balance sheet, real interest rates would
have to be so far negative that they canceled that
debt equal to 30% to 40% of GDP annually.
There is a word for that. Hyperinflation.
There is a fine line between “financial repression”
and more thoroughgoing repression that limits
the freedom of your person as well as that of your
money.
The U.S. Government is
Closing the Exits
To illustrate, consider this story — which I well
know, as it happened to me. I write from Brazil,
where I have been following my own advice by investing my time and money in a more prospective
economy.
So far, touch wood, I have made millions, with four
fortune making projects on the go. To do this, I’ve
had to send money to Brazil and visit at least 51
times.
My success owes absolutely nothing to the U.S.
government. In fact, the overbearing bureaucracy of
a repressive surveillance and security state made it
extremely difficult for me to make an investment on
which I have earned a 1,426% gain to date. (Which
is equal to over 5000 years of interest on U.S. treasury bills at their current, invisibly low rate).
As you may know, one of the strong policy thrusts
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of the Obama administration has been the promulgation of onerous regulations designed to prevent
American citizens from creating or maintaining financial assets abroad. These regulations don’t make
it illegal, per se, for an American to open a foreign
bank account. Rather, their aim is to impose regulatory burdens on foreign banks that are so onerous as
to make it economically irrational for them to entertain American clients.
A little more than a year ago, I learned to my surprise
that Obama is using the same techniques to discourage American banks from allowing their customers to
wire money to other jurisdictions. When I attempted
to wire funds to support what has proven to be a very
successful investment in Brazil, I was amazed to learn
that a bank with which I had been dealing for decades
refused to complete the transaction.
Why?
I was told by the president of the bank that regulators had threatened his institution with fines of up to
$100,000 for permitting international wire transfers
that were not supported by voluminous documentation that the bank had no systems, nor personnel to
manage. I was stuck. It certainly was not a question
of my proposing to use the money for nefarious purposes.
But my money was getting the same kind of bureaucratic scrutiny before it could travel that you get
when you have to take off your belt and shoes at the
airport. After much wheedling and cajoling and the
patient drafting of long memos to the file, I was finally able to prevail on the bank to proceed with the
transfer. As a result, I made millions.
account that it will cover the fines and other costly
regulatory headaches that they may face from allowing you to exercise your rights.
And it is not just a question of whether they will let
you send your money abroad. Don’t forget that a
big part of successful foreign investment is traveling
to other countries, making contacts and realizing
opportunities. If you were stuck at home, like an
East German pinned in behind the Berlin Wall, you
could never launch a fortune making enterprise in
Brazil, or any other jurisdiction.
I believe in the not too distant future that you will
need special dispensation from the government to
travel abroad. In fact, the U.S. Senate passed legislation last year to enable the IRS to seize your passport
if you owe back taxes. A bill titled “Transportation
Research and Innovative Technology Act of 2012,”
(SB 1813 Sec. 40203), would have given the IRS the
power to revoke, limit, and/or deny passports to citizens who owe back taxes.
I recently had the pleasure of enjoying a $416,000
tutorial on just how easy it is to have a gigantic tax
due to the IRS through no fault of your own. A year
ago in March, my wallet was stolen. Presumably, that
is when some cretin stole my identity and thereafter
filed an entirely fictitious tax return with the IRS using my Social Security number.
I suppose he was fishing for a refund. But the return
included no details from the various brokerage accounts and banks that file information notices with
the IRS. Consequently, I was buried in fines and
penalties for “underreporting” which I am still trying
to sort out.
I don’t know whether the bank had to pay a fine or
suffer other bureaucratic recriminations for allowing
me to conduct business abroad. However, I do know
that “financial repression” is edging ever closer to becoming just “repression.” Full stop.
If section 40203 of the “Transportation Research
and Innovative Technology Act of 2012” had passed
the House, I probably would not be in Brazil today. I
would have lost the business opportunities I am pursuing now simply because someone stole my identity.
This experience made obvious to me that the law in
its majesty was making it onerous for anyone but billionaires to do business abroad. In many cases, banks
will balk at wiring money abroad for investments
unless they make so much profit from handling your
That said, it is not worth delving into the quirks and
injustice of this particular piece of legislation, except
to note that it illustrates the authoritarian measures
the U.S. government will pursue to compel you to
do its bidding.
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It is almost comically obvious that one of the next
steps in the intensification of “financial repression”
will be laws to seize part of your retirement assets
and forcibly invest them into government bonds,
under the guise of “protecting” your retirement.
In my view, it is already “baked in the cake,” that
U.S. living standards are destined to take another
deep notch down. If nothing else, the institution of
ObamaCare guarantees that increasing numbers of
the formerly middle class will be pushed into parttime employment.
Full-Time Jobs:
An Endangered Species?
The coverage for mandated healthcare insurance in
Obama’s Affordable Care Act kicks in for employees
working more than 30 hours a week. Consequently,
many employers are cutting hours rather than complying with the mandate to provide costly benefits
for workers who exceed the 30-hour threshold.
As a result, many full-time jobs are being converted
into part-time work. For example, a Taco Bell in
Guthrie Oklahoma “is cutting full-time employees
hours to avoid mandates under the new affordable
care law.”
National restaurant chains including Applebee’s,
Olive Garden and Denny’s have also joined the parade of employers cutting work hours. It isn’t just
downscale chain restaurants that are curtailing the
workweek. In Ohio, Youngstown State University
has announced a 29 hour per week— warning employees that they would be fired if they work more
than that amount.
News reports indicate that the state of Virginia is
trying to force “potentially tens of thousands of
public sector employees in the state to work fewer
hours so the government can avoid providing them
healthcare.”
Prior to ObamaCare, the average, full-time employee in the U.S. worked about 39.5 hours weekly,
which totals about 2,050 hours a year. And a 2010
study conducted by the Center for American Progress, found that many American men born after
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1956 considered a 40-hour week to be a “part time”
endeavor.
That is probably because it is increasingly difficult
for a man with real weekly earnings at an Eisenhower era vintage of $185 (in 1982–1984 constant
dollars) to support a family. Still, in his zeal to increase the proportion of Americans that are totally
dependent on government handouts, Obama has set
in motion incentives which will force many employers to adopt the French workweek.
The Francification of America
is Under Way
The “French way” has been to tolerate one of the
world’s shortest workweeks, with an average of
1,439 hours put in annually, according to an OECD
study. That is a little more than 27 hours per week.
The results for French work culture was succinctly
described by Corinne Maier, who works for a stateowned, French electricity company. She has written
a book arguing that the French attitude to work is
to do as little as possible. She says, “The aim is to
keep your job without working.”
The trouble is that shirking does not pay its way in
a competitive world where Turks work almost 50
hours a week and South Koreans only slightly less.
A shorter work week doesn’t bode well for the future
of U.S. tax rates.
In the 19th century, the famous English economist
David Ricardo, proposed the so-called “Equivalence
Theorem.” It holds that consumers will internalize
the government’s “budget constraint,” and recognizing that they will have to pay higher taxes in the
future when government increases its liabilities, will
put aside savings to pay for the future tax rise.
This may have seemed a reasonable proposition 200
years ago, but today’s total U.S. government debt
and liabilities are so vast that they exceed the total
GDP of the world. That being the case, there is no
way that even the wealthiest taxpayer could make an
adequate provision for them.
It would seem to me, to be more rational to stop
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acting as if you were a member of a close-knit, primal tribe and declare your cognitive and economic
independence.
•
•
10% correction once a year
20% correction once every 3-5 years
And get out while you still can.
Want to know the last time the S&P had a correction of more than 10%?
All the best,
March of last year.
That means we’re due for another. Yet instead of
thinking about the risk, investors are focused on the
rewards. And as a result, the market has moved up
too quickly.
James Dale Davidson
R
How Fear Could
Boost Your Portfolio
by 200%
By Charles Del Valle
When the market makes a new all-time high, investors break out the champagne. But that’s the most
dangerous thing you could do.
We’re overdue for a big correction. And today I’m
going to give you a way to double your money when
it happens.
But first, I want to tell you why I think a correction
is coming. And it all comes down to this simple reality: When investors all expect the same outcome, the
market tends to do the opposite and dole out the
most damage.
Right now, investors are acting like the rally will
never end. But the stock market has never gone up
in a straight line. Even in a bull market like the one
we’re in today.
Eventually a correction comes. And according to Fidelity, corrections happen quite often. From 1900 to
2010 we’ve seen a…
•
8
5% correction three times a year
For example, the S&P 500 is now 6.1% above its
125-day average. Every time the S&P has gone that
far above its average over the last three years, a selloff has followed soon after.
Another indication of greed running rampant can
be found in the junk bond market. Investors in lowquality junk bonds are demanding a premium of
2.64% over investment grade bonds.
That’s an extremely low spread (it was nearly twice
that three years ago), the lowest we’ve seen over the
last few years. And it tells you that investors are being unrealistic when it comes to risk.
In fact, nearly every measure of sentiment tells the
same story. Just this month, the American Association of Individual Investors (AAII) sentiment index
showed bullish sentiment post the largest weekly
gain in over three years.
And all of this optimism is coming just as the entire
globe is on the verge of entering a recession. When
evidence of this slowdown hits the media, investors
are going to sell their stocks.
At least, that’s what happened on the last two occasions the S&P has tried to pass 1400 during the last
13-years. Every time it tried, a big sell-off followed.
Could this time be different? Of course. But I would
expect to see more trading volume than we’re witnessing right now. Both the S&P and the Dow Jones
have made new highs on weak volume.
That’s not a good sign. And I wouldn’t be shocked
if we see a 10% or 20% correction by the end of
spring.
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All it would take is a trigger. And it could be anything, like evidence that the EU is unraveling further.
Or a weaker-than-expected GDP report in America.
Even a war with Iran.
So here’s how we’re going to prepare for the coming
sell-off…
I recommend that you to buy the iPath S&P 500
VIX ST Futures ETN (NYSE: VXX).
tic. After all, this month, fourth-quarter GDP was
revised from a contraction to an expansion. Employment and consumer spending both beat expectations,
and industrial production seems to have bottomed
out.
Moreover, let’s not forget that earnings came in better than expected. Nearly 70% of S&P 500 companies beat analyst expectations.
VXX is an ETN that tracks the VIX volatility index,
also known as the “fear” index.
To top it off, Congress now seems hell bent on not
putting the country into another politically manufactured crisis.
Why? Because the VIX goes up when stocks are selling off. And the more fear that’s in the market, the
larger the sell-off, and the higher the VIX will go.
Clearly, there’s a lot to be optimistic about. And
that’s what drove the Dow Jones to hit new record
highs over the last month.
Right now, the VIX is at the lowest level seen since
before the financial crisis. This is important for two
reasons. First, it shows how complacent investors
have become.
But investor’s aren’t paying attention to some important details.
And second, when the VIX last traded at these lows
back in 2006 and 2007, it never moved much lower.
That means you’re going to be exposed to very little
downside risk.
But your potential profit is fantastic.
You see, the last time we had a big, 20% correction,
VXX rocketed 200%. If we get another correction in
the next few months, the same could happen.
Low-risk combined with a massive reward is exactly
the kind of investment we like to make.
So go ahead and buy the iPath S&P 500 VIX ST
Futures ETN (NYSE:VXX), but don’t chase prices
past $23.
Portfolio Review
Dear Strategic Investor,
If you ask the average investor, they’ll tell you that
everything is right in the world.
The reality, however, is far different.
Of course, I don’t blame anyone for feeling optimis-
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For example, the globe is on the verge of entering a
recession. Maybe some investors believe we’ll avoid
the fallout — but I beg to differ.
U.S. GDP has been steadily trending down for the last
year. A global recession is sure to accelerate that trend.
Yet, investors aren’t pricing that possibility into the
stock market. They think we’re all clear. But they
reached this conclusion by looking at flawed data.
Take the employment report. Jobs are being created
primarily because companies are cutting full-time
workers down to part-time and hiring more people
to make up the difference. This results in more employment, but also reduces income potential.
And that’s just one thing wrong in this country.
The sequester budget cuts and tax increases is another. According to some analysts, these actions will
reduce GDP by between roughly 1.3% and 1.8%.
With our economy flat-lining, that would put us
into an official recession by the middle of the year.
Now, let’s look at corporate earnings. Yes, expectations were exceeded, but that doesn’t mean companies are making more money. Corporate earnings
outside of the financial sector have flat-lined, and in
some cases dropped.
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STRATEGIC INVESTMENT
Then there’s Europe. In the fourth quarter, euro zone
GDP dropped by 0.6%. That’s the third straight decline.
implemented in January — reduced consumer electricity prices by 20%... and the business sector’s prices
by 30%.
Even worse, the EU has done little to forge a true
fiscal union between its members. Without that,
the euro won’t survive. No currency has ever lasted
without fiscal union. That’s why we’re short the euro
with the Market Vectors Double Short Euro ETN
(NYSE: DRR).
This will, no doubt, lead to a big increase in consumption. That’s why share prices are up nearly 20% since
January. And the run is far from over.
Last month, we placed it on hold because the euro was
gaining value. But the downtrend has finally resumed.
Go ahead and buy the Market Vectors Double Short
Euro ETN (NYSE: DRR), but don’t pay more than
$46 a share.
Why You Need Income… NOW!
Despite the problems here and in Europe, investors
remain optimistic. They think higher stock prices
signal a recovered economy. But the truth is that the
good times are a result of Bernanke dropping interest
rates and throwing money out of a helicopter.
Sure, it’s helped banks make some huge profits. But
low interest rates also hurt savers, because yields can’t
keep up with inflation.
That’s why we’ve recommended dividend stocks with
yields much higher than the rate of inflation.
Tobacco company, Altria (NYSE: MO), is one of
them. Presently it yields 5.2% and has a long history
of increasing that payout over time. And it will keep
doing that for years to come.
So snatch up shares of Altria (NYSE: MO), just don’t
pay more than $36 a share.
Another income recommendation is Brazilian electricity producer, Cia Energetica de Minas Gerais
(NYSE: CIG).
Now, Cia’s stock has given us one heck of a roller
coaster ride. After being up more than 20%, the share
price collapsed after Brazil announced a tariff scheme
that would reduce earnings.
But here’s the flipside. Brazil’s new tariff scheme —
10
So go ahead and buy shares of Cia Energetica de
Minas Gerais (NYSE: CIG), but don’t pay more than
$15 a share.
Two more income recommendations — with huge tax
benefits — were the PIMCO California Municipal
Income Fund II (NYSE: PCK) and the Invesco Van
Kampen California Value Municipal Income Trust
(NYSE: VCV).
These two municipal bond funds have performed exceptionally well. But we expect them to do even better.
Here’s why…
The tax increases in January gave investors an incentive to reduce their taxable income. One of the best
ways to do that is with a municipal bond fund.
But here’s the best part: Those who live in California
— a state with one of the highest taxes in the U.S. —
have a massive incentive to purchase municipal bonds
in their state and lower their overall tax burden.
I suggest you buy PIMCO California Municipal Income Fund II (NYSE: PCK) but don’t pay more than
$12. And snatch up the Invesco Van Kampen California Value Municipal Income Trust (NYSE: VCV),
but don’t chase it past $16.
Inflate the Debt Away
Another reason the Fed is printing money is to inflate
away our debt. This will eventually lead to higher inflation that will increase commodity prices.
That’s why we gained exposure to gold with the SPDR
Gold Shares (NYSE: GLD).
Gold is now trading at the lowest prices seen since
June. A price that has marked a short-term bottom in
the price of gold in October and December of 2011,
as well as May of 2012.
www.strategicinvestment.com
STRATEGIC INVESTMENT
I expect another bottom this time. So go ahead and
buy the SPDR Gold Shares (NYSE: GLD), but don’t
chase it past $175 a share. Or if you prefer, buy gold
bullion, just don’t pay more than $1,700 an ounce.
While exposure to gold is good, exposure to a promising junior resource mining company is even better.
That’s why we told you to buy Peruvian junior-explorer Tinka Resource (OTC: TKRFF).
In March, Tinka announced the results from one of
its drill holes. It found zinc mineralization of 5.84%
across 11 meters, and 11.56% across 4 meters.
These are great results. And as more come in, share
prices will increase. Feel free to snatch up shares
of Tinka Resources (OTC: TKRFF) at any price
under $1.50.
Our last commodity-based company is one that sells
no commodities at all.
Instead, SeaDrill Limited (NYSE: SDRL) leases the
rigs that oil companies need to drill offshore.
Demand for its rigs is so high, that it has a record
backlog of orders worth $21 billion.
Yet, despite this, SeaDrill’s stock fell from nearly $42
in October 2012 to $36.67 as of this writing. And
for the life of me, I can’t find any reason why. Fundamentally, SeaDrill has only gotten stronger since
our recommendation. It’s only a matter of time before investors rush in. So I suggest you buy SeaDrill
(NYSE: SDRL) at any price under $40.
How the Fed Creates Wealth
since December. The rally is overdone. It’s only a matter of time until the shares pull back. For now, we’re
placing a hold on Ultrapar Holdings (NYSE: UGP).
Another way we’re taking advantage of this rally is
with Rockwell Automation (NYSE: ROK).
Rockwell is making a lot of money as manufacturers
streamline operations and lower costs by means of
automation. This trend is just getting started, especially in China (which makes up only 15% of Rockwell’s revenue).
So go ahead and buy Rockwell Automation (NYSE:
ROK), just avoid chasing shares past $90.
Since we just covered the Fed’s wacky policies, commodities and income stocks, let’s switch focus to
healthcare.
The Fix to America’s Health Care
Problem
Health care spending in this country is out of control.
And ObamaCare has made things worse by adding
more demand to this sector.
That wouldn’t be a problem if we had enough doctors, hospitals and health care facilities. But that’s
not the case. Healthcare costs are already rising at
twice (sometimes three times) the rate of inflation.
By 2020, health care spending will consume America’s budget (and the budget of older American’s).
The question is what can we do about it? Reduce costs.
If printing money comes with so money consequences, why is the Fed doing it?
Of course, that’s easier said than done. To control health
care spending, we need breakthrough innovations.
To raise asset values.
Innovations like the one Organovo (OTC: ONVO)
is involved in.
As much as I disapprove of Bernanke’s actions, the
reality is that you need to take advantage of this Fed
induced rally. One way is with Brazilian chemical
company Ultrapar Holdings (NYSE: UGP). We
like Ultrapar because the Fed’s policies are funneling
money into BRIC-related stocks.
The only problem is that Ultrapar’s shares are up 25%
www.strategicinvestment.com
Organovo has a 3D printer that can print blood
cells, cartilage, even organs. And it’s collaborating
with some big companies to make 3D printed body
parts a reality.
This isn’t decades away, either. In March, a man had
75% of his skull replaced with a 3D printed implant.
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STRATEGIC INVESTMENT
This is the first time a patient received a completely
customized 3D-printed implant.
And if Organovo has its way, it won’t be the last.
So go ahead and buy Organovo (OTC: ONVO), but
don’t chase it past $3.80.
The Upside of a Bleak
Economic Future
It’s only a matter of time before the global economy
falls flat.
But for now, stocks are moving higher.
While 3D printing isn’t the only way to improve
health care. Revolutionary new drugs like the cancer
drug TapImmune (OTC: TPIV) currently in clinical
trials, can work wonders too.
While we don’t agree with the rally, we’ll certainly take
advantage of it while it lasts (which may not be too
much longer).
According to a study done at the Mayo Clinic, the type
of drug TapImmune is working on has the potential to
kill cancer more efficiently than existing therapies.
Still, it’s not too early to prepare our portfolio for an
economic fallout. So in the coming months, we’ll recommend more companies that can help you weather
the troubling times coming our way.
That’s good news. But not enough to move shares.
Until next month,
We’ll have to wait for clinical results before that happens. But as long as those results are positive, TapImmune’s shares could soar in short order.
Go ahead and buy shares of TapImmune (OTC:
TPIV), but avoid chasing shares past 15 cents.
Charles Del Valle
STRATEGIC INVESTMENT PORTFOLIO
Date
Price on
Purchase
Dividend
Total Currency Adjusted
Investment
Added
3.26.13
Price
Yield
Returns Total Returns
Advice
STRATEGIC INVESTMENTS
3D Systems Corp. (DDD)
Altria Group Inc. (MO)
Cia Energetica (CIG)
Diageo (DEO)
Market Vectors Double Short Euro ETN (DRR)
Organovo Holdings (ONVO)
PIMCO CA Muni Income FD II SBI (PCK)
Rockwell Automation (ROK)
SeaDrill (SDRL)
SPDR Gold Trust Shares (GLD)
TapImmune, Inc (TPIV)*
Tinka Resources (TKRFF)
Ultrapar Holdings (UGP)
Van Kampen CA Muni Income Fund (VCV)
12/04/12
$30.84 $29.29 0.0%
5.29%
5.29%
06/09/10
$34.33
$20.05
5.6%
95.3%
95.3%
08/23/11
$11.40
$14.21
11.2%
6.5%
6.5%
12/31/12$123.12$116.562.4%5.6%5.6%
01/26/11
$45.04
$43.10
0.0%
4.5%
4.5%
01/23/13
$3.77
$4.69
0%
-19.62% -19.62%
08/07/09
$10.80
$9.14
7.1%
48.3%
48.3%
10/29/12
$84.85
$70.25 2.2%
22.12% 22.12%
07/31/12
$36.63
$38.79 9.7%
-6.76%
-6.76%
01/20/11
$154.83
$131.57
0.0%
17.7%
17.7%
05/02/12
$0.10
$0.17
0.0%
-44.9%
-44.9%
03/07/13
$1.18
$1.10
0.0%
7.0%
7.0%
09/26/12
$24.95
$22.38
2.2%
12.99% 12.99%
08/07/09
$13.17
$11.88
5.8%
37.9%
37.9%
** See note
Hold
Buy - up to $15
Hold
Buy - up to $44
Buy - up to $4.10
Buy - up to $12
Buy - up to $90
Buy - up to $43
Buy - up to $175
Buy - up to $0.15
Buy - up to $1.50
Hold
Buy - up to $16
NOTES:
The Strategic Investment Portfolio is an equally-weighted strategy and does not include taxes or dealer commissions, if any. “Total return” includes capital gains,
dividends, interest payments, and stock splits. “Total Return (currency adjusted)” is equal to the “Total Return” adjusted for any gains or losses due to currency
fluctuation on securities listed on non-U.S. exchanges. “The Purchase Price is based on the first closing price after the recommendation’s release. Sources for
price data: Yahoo Finance, and websites maintained by securities issuers. Dividend yield is based on trailing 12-month distributions. Stop-losses: The Strategic
Investment Portfolio maintains a 25% trailing stop-loss on every stock, ETF and bond recommendation. The 25% stop-loss is waived for any security listed in
the portfolio marked with an asterisk.(*) **Adjusted buy price according to a 3 for 2 share split
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