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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 www.strategicinvestment.com 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 1 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 www.strategicinvestment.com STRATEGIC INVESTMENT 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 Strategic Investment To contact us with a question or comment, please call: 1-866-584-4096 or email us at [email protected] Published by Delray Publishing Editor: James Dale Davidson Managing Editor: Charles Del Valle Associate Publisher: Brian O’Connor Graphic Designer: Bruce Borich www.strategicinvestment.com 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. Legal Notice: Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed under securities laws to address your particular investment situation. Also you should not base investment decisions solely on this document. Delray Publishing expressly forbids its writers from having financial interests in securities they recommend to readers. Delray Publishing, its affiliated entities, employees and agents must wait 24 hours after an initial trade recommendation published on the Internet, or 72 hours after a direct mail publication is sent, before acting on that rec- ommendation. Also, please note that due to our commercial relationship with EverBank, we may receive compensation if you choose to invest in any of their offerings. (c) 2013 Delray Publishing LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Delray Publishing , LLC. 55 NE 5th Ave, 2nd Floor Delray Beach, FL 33483. 3 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%. www.strategicinvestment.com 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. www.strategicinvestment.com 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 5 STRATEGIC INVESTMENT 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. 6 www.strategicinvestment.com STRATEGIC INVESTMENT 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 www.strategicinvestment.com 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 7 STRATEGIC INVESTMENT 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. www.strategicinvestment.com STRATEGIC INVESTMENT 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- www.strategicinvestment.com 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. 9 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. 11 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 12 www.strategicinvestment.com