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The global financial bubble burst in 2008 — and that’s a good thing. It
means that the bubble economy will no longer make it attractive to ignore our problems
and drain the real economy. Instead of investing our capital in fraudulent
mortgage securities, complex derivatives, and companies running black-box Ponzi schemes,
perhaps we will see the merits of financing real people crafting real solutions to
the problems before us. In 2008, the incentives grew to understand the real world
and address real issues.
Alas, like the bubble, the collapse
was engineered. The nature of the “pump and dump” financial model on planet
earth is that the most powerful people on the planet will make more money on the dump
then they did on the pump. In 2008, a strong dollar combined with global drops in
commodities and equity prices created more buying opportunities for insiders who exited
the bubble in time or enjoyed the largesse of bailouts.
Thousands of bankers and executives
who created the bubble were unprepared for the events of 2008. They were left scrambling
in a game of global musical chairs. The moral of the story is as old as the hills:
there are a lot more people who think they are insiders during the “pump”
than during the “dump.” The dump is when you find out who is really in
and who is out … or who your real friends are.
This cycle will be different.
We are not witnessing just another bubble burst as we did in 1988-89. This is a fundamental
re-engineering of the governance system — the culmination of a financial coup
d’etat. I often quote the story of Clarence Dillon, the head of my old firm,
Dillon, Read & Co. Inc., in 1929 at the beginning of the Great Depression:
|Driving through New Jersey,
Nitze [asked] Dillon if he thought the market decline an omen of hard times ahead
. . . Dillon thought for a few minutes and replied, “I think it presages the
end of an era.” By this Dillon meant that what lay ahead was not merely a period
of retrenchment, after which affairs would be conducted as before. Rather, the world
was in for a major overhauling of institutions.
Dillon and Paul Nitze in 1929
We are not at the end of history.
We are, however, at the end of the notion that the people in control want anything
less than total control of everything.
How do we integrate powerful
new technology in a manner that is human and civilized? How do we address population
growth and align our economy and lifestyles with the health of our natural environment?
How do we create and sustain communities in the face of invisible powers? Is a war
economy the only kind of economy we can imagine?
The urgency of these conversations
will grow as the bubble evaporates.
The big question of 2008 is “Where is the money?” It just keeps disappearing.
There was $4 trillion plus that disappeared from the U.S. government between 1998
and 2002 along with trillions more from the pump-and-dump of the Internet and telecom
stocks, the Enron debacle, and other financial frauds. Since then and into 2008, funds
keep disappearing into the Afghanistan and Iraq campaigns.
Now we have $700 billion in
bailouts and $7 trillion plus in loans by the Fed, not to mention the $5 trillion
in mortgage market liabilities assumed by the Federal government with the passage
of the Housing and Economic Recovery Act of 2008. The fraud in the U.S. mortgage bubble
was clearly enormous. But, where did all the money go? Who’s financial appetites
demand this much money and what, if anything, will ever satisfy them?
This of course leads us back
to “Cui Bono?” – “Who benefits?” And this, in turn,
leads us to wonder who is really at the top of this pyramid scheme. What is the end-game
for global governance?
Up, Gold Down
To recapitalize the U.S. banking system, it was necessary to have the dollar up and
gold down in 2008. Sure enough, this is what happened — although by the end
of the year, the dollar was up 5% and gold was up 4%.
The ability of the "plunge
protection team" (formally known as the President's Working Group on Financial
Markets) and their agents to intervene in markets and suppress the gold price continued
to surprise knowledgeable commentators.
We still do not adequately understand
how the “management" of markets is engineered. Put this on a list of mysteries
it would be wonderful to solve in 2009.
Interestingly, by year-end the
precious metals market was tracking both the London spot price and premiums paid for
gold coins on E-Bay, as the paper market and the physical market diverged.
The global financial meltdown that some market pundits predicted hasn’t happened.
Instead, the “Slow Burn” continues albeit at a more rapid, scarier pace.
Still, investor losses have been significant. After quite a run-up, the commodities
markets crashed, the Dow dropped by 34% and global stock markets were down across
the board. Financial institutions throughout Europe and Asia were hammered by losses
and fraud in the U.S. mortgage and derivatives markets.
The division grew sharply between
those with access to cash, credits and bailouts and the growing number of people losing
businesses, jobs, savings, homes, health and lives. The division had little to do
with talent or productivity. The personal pain is great and will grow greater. It
is made greater by the realization of betrayal by political leaders, the mass media
The amount of human talent being
drained and destroyed throughout North America and around the globe is incalculable.
Supporting rather than destroying this talent remains our greatest opportunity (it
is an invisible opportunity). It calls for a financial system which can generate profit
from the education and well-being of families and communities and the reduction of
The Freezing Up of the
Global Banking System
As financial losses grew throughout 2008, an outbreak of healthy distrust resulted
in the freezing up of the global banking system. This is the evidence of markets working
— not, as reported, of markets failing. Banks do not trust each other or their
accountants or their lawyers for a very good reason: who can price an asset when the
parties may be lying and regulators and courts will not uphold the law?
The Pension Fund Time
Because pension funds are not leveraged, reports on pension fund losses have been
relatively quiet. Look for reports regarding pension fund performance to have a profound
impact in 2009.
Unfunded pension liabilities
will hit hard on state and local government. Indeed, municipalities are getting hit
on all sides as tax revenues fall with dropping real estate values and the cost of
The dependency of state and
local governments on the central government is not widely recognized. Real trouble
with the U.S. dollar, the integrity of tax systems, or the federal credit in 2009
could spell serious hardship for local governments, leaving the economy even more
dependent on bailouts and military spending as the infrastructure of control grows.
$1 Billion Candidate
The American elections captured a great deal of attention this year, with the victorious
candidate, Barack Obama, raising nearly $1 billion. As the American economy centralizes
with companies, states and municipalities, universities, health care and all aspects
of life becoming increasingly dependent on the federal budget, the business of buying
the White House and congressional seats becomes ever more expensive. We are not just
electing representatives — we are electing the “managers” of markets,
including an ever-growing percentage of private income and profits.
While some say President-Elect
Obama is the face of hope and some say he is the face of the Rockefellers, I say he
is a Harvard lawyer turned politician who is a prisoner of the
red-button problem, just as we all are. So far, his economic team includes the
original engineers of the strong dollar policy and its component parts: the housing
bubble and the gold suppression scheme. Let’s face it. If engineering a financial
coup d’etat is the goal, these guys are the victors.
Obama has announced a massive
infrastructure program. Infrastructure is potentially better for the economy than
housing bubbles. The devil, however, is in the details. The scariest idea? A centralized
medical-records database. We will talk about this more in 2009.
Given the state of the economy
and the intelligence of the Obama team, it should be possible to manage the program
design and the contracting of a massive government investment such that the infrastructure
created is cost competitive and creates net value in the economy, including contributing
to, rather than destroying, the value of labor and communities.
So let's see what comes out
of the other side of the Washington sausage-maker after the inauguration. My expectations
are minimal, yet I am willing to be surprised. This is, after all, the seasons of
miracles and the system is full of decent people who would like to see things work
and are willing to work hard to make it so.
China, and the Middle East Rising
Of the many challenges facing the new Administration next year, none will be more
pressing than managing rising power-bases and younger populations throughout the Middle
East, China, and Russia. Perhaps the implosion of the commodities markets will ease
this process, but our bet is that the shift from a financial bubble to a world of
rising tangible asset values will continue.
The Anglo-American alliance
“stuck” the world with massive losses from financial fraud. Now we are
taking advantage of these losses by enjoying another global buying opportunity. In
the process, we have vastly increased the incentives for world-wide competitors to
collaborate in protecting themselves from us. Mr. Putin has said so publicly and one
of his advisors reiterated this to me privately in chilling detail.
The Internet Inspires
Throughout 2008, the Internet provided an alternative to the continuing censorship
of numerous stories that we need to know. These included not just stories that impact
our finances but which concern manipulations harmful to our health including chemtrails,
efforts to control food and seed supplies, and the ongoing suppression of new energy
technologies. Watch for the failure of traditional media in 2009 due to a loss of
market share to the Internet. Go, Wikileaks!
The Good News
One of the few good investment categories in 2008 was building personal and local
From the success of the Financial
Permaculture conference in Hohenwald, Tennessee, to the spread of Transition Towns
from the UK, participatory budgeting from Latin America, and community currency and
barter systems around the globe, efforts by entrepreneurs and communities to re-localize
and network are encouraging.
The logical response to uneconomic
centralization is to look for ways to decentralize. Despite all the difficulties in
the economy, entrepreneurs doing and teaching natural home building, farmers markets,
starting farms, installing solar energy and weatherizing homes enjoyed a market moving
their way. These efforts will continue to grow well beyond any shakeout, particularly
if commodity prices head north again.
The great mystery is, what will
be unleashed as the awakening continues in the face of continued reports of institutional
corruption and failures? We think this awakening will have a very positive impact
spiritually, culturally and economically in 2009.
The Shakeout Moves into
We have started to hear that the shakeout in financial markets is over and that it
is now a good time to invest in the stock market. Don't believe it. The shakeout in
the U.S. is far from over. A great deal has been “held together” through
the election and the inauguration.
Numerous companies and investors
have disclosure obligations in the form of annual reports due in March. Many corporate
taxes are due in March and individual taxes are due in April. Let’s see what
emerges during the disclosure and tax period and how the housing market responds in
the spring and summer.
If we are lucky, Washington
will produce real plans for real infrastructure investment that will have a positive
total economic return. If luck is not with us, Obama will play Pharaoh presiding over
the allocation of rigged profits financed with inflation and force. The real economy
will continue to die as productive enterprises are starved of capital simply because
they are not politically connected.
Can diverse networks of citizens
switch their remaining capital in time to protect the productive enterprises that
generate jobs and wealth and offer real solutions? We hope and pray that we can.
Our prediction? If you thought
2008 was wild, hold on to your seats— we ain't seen nothing yet.
Plenty of Opportunities
In my audio seminar, Positioning Your Assets for Growth in Uncertain Times, I identified
eight areas of opportunity. Here is a recap of how these areas performed in 2008 and
some thoughts on what we can expect in 2009.
Opportunity #1: Personal
The after tax yields on stockpiling household non-perishables was typically better
than money markets in 2008. Investing to reduce your expenses or to build a business
that would generate income sure looked better than leaving money in the stock market.
Expect the same in 2009.
Opportunity #2: Family,
Community, and Network Self-sufficiency
Collaborating with others can be time-consuming and complicated, but the opportunities
in this area continue to grow. Expect the trend to continue for the foreseeable future.
Big challenge in 2009? How do we find like-minded people who will respect our time
Opportunity #3: Banking
The desire to find a bank one could trust was still overshadowed by the belief that
big banks were safer because of massive Fed support. As the appalling behavior of
the large banks becomes ever more apparent, let’s hope that withdrawing to healthier,
local institutions accelerates.
Opportunity #4: Precious
Despite great expectations, gold and silver prices were flat in U.S. dollars for the
year. Starting at $840 per oz, the price of gold rose above $1,000 until the Bear
Stearns assassination, and then dropped to a low of $700 in October before rising
back to the $840 levels before Christmas.
While disappointing for gold
bugs, it is worth noting that precious metals performance was strong relative to oil
and other commodities and when measured in other currencies, making the case that
gold and silver would perform well in a deflation marked by untrustworthy fiat currencies.
Perhaps most notable was the
divergence of the spot price from the coin markets, with dealers and E-Bay reporting
rising premiums above spot on coin purchases and serious difficulties obtaining inventory.
This divergence bears close attention in early 2009.
Despite the “managed”
nature of these markets, the outlook is strong for precious metals in 2009.
Opportunity #5: Natural
Commodities had a bad year. Oil down. Agricultural commodities down. Don’t be
fooled: de-leveraging can bring prices down a lot in a bubble economy. However, we
still have 6 billion plus people competing for limited natural resources. Look for
natural resources to grow more valuable over the long term.
My bet is that the smart money
is taking advantage of the credit crunch and the strong dollar to buy up strategic
resources around the globe — farmland, water, oil and gas.
Is this where some of the bubble
profits and bailout money is going? To buy up your land at low cost? I believe so.
Opportunity #6: Countries
with a Strong Popsicle Index
Place matters. As the yields on sovereign bonds approached 0% this year, it was interesting
to watch who approached 0% first. Sure enough, it was typically countries with a strong
Popsicle Index combined with a reputation for
prudent financial management.
Opportunity #7: Enterprises
that own or are excellent at:
- Serving high-Popsicle-Index
- Precious metals
- Natural resources
- Infrastructure and essential
- “No waste” new
Ultimately, equity in enterprises
that create real value is the source of much financial wealth. This area will be the
greatest opportunity over the next decade. However, it is still early to move into
equity. A few exceptions include your own or family companies as well as local and
network investment that build up local capacity critical to your strategic needs.
If you have not done so already,
start learning about these areas now. However, let the shakeout move through the market
before investing. And even then, beware the pump and dump of “green investing”
and other potentially fashionable investment trends.
Opportunity #8: Cash
and Cash Equivalents in Strong Currencies
Looking for a strong currency in 2008 was like the search for the Holy Grail. If anything,
this year proved that there are no strong currencies left. This means that community
currencies are looking more and more viable. At the end of the Great Depression, there
were more than 3,000 community currencies operating in America. To put that number
in perspective, America currently has approximately 3,100 counties and county-equivalents.
The dollar soared, thanks to
intervention, a flight to safety, and the rush to pay off dollar debts. For a large
part of the year, the dollar was one of the few places to be. This, despite the fact
that the St. Louis Federal Reserve reported in November that the aggregate monetary
base was growing at an annualized rate of 785% (this is not a typo).
The inter-dependency of the
global economy during 2008 seems to say that there is no de-coupling from the U.S.
economy and no diversifying from the dollar into other currencies. Other central banks
are printing like crazy too. It would appear that the real safety lies in shifting
from fiat currencies to precious metals and other tangible things.
That said, we all have expenses
and debts in fiat currencies, so we need to hedge. For U.S. citizens, where do we
put our cash reserves? With money markets headed toward 0% yields and showing signs
of credit problems, insured CD’s at strong local banks, credit unions and savings
banks still look like a better bet. Paying down debts and lowering overhead continue
to be practical ways to lower risk in an uncertain world.
The dollar is headed back down.
The question is how slowly or quickly will it fall and how many other currencies will
fall with it?
A Word on Philanthropy
If you have money to donate, please shift it into activities that build local food
supplies and economic self-sufficiency. There is no better philanthropic opportunity
today than local venture capital that creates lasting jobs and skills or the education
that supports them.
For many years, I was teased about how sentimental a notion the Popsicle
Index was. As our sense of personal safety diminishes, perhaps the possibility
of living among individuals who care about and lift up the people around them will
come back into fashion.
Avoiding and putting as many
degrees of separation between you and institutions who do not behave honorably is
not pie-in-the-sky ethics. It is dangerous to share your money and your data with
people who cannot be trusted. Surely, the events of 2008 underscore this lesson.
Before making your New Year’s
resolutions, why not sit down and make a list of who and what will cause your Popsicle
Index to go up or down. Estimate their contribution mathematically. Now look at how
you invest your time. Are you giving time, money and energy to the people and activities
that cause your Popsicle Index to go up? Or to those who cause it to go down? Get
ruthless about giving energy only to those who return energy to you.
The way to build a new financial
system which is supportive of human capital is to start with each person. You
are the asset. So let’s get your Popsicle Index rising.
My goal for The Solari Report
in 2009 is to help you do so.