September 2012 02

In This Issue
News and Analysis Re-leveraging Economy & Market Major Demographic Investing Shifts Peak Oil is Dead Who wants to be a Billionaire? Early Signs of Bank Troubles European Crisis to Reawaken Europe Update Weird Weather 1 1 2 4 5 6 7 8 9 11

Welcome to this Issue of Joseph Insight!

Its time to make your plans now for our national finance and economics conference, Prospering in Changing Times, in Kansas City Nov. 8-10th. This is a must attend event for anyone interested in finance or economics. We will have leading experts and prophetic voices, who will tell us what they are seeing for 2013. If you cannot attend, this event will also be webstreamed live. Every Blessing, Bob Fraser

NEWS AND ANALYSIS

Re-leveraging
Total US debt is again on the increase, exceeding pre-crash levels: As you can see, households and corporations are reducing their debt. But overall debt is rising due to extraordinary increases in government debt. Obamas Amazing Debt Legacy Most people think of Bush or Reagan as big-spending presidents. But Obama will close his first presidential term in record setting fashion:

Gregs Market Outlook 13 Investment Themes 15

Obama deficits have averaged $1.5T/year During the Obama years, we will have added $6T to publicly held US debt (US publicly-held debt) That is more than any other president in history It is more than all the other presidents in history combined.

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Economy & Market

The Economy: Slowing DownAnd Picking Up If you are like me, you have seen a mix of strong and weak economic news. So which is it? There are several manufacturing indexes in the US. The latest data clearly shows weakness. Here is a chart of new orders in manufacturing:

DEBT SUPERCYCLE WATCH

We are in the midst of an economically dominant Debt Supercycle for more background on this, read the article, What is the Debt Supercycle?. Here are the 7 phases I am expecting: 1. Boom (complete): Excess speculation and leverage, asset prices (real estate, stock markets) rise. 2. Bust (In progress): Debt decreases; asset prices drop (housing, stocks); banks fail; and economic growth slows. 3. Government spending (in progress in US, Europe, Japan): Public debt increases; an economic boomlet due to spending (in progress). 4. Bond crisis (in progress in Southern Europe): interest rates rise as creditors lose confidence; rising interest rates cause stocks and bonds to fall; inflation begins; government budget crisis as borrowing costs rise. 5. Currency crisis (soon): governments try to solve crisis by printing money, currencies plummet; interest rates rise; inflation soars. 6. Austerity (In progress in Europe): governments restructure debts and entitlements, cut spending, raise taxes and head toward balanced budgets. 7. Normalization (not yet): economic rebuilding and prosperity.

But Citibanks Economic Surprise Index tells a different story. This index looks at the economic numbers and measures whether they came in better than expected, or worse. It clearly looks like it has bottomed and is turning stronger:

There are some positive indications for US employment as well. US firms are hiring temporary employees. Temps are usually the first to be let go in a recession and the first to be hired when things are picking up. Temp hiring continues to accelerate:

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Estimates for S&P 500 earnings continue to be revised downward, just like they were in 2000-1 and 2007-8, suggesting the stock market may be at an intermediate term peak:

So how do we interpret these numbers? Here is my take: The European debt crisis is causing a deep recession there. Because the economy is global, all manufacturers, including the US and China, are seeing a slowdown. However, 70% of the US economy is consumer demand, and US-based consumer demand continues to be strong. Stocks It was a fairly disappointing earnings season. The S&P 500 is an index of the 500 largest companies in the US. Here is how earnings looked:

However, election years are usually good for stocks:

Stock valuations are right at their historical average:

The Fiscal Cliff The fiscal cliff the expiration of the Bush-era tax cuts and stimulus is looming large, January 2013.
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If the cuts are not extended, it promises to be an economic cliff swan dive. On this chart from Goldman Sachs, the gray dashed line below shows the impact on economy (GDP) if all the items are allowed to expire:

wave is getting ready to retire and hence are increasingly investing in bonds. The second factor is the disappointment in the markets. Increasingly investors believe that the system is rigged against them: with the MF global debacle, HFT trading, the flash crash, hedge fund manipulations, etc. Facebooks high profile, megaflop IPO will probably prove to be a turning point in investor rejection of the stock market. As clear illustration of this megatrend, total stock market volume also continues to drop to record lows (Bloomberg) in the last several years:

The fiscal cliff debate will be complicated by the fact that we will be hitting the debt ceiling again by year end. Hopefully the US congress can cross the partisan and ideological divide and address these issues. Yet in spite of decreasing volume and high outflows since 2009, the stock market continues to rise:

Major Demographic Investing Shifts

A major megatrend shift in investor habits is underway. This will affect the markets for decades to come. Investors are increasingly exiting the stock market. In the late 90s, investors flocked to stocks (the blue line) to play the tech bubble. But since the financial crisis in 2008, investors have exited equities and have been moving heavily into bond funds (red line):

Moreover, the market has consistently moved higher on low volume. This interesting chart from Bespoke shows the performance of the S&P 500 (blue line) compared to the performance on high-volume days alone (red line).

The biggest factor in this transition is changing demographics. The generation of Baby Boomers is about one quarter of the population, but controls some 80% of financial assets. This giant population
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To many, this is a sure sign the stock market is manipulated higher. But the truth is a little more complicated. The composition of stock market investors has changed dramatically in the post-war period:

Peak Oil is Dead

For many years I have subscribed to the Peak Oil Theory. This theory was advanced by oil analyst M. King Hubbert in 1957, correctly predicting that oil production would peak in the US in 1970:

Households and mutual funds used to own nearly 95% of stocks, but today only account for 54% of stock ownership. The next eye-popping chart comes from the New York Federal Reserve themselves and shows the impact of the Feds announcements on the stock market. The blue line shows the S&P 500 and the red line shows the S&P 500, but subtracting the markets move from 2pm the day before the Feds announcement to 2pm the day of. Without the Fed, the market would be almost 50% lower. For years I have forecast higher oil prices based on increasing oil demand, especially from China and India, and decreasingly supply, based on decreasing oil discoveries:

However, I am now changing my view. A revolution in oil extraction technologies is extending the life of old oilfields and unlocking millions of barrels in nontraditional new fields. The new technology is hydraulic fracturing and horizontal drilling. Contrary to popular perception, oil deposits are not underground lakes; they are deposits of oily rock. If the rock is porous, the oil is easily extracted through traditional methods. But when traditional extraction methods are finished, typically 70% of the oil is still in the ground. Hydraulic fracturing fractures the deep rocks, causing more of the remaining oil to flow. Horizontal drilling

Bottom Line Demographics will continue to drive money flows away from the stock market. However, the action of the Fed and other non-household market participants will continue to drive the markets higherreason to be cautious shorting the markets.
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allows clusters of smaller oil deposits to be accessed cost-effectively. These new technologies have reversed the long decline in US oil and natural gas production.

technology will continue to advance, even further extending the time horizon before we face a global oil shortage. I expect oil to continue to be plentiful but that doesnt mean it will be cheap. This new technology is very expensive. I think oil below $80/barrel is probably a thing of the past, unless we have an economic depression. Middle East oil producers have greatly benefitted from higher oil prices. Most have used these huge revenue increases to spend freely, increasingly on subsidies and giveaways to placate the populace. This chart shows the price of oil required by each country in order to maintain their fiscal budgets.

US oil reserves have grown sharply since 2009: Again, this points to the increasing likelihood oil will remain near the $100/barrel level.

Who wants to be a Billionaire?

On black Wednesday, September 16, 1992, the UK government withdrew the pound sterling from the European exchange rate mechanism. They had pegged their currency at an artificially and unrealistically high level. These new technologies have been pioneered by US oil companies and perfected on US oil deposits. But the same technology can be applied elsewhere across the globe and will release billions of barrels of new oil. This technology will give the globe 20-30 more years of oil. We will still face oil shortages at some point, just not anytime soon. It is possible that
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On that day a billionaire was born: George Soros made an estimated $1.1B in profits. He is called the man who broke the bank of England. Today, a similar but even better opportunity is available, thanks to the Swiss National Bank (SNB). Anyone want to be a billionaire? The SNB just released their Q2 2012 balance sheet data, and it is eye-popping indeed. Their foreign

currency reserves totaled 365B francs, an 85% year-on-year increase, now 57% of the tiny countys GDP. Euros now account for 60% of their total currency reserves.

US and other non-Euro investors have a little more work to do. You have to go long the Swiss franc and short an equal dollar amount of Euros. As long as the peg is in place, this will be the most boring trade you ever did. But one day it will jump in value. You can do this in the futures market, but you have to be careful to balance the trade in the US markets it would be 6 long Swiss contracts against 5 short Euro contracts. It ends up being a big position, $750K per side. So who wants to be a billionaire? Soros had a $10B bet in place. Unfortunately you have to have a lot of capital for this trade and probably a lot of patience too. Hopefully some of you can make some money on this wonderful gift from Switzerland!

The Swiss currency had been skyrocketing since the beginning of the Euro crisis due to its safehaven status. But the stronger currency was creating havoc with the Swiss economy, pricing Swiss goods and services too high. So the Swiss decided to peg the Swiss franc to the Euro at 1.20. Since the Swiss franc is freely traded in the open market, the only way they can maintain this peg by selling Swiss francs and buying Euros in the open market, accumulating huge amounts of Euros in the process. Denmark too has a currency peg, and it too will end as all pegs do. At some point they will stop this practice, and the Swiss Franc will jump, in a day. Who can say when this will happen? It could be when they simply choke on owning so many Euros, or when leadership changes. But it will almost certainly be when the Euro is restructured. In fact, this is one of the cleanest ways to play a Euro breakup. If you live in the Eurozone, you should immediately move your money and as many of your transactions as possible into Swiss Francs. As long as the peg is in place, it will cost you nothing. And when the peg is removed, you will have a sudden windfall gain of perhaps 10-20%. Speculators can simply buy and hold Swiss currency futures. As long as the peg is in place, this trade is locked in neutral it wont gain or lose anything. But when the peg is lifted, overnight it will gain. Swiss citizens can simply short the Euro; again it will cost nothing to hold this trade as long as the peg is in place.
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Early Signs of Bank Troubles

A year ago I was writing every month about increasing pressure on the banking system in Europe. I am not exaggerating when I say the banking system was on the verge of collapse. Then in December 2011, ECB president Mario Draghi saved the world the banking world at least. The ECB loaned $1.3T to European banks for 3 years at 1% interest. But of course more debt cannot really solve a debt problem only postpone it. Now we are again seeing very early signs of more pressure on the banks. After dropping earlier this year, the Federal Reserves swap line with the ECB is again being tapped by European banks:

This is a clear sign that many of the European banks are again having a US dollar shortage and that the money markets are freezing up. The second piece of data comes from the Federal Reserve. For the first time since December 2008,

the Fed initiated repos, which is essentially giving cash to banks in exchange for assets (WSJ). For 3 years the Fed has done the opposite, removing liquidity from the banking system; but now suddenly they are once again adding liquidity. This means there is at least one bank in dire need of liquidity rumors are pointing a finger at banking giant Morgan Stanley. However, I do not think we are at a point of crisis yet, this is just an early warning.

from the EZs bailout fund, the European Financial Stability Facility (EFSF). Italy: The Italian general election campaign will begin in earnest in September. Although polls point toward a center-left-led coalition, Italian politics is at its most fluid state since the early 1990s and, with so many voters still undecided, it is impossible to call the election. Germany: The German constitutional court is due to vote on the legality of the ESM (the successor to the EFSF) and the fiscal compact on September 12. We expect the court will deem the ESM legal but, if this does not occur, it would serve a major blow to EZ policy makers, who have committed the ESM to potentially purchasing sovereign debt in the primary markets. France: The French government is scheduled to unveil its 2013 budget in September. Markets will be disappointed if it does not include large spending cuts, but the announcement of further austerity risks riling trade unions and stoking civil unrest. Netherlands: A general election is scheduled for September 12. Recent opinion polls suggest the ruling right-of-center VVD will be unable to form a right-ofcenter majority government. Consequently, coalition negotiations are likely to be protracted. The left-wing, euro-skeptic SP may win enough votes to be the secondbiggest party. This would make it more difficult for the new Dutch coalition to secure parliamentary support for additional support measures for peripheral EZ countries. Eurozone: There is a progress report on establishing the ECB as a single banking supervisor due out in September. Given that many details have not been hammered out yet, there is a chance that the progress made on this first step toward a banking union will disappoint. In terms of the broader EZ developments, we expect the Greek government to collapse by the end of the year, and a Greek exit in early 2013, followed by an exit by Portugal by end-2014. Moreover, we expect Spain to receive official support from the EFSF/ESM in late 2012 after the ESM has been fully ratified (the second half of September at the earliest), while Italy will hang on longer but will eventually need support as well.

European Crisis to Reawaken

In Europe everything is put on hold for the summer. Europe is well-known for its extended summer holiday traditions continent-wide. It means nothing much happens in the summer. But that is likely to change soon. September will bring more highdrama out of Europe. Here is a summary of September events from Megan Greene of Roubini Global Economics (www.roubini.com):
EZ: The Drama Ahead in September As usual, this has been a lazy August, but we do not expect the quiet to last. Indeed, for the second September in a row, developments in the eurozone (EZ) have the potential to be highly dramatic. Greece: The troika is due to return to Athens in September and make a ruling on whether to release additional tranches of funding to Greece. If the troika decides to cut the taps offand we dont think it will then Greece would default and exit the EZ. The Greek government aims to renegotiate the second bailout program when the troika returns to town in September. If the troika plays hardball and does not grant the Greek government any concessions, then the governing coalition would likely collapse. Also in September, the Greek parliament will have to pass a number of measures to generate 11.5 billion in savings for 2013-14. With a high degree of austerity fatigue in Greece, we can expect social unrest. Portugal: With Portugal starting to slip on its fiscal targets, we expect Portugal to begin negotiations on a second bailout package. Currently, Portugal is meant to return to the markets in 2013 but, with bond yields well above sustainable levels, we regard this as highly unlikely. Spain: The auditors Deloitte, KPMG, PwC and Ernst & Young are due to present their full reports on the capital needs of Spains financial sector in September. The findings of this report will be used to determine the exact amount the Spanish banking sector will need to borrow p 8 Joseph Insight

By the time you read this, ECB President Mario Draghi is going to release his bailout proposal to the national central bankers. It will probably be leaked. Stay tuned on my blog, blog.josephinternational.org for midmonth updates. But his proposal, if it is anything, will involve money printing. This is why gold and silver took off at the end of the month, in anticipation of the ECB and the Feds money-printing.

Europe Update
Spanish and Italian Rates Ease The last month has been good to the bellwether Spanish interest rates, which have retreated below 6.5%, on speculation that the ECB will step in and buy Spanish debt to suppress rates:

3.8B/month; and since 2008 it has been adding 6.4B/month. Funding Trouble in Spain Spains funding outlook is troubling. For the remainder of 2012, Spain needs to sell bonds totaling around 8B per month, or 4B per auction something it hasnt done since March. The situation gets worse in 2013 Spain will need to redeem 60B in maturing bonds in addition to covering its 45B deficit, 15B in Spanish regional debt, and another 3-4B in FADE agency bonds, which means it will have to sell around 120B in bonds. That is 40% higher than 2011. It simply cannot happen. Without a bailout, Spanish interest rates will soon go stratospheric. European Economy Slowing

Italian rates have also retreated sharply, dropping below the critical 6% threshold:

The European economy is contracting, as is China, while the US economy is growing slowly. Here are the manufacturing indices; a number below 50 indicates contraction:

Italian Debts Levels Hit Record Italy announced an all-time record government debt load as it continues to pile on debt at a record pace: The manufacturing sectors of most of the major economies are now showing contraction:

Prior to 2000, Italy was adding about 2B/month in debt. Between 2000 and 2007, it increased to
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Loan delinquencies in Spain are accelerating: Most concerning is that global growth engine China has now shifted to contraction in its manufacturing sector, both according to HSBCs proprietary PMI reading and now Chinas official data as well:

And here is a final chart that defies the imagination and graphically illustrates the insanity that currently possesses global bankers, European bankers in particular. It shows that largest 25 global banks and depicts the size of their loans (assets) relative to the size of their countrys economy. What business does UBS have making loans equal to 3.76 times the Swiss economy? Notice that every bank above 50% is headquartered in Europe: As bad as this chart looks, it understates the full magnitude of the problem. The biggest banks are actually leveraged far higher than their balance sheets indicate. Banks are able to take huge risks and hide them through the clever use of derivatives. Just like AIG which blew up in 2008, they have written huge financial insurance policies which, they do not have to report. It baffles me how in the midst of the most stifling regulatory environment we have ever seen, the most critically needed regulations are ignored. Banks must be required to report in detail their derivatives positions. The growth of derivatives has been gargantuan, dangerous, and completely unregulated:

More Banking Problems Surfacing France just nationalized its second-largest mortgage lender (ZH). Spains banking situation is rapidly deteriorating. For months I have shown you bank depositors fleeing Greek banks; now it is happening too in Spain:

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I appreciate the comments of hedge fund manager Paul Singer:

Public data reporting: Decades ago, the balance sheets of the Financial Institutions contained most of the information you needed to know to understand their risks. Today the picture is profoundly different, predominantly due to the growth of leverage through derivatives....As a result, there is no major Financial Institution today whose financial statements provide a meaningful clue about the risks of the firms entire panoply of assets and liabilities including derivatives, nor how the firms performance, or even survival, will be affected by market movements in the future. Leverage: Including derivatives, nearly all the worlds largest Financial Institutions are levered 50-100 times (not 10-20 as reflected on their balance sheets), so the exact composition of their derivatives books is essential to an understanding of their risks and stability....no hedge fund is remotely as leveraged as the Financial Institutions, and no hedge fund actually had to be rescued during the crisis. European banks: European institutions are in worse shape than before. Not only is their leverage (including derivatives) still at pre-crash levels, but they are choking on vast holdings of questionable sovereign debt which p 11 Joseph Insight

regulators more or less forced on them with lenient riskweightings. These banks are stuffed with paper that private investors would not buy

Weird Weather
The following chart from NOAA shows just how hot 2012 has been. This shows the temperature difference from normal for every year since 1895.

Corn is hitting record highs as are soybeans:

This chart from JP Morgans research note shows the US soybean crop condition index (CCI): The CCI is calculated using weekly data from the USDAs crop condition ratings (2*proportion of crop rated excellent plus 1*proportion of crop rated good plus -1*proportion of crop rated poor plus 2*proportion of crop rated very poor):

US harvests are looking to be very poor this year. Poor harvests are coming at a time when global stocks are at extreme lows:

My farmer friends are very concerned about the US harvests this year. US exports will be far smaller this year. They are carefully watching the Brazil harvests this year. Brazil is huge agricultural producer and they will have a huge planting this year. If Brazil has a strong harvest, then crop prices will normalize. But if Brazils harvest is also hit, prices could skyrocket from here. In the west, higher crop prices mean a slightly bigger bill at the grocery store. But in the third world, food accounts for a much larger portion of the family income. Many forget that the Arab Spring uprisings were sparked by high food prices. China is very sensitive to food prices. From WSJ:

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A sweeping monetary stimulus in 2009 and 2010with the banks issuing 17.5 trillion yuan ($2.7 trillion) in new loanstranslated into higher levels of inflation, reflected largely in food prices. In 2011, the problem has become more severe. The latest data show food prices rose 13.4% year-to-year in August. Prices for pork, China's favorite meat, rose 52.3% to a record level. The urban poor, who spend a large share of their income on food, are hardest hit by food costs. Rapid increases in the cost of living can take a toll on social stability, as illustrated by the 1989 protests that ended bloodily in Beijing's Tiananmen Square. A yearning for political reform triggered those demonstrations, but anger over increasing food prices was a factor. Political posters on walls around the city criticized the sumptuous meals enjoyed by China's ruling elite at a time when ordinary workers were struggling to make ends meet.

This means the dramatic rise not just in grain prices, but in the up-stream prices of meat, eggs and milk. If China does experience high inflation, it will not be able to do the monetary easing as the markets hope today. In many ways the fortunes of the globe are tied to the farms in the US Midwest

GREGS MARKET OUTLOOK

Editors Note: In this regular column, Greg Lentz will give his regular market outlook. Greg has been a professional trader for 18 years.

Any increase in soybean prices will affect Chinas CPI. Look at the correlation of soybean prices to Chinas CPI:

Drought, Hurricanes, & the U.S. Election

Midwest Drought Conditions in the drought stricken areas of the Midwest have alleviated as more normal weather patterns have prevailed the past few weeks. However, to get the drought label removed, a major rain event will be needed to deal with the deficit and moisten back up the soil conditions. There have been many major prayer initiatives and I have thought all along that the most obvious solution was for a tropical system to make its way north from the Gulf of Mexico. It seems that is what is about to happen with the remnants of hurricane Isaac. This will be a good first step for the Eastern portions of the drought area. The upper air pattern is setting up similarly for the next few weeks so another storm tracking like Isaac is certainly not out of the question. The Lord continues to honor the Isaiah 58:12 pattern. Every issue that arises seems to be met with an answer in due time. The Midwest drought situation has seemed to take a bit longer than others and I went to the Lord about this delay last month. He immediately brought to mind the enemys plan to form conditions that would bring fear of another Great Depression and that Isaiah 58:12 was the Lords promise to stand against the enemy with. In the past week Ive asked the Lord to clarify why there was an open door for the enemy to work in this area related to ethanol and the corn crop that supports its production. The Lord immediately said to me Isaiah 5:2 and Isaiah 52 the whole chapter. As I read it became clear that Isaiah 5:2 is the problem and the Lords solution and plan is in chapter

While soybeans are something few westerners think about, it is one of the most important global crops, especially in China. Soybean oil is the most important edible oil in China with more than two-thirds of cooking oil consumed in China coming from soybeans - and most of those soybeans are supplied by the US (more than half of US exports are to China and the US is China's number 1 supplier). The Chinese devote more than 20% of their income to food (three times more than Americans - according to the USDA).

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52. I encourage you to read through these verses. The issue deals with the condition of the fruit of the land and results in a judgment of drought. The past few years, I have had the great honor of working with many prophets/intercessors who are called to dealing with these issues in the Midwest. One consensus I have observed from them is that much of the roots lie in the greed movement of the land grabbers as they mistreated Indians and rushed to farm this rich soil in the Midwest. The resulting curses from much innocent bloodshed setup a very difficult spiritual climate from the very beginning of American rule. It doesnt take much research to realize how important the care and respect of the land was for most Indian cultures. This movement took this stewardship away from them. We have spent much time traversing this territory and repenting/standing in the gap and breaking curses. In fact, much of the tornado chasing that I do in the Midwest is a mission where God uses their locations and tracks to show me where curses/altars still exist that have been unchallenged. We have had many amazing encounters and come up against incredible warfare. Along the way in this journey I began to research ethanol production and was greatly confused as to why corn became the most prominent source. Please dont get me wrong here, I believe in ethanol as a replacement for MTBE and for legacy vehicles and even as a bridge to other more efficient fuel sources. I just dont believe corn was the answer for feedstock. The pioneers of the ethanol movement like Vinod Khosla only saw corn as a short term bridge to better feedstocks. Instead, we saw a land grab with a spirit of greed shrouding it as speculators rushed in. The salesmen and promoters continued to use Brazil as a great example of successful ethanol production but fell short of making it clear that they use sources like sugarcane and not corn. Many lost their way and ended up entertaining a familiar spirit unawares and did much damage to the soil in the Midwest by forcing continuous corn on much farmland. The ideas of crop rotation and giving the land rest went out the window for many as fertilizer companies thrived with ways to replenish soils with nitrogen/potash. I am not talking about those who use responsible, sustainable techniques to properly care for their land. Much of this mistreatment was already occurring, but the corn ethanol movement seemed to take it to a climax point. An interesting essay was written by Richard Manning entitled The Oil we Eat. It was published in 2004 in Harpers magazine and the Lord spoke to me through this
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paper and I was given an opportunity to repent and back away from trading corn ethanol related stocks. Unfortunately, I heeded the warning for a season and then returned and lost much in many of the now bankrupt corn ethanol producers. Though I was not a farmer, I was aligned with the movement and had to deal with judgment and where this familiar spirit had attached to me, it was a rough time. Coming back to this seasons issue with drought, I see the Lord opening the window for many to repent. The Lord desires the restoration of Isaiah 58:12 to go throughout the farmlands. We are praying for farmers to have visitations and to awaken to their need for change. God desires to reach them all, even the hardest of hearts. I have heard many stories of farmers who have heard from the Lord and made it through this terrible season with little or no issue, they are now the evangelists with a testimony to share for those who were devastated. Lord, bring revival out of the ashes and barrenness and may the testimony of those who follow Your Ways faithfully spread throughout the land. May the suffering servant, Jesus, and Your plan of redemption outlined in Isaiah 52 be our prayer! We stand on Isaiah 58:12 as our promise of restoration in Jesus name. Hurricanes & the U.S. Election Hurricane Isaac has been quite the unusual storm. The name Isaac means he will laugh; many forecasters have felt as if this storm was laughing at their forecasts! As expected, many refineries have been disrupted along the Gulf coast and gas prices have risen back to near the earlier highs from the springtime. Refiners stocks have been on fire with many rising 50 70% or more the past few months. While I believe the bull market will likely continue, seasonally it is the right time to be taking some profits. Earlier in the year the Lord showed me that this years election results would be influenced by a spike in gas prices in the summertime. I immediately began thinking about hurricane season. Partly because of what transpired in 2004. Heres the short version of the story: At the end of 2004 after Florida was ravaged by 4 major hurricanes I met another storm chasing prophet who specialized in going up against hurricanes in Florida. At the time we met he was in deep repentance and travail. He had led teams of intercessors in FL for many years and no major storms occurred as long as they were active. Then he moved out of the state and the very

first year, 4 major storms nail FL. He inquired of the Lord and was told he failed to train anyone to take his place and the enemy had access again. It was a very revealing time for me as I grew up in Florida, actually in Palm Beach county and was following the canes closely as well as the election and the results and infamous hanging chads controversy in Palm Beach county. Little did I know at the time that the Lord was about to use me to show His grace and mercy towards this prophet. As I studied and prayed over the election issues, the Lord showed me how the first 3 major hurricanes, Charley, Frances and Jeanne all crossed the same counties near the Orlando area. This is where this prophet had lived and operated from! As I went deeper, the Lord showed me a political report analysis that said the Florida results were only close because of the mysterious change in 4-5 counties in central FL that historically went Democratic but that year went Republican and shocked the political tracking community. When I saw the county names I almost fell out of my chair! Yes, it was the same locations where the storms all crisscrossed. Later on, the Lord showed me that it was the relief effort that turned those counties as Pres. Bushs brother Jeb was Governor of FL and spent much face to face time helping the people in those counties. This incredible revelation from the Lord was an amazing picture of the Lords grace towards a prophet who missed it on one count, but the Lord had a plan anyway! With this story in mind, I am seeing dj vu as we head into this years election. We have a hurricane named Isaac making landfall in southern Louisiana on the 7 year anniversary day of hurricane Katrina. This Isaac while on its way through the Gulf of Mexico causes devastating flooding in Palm Beach county FL! Now the storm is likely to move incredibly slowly, causing major flooding from Louisiana and points north into the drought stricken areas of the Midwest. The storm is also shutting down a lot of refining capacity at a crucial time. I dont know what it all means yet, but I know in my spirit that this election is being influenced by this and that I am to pray for the Lords will to be done in it. I will share more as I receive it, pray I can hear clearly and interpret accurately! Finally, I leave you with a word of encouragement this month: Maybe youre like me and youve battled in the past and even recently with a spirit of greed; maybe youre a farmer whose done your best to follow the Lord but know youve fallen short
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in some areas; maybe youre dealing with curses that had nothing to do with you yet you have to deal with their effects; maybe youve been called into a dark place and finding it hard to stay pure. I have good news, Jesus already died for all of us and for all of these things. I encourage you to simply repent, stand back up, and speak into whatever atmosphere your sphere of influence encompasses! Just like the prophet who missed training another in FL, God knew it would happen and already had a plan, an amazing one! He has an amazing plan for you and for me too! As it is written, eye hath not seen, nor ear heard, neither have entered into the heart of man, the things which God hath prepared for them that love Him! 1 Corinthians 2:9.

INVESTMENT THEMES
Editors Note: In this section we review the investable megatrends we are currently following. While some of the text will be the same monthto-month because our long-term themes remain unchanged, we will update it monthly with our current outlook. Updates are shown underlined.

Time for Caution

Systemic risks abound, especially in Europe and Japan, but also in the US and many other nations. Unstable debt dynamics make for a difficult investment environment. Conservative investors who want to invest for the next 5-10 years should exit the stock and bond markets, and move into cash and hard currencies (not in the US Dollar, the Euro or the British Pound) and gold.

Equities
I wrote in July, The bias now is certainly to the upside, but it might be a bumpy ride. I expect the markets to rise, but investors should remain cautious as Europe continues to boil. The markets have been moving according to script, but look decidedly weak in the short term. I expect volatility to continue as the markets respond to the crisis and bailout hopes.

I expect the crisis out of Europe to continue to build in intensity through the remainder of summer and autumn. However, the authorities in power have used everything at their disposal to defend the system, and I expect them to continue to do so.

3. Inflation. Gold and silver are historically the best protection against inflation. While government inflation statistics are reporting artificially low inflation numbers, inflation actually quite high. 4. Uncertainty. Banking crises and sovereign debt crises mean there are no safe places to store wealth. Gold and silver are the best way to store wealth and will benefit through most crises. So far my forecasts for gold have been fairly good. I forecast gold would hit $1,360 by December 2010. It handily beat my forecast, topping $1,400. I also forecast gold would see its 2011 low in May, and that this would be a good time to buy, which it indeed turned out to be. In January, 2011 I forecast gold would hit at least 1900 by December 2011. In my August newsletter I said, I would not be surprised to see weakness this month, and on August 23 gold hit my target or 1900 and I wrote in my blog post for traders to take profits. Gold has plunged on the back of a strong US dollar, firmly breaking its 3 year uptrend, but has showed its resiliency, and last month rose sharply indicating it is resuming its long-term uptrend:

Gold and Silver

Gold and silver fluctuate between being commodities and currencies. When governments are responsible, they become commodities for use in jewelry, electronics, etc. When governments are irresponsible, they become currencies. Gold and silver are now firmly in the process of becoming currencies. They remain the best bet against government fecklessness. Gold and silver are your best defense against the irresponsible monetary policies being madly pursued across the globe. Here are some of the fundamental reasons Gold will rise: 1. Governments across the globe are pursuing money printing schemes to devalue their currencies. Gold and silver cannot be printed and will hold their value relative to all debasing currencies. 2. Negative real interest rates. Today interest rates, after adjusting for inflation, are negative. This means there is no incentive to hold cash, and thus the relative cost of holding gold and silver disappear. Whenever real rates are negative, gold and silver always rally.

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Silver moved lower in sympathy with gold, but bounced off its major support zone at $26 and is now clearly moving higher:

Gold miners are on sale. Gold mining companies continue their brutal decline. But the cheaper the price of the stock, the greater the value becomes. With mining companies, we must not only measure earnings and cash flow, but also the value of the precious metals in the ground. This has been calculated courtesy of Bank of America, and you can see this chart of price to Net Asset Value (NAV):

If you have not subscribed to my blog feed, you should consider doing it. On 8-3 I issued a buy alert on silver when it was at $27.62, then reiterated it on 8-6 and again on 8-20 with a target of $30.50, which it promptly met, for a quick 10% gain:

Precious metals miners profits continue to grow strongly with the price of the metal. The result is that something historical is happening: miners are becoming bargain stocks. Among these few senior gold miners, the 2013 estimated P/E ratio is 7.8 and the price to cash flow is 5.1: P/E
Barrick Kinross Newmont Average 10.6 12.6 11.3 11.5 7.5 9.5 9.9 9.0 7.4 7.8 9.4 8.2 7.2 7.2 9.0 7.8

Price/Cash Flow
8.5 5.5 5.4 6.5 6.2 5.2 5.2 5.5 5.0 5.0 5.7 5.2 5.1 4.8 5.5 5.1

2010A 2011A 2012E 2013E 2010A 2011A 2012E 2013E

What is driving gold down? 1. Gold is still digesting its massive run up to $1920 in Sept 2011.It rose $455, or nearly 30% in just 8 months. Nothing goes up that sharply without some consolidation. Cycle corrections in gold typically last 6-12 months. Gold is now in its 9th month of correction, and silver its 13th. 2. The dollar has been very strong on Euro weakness. Remember, the dollar is the anti-Euro. Euro weakness will always drive up the dollar. 3. The massive money-printing regimes QE 1&2 and LTRO 1&2 are over. Gold will respond to money-printing expectations, but today, few are anticipating any new LTRO or QE. The Bank of Japan is engaging in a mammoth moneyprinting scheme and buying its own debt, but the market is largely ignoring it. 4. Gold is highly seasonal, and seasonality is weak. As you can see from the chart below, gold seasonally is weak through the summer:
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Gold miners have also broken down from key support levels, but are also clearly reversing direction:

Last month I wrote, it is time to buy this month. The seasonal weakness persists through (August). You should finalize any purchases of precious metals by the end of the month. That proved accurate and both gold and silver have rocketed out of these beautiful bases. Gold will respond to any rumor of QE or money printing schemes cooked up by the authorities to rescue the world. We dont know when this will be but you want to be invested beforehand. For details on how to purchase precious metals download my free Special Report on How to Buy Gold and Silver.

Gold is now in its period of seasonal strength. I expect gold and silver to rally into November/December, though it may pause off its strong showing at the end of August. In 2007, we saw gold rise from $650 to over $1000 in just 7 months. Then gold corrected for 8 months in 3 successive drops of 18%, 25% and 27%. It then rose from 700 to 1000 in just 4 months:

Bonds / Interest Rates

In the long-term, interest rates are going up, due to simple supply and demand. But in the short term and intermediate term, I expect interest rates to remain low due to the ongoing financial crisis and stock market weakness. Bonds have continued to soar in May and June on weakness in the equity markets and turmoil in Europe. As I have said in earlier articles, the US bond market will be the primary beneficiary of the European economic crisis. I expect bonds to remain strong for a while.

What is happening now looks amazingly similar to me. In 2011 we saw gold hit a record-setting $1900 and has since been correcting since, in 3 waves of 20%, 15%, and 15%:

Currencies
The Euro and the US Dollar are racing each other toward worthlessness. But it is difficult to short either of them, because shorting the Euro is essentially betting on the dollar; and shorting the dollar is essentially betting on the Euro. Investors need to exit positions in both the dollar and the Euro, and be wary of all hidden dollar and Euro exposure. The Euro is in trouble. The idea was untenable from the beginning and I have predicted the demise

If we follow the same pattern, gold should hit $1850 before the end of this year.

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of the Euro since 2006. The Euro strips individual countries of key financial policy levers: the ability to lower interest rates and the ability to devalue its currency. The only policies left are government spending and taxes. Several countries will default on their debts. Governments go bust when they borrow in a currency they cannot print. Either the club-med countries will leave the Euro to form a new weaker currency, or more likely, Germany will leave the Euro to form a new, stronger currency. There is simply no alternative. Europe is also very sick economically because of its socialism. Its social contracts are unsustainable due to the large amounts of retirees relative to workers. This will create terrible hardship as government programs are forced to be slashed just as they are now in Greece. The best way protect against the demise of the Euro and the dollar is to buy well-managed currencies Switzerland, Norway, Singapore, Brazil, Chile and South Korea are my top picks as well as the only unmanaged currencies: gold and silver. Secondary currencies that will also do better than the dollar or Euro, but also have some problems are: Canadian, Australian, New Zealand dollars, and the Chinese Yuan. I am recommending the Franklin Templeton Hard Currency Fund (ICPHX) as a simple way to buy hard currencies and earn a 6% yield. In the last two months the strength of the dollar has caused this fund drop, making it a much better bargain. Balance your exposure to this fund with the US dollar, which may continue to strengthen temporarily as the markets unravel.

However, I am now changing my view. A revolution in oil extraction technologies is extending the life of old oilfields and unlocking millions of barrels in nontraditional new fields. While oil is a good long-term bet, the slowing economy will depress oil short-term, though if we do experience a currency crisis or a geopolitical crisis, oil could easily move to $150/bbl or more. This uncertainty makes it difficult to invest.

Oil and Energy

For years I have forecast higher oil prices based on increasing oil demand, especially from China and India, and decreasingly supply, based on decreasing oil discoveries:

You can invest in oil prices through the ETFs USO and OIL which track the price of oil. You can also invest in oil producers. My favorite oil producer is Suncor (SU) a huge Canadian Oilsands producer. However, at this time I favor oil itself over oil producers, since any market correction will affect the producers more than the commodities.

Food and Agriculture

Food and agriculture are on a long-term, irreversible megatrend higher, due to 1) global population increases; 2) the amount of farmland globally is decreasing 1.5% per year due to development; 3) rampant money printing of paper currencies drives up commodity prices; 4) Increase in meat consumption: as third-world nations are growing
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wealthier, they are consuming more meat per capita. It takes eight pounds of grain to produce one pound of meat. The easiest way to invest is rising food and agriculture prices is via stock symbol DBA, which tracks the prices of agricultural commodities; or MOO, which invests in shares of agricultural companies. At this time I favor agricultural commodities (DBA) themselves over agricultural companies (MOO), since any market correction will affect the companies more than the commodities. I think agricultural commodity prices will be strong in the long term, but in the short term will probably not perform well.

This newsletter is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security. The publisher does not represent that the securities, products, or services discussed are suitable or appropriate for all investors. Any market analysis constitutes an opinion that may not be correct. Readers must make their own independent investment decisions. The information in this publication is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject the publisher to any registration requirement within such jurisdiction or country. Any opinions expressed herein, are subject to change without notice. In addition, there are many market, currency, economic, political, business, technological and other risks that are beyond our control. We make reasonable efforts to provide accurate content in these articles; however, some content and some of the assumptions, formulas, algorithms and other data that impact the content may be inaccurate, outdated, or otherwise inappropriate. In addition, we may have conflicts of interest with respect to any investments mentioned. Our principals and our clients may hold positions in investments mentioned on the site or we may take positions contrary to investments mentioned. All current and past market commentaries are protected by copyright. Apart from any use permitted under the Copyright Act, you must not copy, frame, modify, transmit or distribute the market commentaries, without seeking the prior consent of publisher.

Real Estate
Real estate will continue its downward price correction due to: 1) the huge supply of homes on the market and in the foreclosure process; 2) the stilldeflating price bubble; 3) coming higher interest rates; 4) the potential end of government subsidies to the mortgage industry. However, in the May 2012 newsletter, I updated my position, calling real estate The Opportunity of the Next Two Decades. I stated, It is time now to get into a position to purchase US homes in the next few years. I do not think we have seen the bottom yet, but that shouldnt stop investors. I expect housing, especially in the US, to rise because: 1) the central banks of the world have committed to an epic money-printing regime. They will continue to print money to bail out the banks and the sovereign debtors. As the deleveraging completes its course, excessive money-printing will cause asset prices to rise including real estate; 2) the easy-money policies are being directed at lowering mortgage interest rates. For example, my son is getting a first-time mortgage for 3%; 3) houses are selling for 50% below replacement cost. At some point the inventory of homes will diminish and housing will return to build-cost. Make sure to focus on extreme value real estate that can earn income. Measure any real estate purchases by dividing the annual rent potential (after deducting taxes and other costs) by the purchase price. If it is above 10%, then it might be a good purchase. If not, wait. In some areas (Kansas City!) this ratio is well over 10%. Contact me if you are an accredited investor and wish to find out more.

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