'This will be an economic catastrophe on a scale never before seen in history...'
A powerful ancient symbol reveals the hidden architecture of the world's financial system. Read on to see how it predicts the on-set of a new and final phase to the current crisis.
Plus, the steps you must take now to protect your wealth in 2013
By Dan Denning
'The World Will End On December 21st 2012'
This is the prophecy the Maya people of Mesoamerica left us many years ago.
They believed our universe is cyclical - destroyed and recreated after each Great Cycle of the Long Count Calendar (around 5,125 years).
According to the Maya, the current cycle began on August 13th 3114BC.
If you're reading this, though, the Maya were wrong. The world lives on. If you haven't made your financial plans for 2013, you'd better get started!
In this report, I'm going to show you why 2013 could be the most destructive year of the financial crisis yet. It could be the year the crisis hits Australia full force. Yet there are real steps you can take now before the crisis arrives. Some of them could be quite lucrative.
To show you exactly how events may play out, I'm going to tell you about another prophecy.
This one doesn't involve meteors falling from the sky, but it does have the very real potential to wipe out your hard-earned savings and investments - unless you act now.
You're about to meet an obscure Vice President of one of the most powerful banks in the world. His life's work shows you the shape of the threat about to rain down on your wealth. It also reveals clues about what you can do.
It all revolves around an ancient symbol with great power. You will recognise this symbol immediately. But I'm almost certain you've never seen it used in quite this way.
Turned upside down, this symbol is a map of the world's financial system. It shows you where money lives, how it moves in the system, and where it dies. It can show you with great clarity what has happened in the financial world since 2007. It can show you exactly what's happening now.
And most importantly, I believe it can show you what HAS to happen in the future, perhaps as soon as 2013.
This advance knowledge of what may be coming puts you in a unique position most other investors will envy. You'll not only know WHY things are happening, you'll know exactly WHAT to do to avoid needlessly losing more money.
And if the prophetic power of this symbol is true, you'll know which investments stand to prosper the most as the prophecy plays out.
I realise that's a big claim.
But at stake is nothing less than your retirement.
That's why I'll also reveal what I believe you should do with your money today. I'll show you an investment strategy designed to take advantage of any profit opportunities in the market. In fact there's one specific opportunity that could make Australian investors double and even triple digits gains next year - even if the market does nothing.
But here's the thing...you must act on this opportunity no later than April 2013. Shortly thereafter a single event will take place that could change Australia's economy in radical ways - and create windfall profits for investors.
I'll tell you more about it in a moment. It's important you learn all the details before taking action. But first, back to the prophecy and the man who made it....
He was once a Vice President of the New York Federal Reserve, in charge of its international banking and gold and silver operations. He had insider knowledge of the inner workings of the world's economy, of precious metals and currency markets, and the deliberations of the world's powerful central bankers. He was...
The Insider's Insider
John ExterJohn Exter was born in 1910. He grew up during the Roaring '20s and went to college at the College of Wooster in the US state of Massachusetts from 1928 to 1932. He did post-graduate studies at the Fletcher School of Law and Diplomacy. In 1939 he went to Harvard to study economics and the Great Depression.
(1910 - 2006)
If you haven't heard his name before, don't be surprised. As far as I can tell, Exter only ever granted one public interview, and that was in 1991. It's where he made his famous prophecy, which I'll get to shortly.
When Exter enrolled at Harvard, John Maynard Keynes had recently published his book The General Theory of Employment, Interest, and Money. It was all the rage at Harvard.
Over the next seven decades, Keynes' theory of spending would dominate. He advocated government going into debt to spend the economy out of recession. Today that idea is economic gospel.
But it's failing badly.
The world is awash in debt, much of it government debt that may never be repaid.
John Exter was never persuaded that more government debt was the answer to a recession or high unemployment. But surrounded by Keynesians and people who did not take him seriously, he kept his own counsel.
After Harvard, he studied at the Massachusetts Institute of Technology (MIT), and then became an economist for the Board of Governors of the Federal Reserve System.
He had brief stints advising government ministers in the Philippines and Ceylon (now Sri Lanka) on how to set up a central bank. He even became the first governor of the Central Bank of Ceylon in 1950. He was one of the first (and only) men who, as a foreigner, ran another nation's central bank.
Eventually he moved onto the role I mentioned earlier: Vice President in charge of international banking and gold and silver operations at the Federal Reserve Bank of New York.
What Exter Saw
This period at the Fed was critical to Exter's understanding of money. It led directly to the symbol he created shortly thereafter. This symbol explained what Exter thought was happening in the world's financial system. And it led quite literally to a single investment.
Now I should say I have no proof that Exter's time at the Fed led to this insight. Other than the symbol that now bears his name, Exter left no published books or articles about his theories on money, save a 1949 document called 'Report on the Establishment of a Central Bank for Ceylon'.
But even if he didn't leave a paper trail of ideas, he DID leave us a very powerful symbol.
This symbol both EXPLAINS and PREDICTS what Exter believed was happening and WOULD happen to the world's financial system.
He published that symbol after he left the Fed in 1969 to become Vice President of what was then the world's second largest bank, First National City Bank (now Citibank).
As you can see, he was truly an insider's insider; as well placed as any man in the world to know about the inner workings of the world's monetary system. And to know exactly what was wrong with it. And why it was nearly inevitable we'd reach a final crisis point.
With that kind of insider knowledge, you may be surprised to know that Exter had only one investment in his entire portfolio...
A Portfolio Of 100% Gold
In 1968 Exter adopted a radical portfolio position: 100% gold.
What makes his portfolio even more incredible is that it was actually illegal to own gold in the United States at the time.
Exter realised that he could circumvent the ban by owning legal tender, rare gold coins and gold mining stocks.
He combined coins and gold stocks into a portfolio of 100% gold.
Most financial planners would tell you it's suicide to have all your money in one investment. And they'd be right. Exter's strategy was radical. What drove him to it?
To be fair, modern portfolio theory (MPT) wasn't widely understood outside business schools back then. In MPT, you try and maximise your returns with a given level of risk by making investments in a portfolio of shares or assets. The whole is the sum of the parts and it all works together.
But that theory probably wouldn't have mattered to Exter. His unique insider position led him to the conclusion that only one investment made sense when faced with a monetary catastrophe.
Here is the question: why would someone so deep inside the monetary system invest in the one asset that lies outside it? What insight or understanding had he gained that led him to take such a radical point of view?
The answer is simple: He knew the system couldn't last. His pyramid proved it.
'IOU Nothing' Money
From his time at the Fed, Exter knew that central banks would always be pressured by politicians to print more money to promote economic growth, especially during a crisis. All modern central banking, Exter knew, has a bias toward creating inflation.
If you've been following the course of events in the world since 2007, you'll know how true this is. Every time a big bank goes bankrupt, or even a government, a central bank bails them out. But where does the money for bailouts come from?
Some of the time it's borrowed from investors in the form of government bonds. But the debt crisis has become even larger and unsolvable in the last five years. You can see what I mean in the chart.
Total Credit Market Debt as % of GDP
Source: Ned Davis Rosenh
Since the only way to create inflation is to print more money, Exter summarised that central banks always tend to devalue their currency.
But you can only devalue a currency in terms of real things. And that gave Exter his insight.
If paper money was to be devalued, and all other assets in the financial system were affected by this, then one investment would actually increase in value: gold.
Remember, Exter worked at the New York Fed from 1954 to 1959. His job put him in regular contact with foreign governments and central banks.
As head of gold and silver operations, Exter would have been intimately aware of how much gold foreign investors were taking from Ft Knox. Back then, you could still trade in your paper US dollars for real good.
Exter would have seen firsthand that in a crisis, the most informed investors always choose real tangible wealth like gold over intangible wealth (like paper money).
He was ahead of his time.
America's participation in the Vietnam war from 1965-1975 cost it $738 billion in today's money. In 1968, the year Exter formulated his 100% gold portfolio, defence spending made up 9.5% of GDP in the US. It was the beginning of long-term historical trend that will end with bankruptcy of America and the destruction of the US dollar as a world reserve currency.
Exter knew America didn't have the money to pay for the war. It would have to be borrowed or created from nothing - and it couldn't be done while the US dollar was backed by gold.
When Nixon 'closed the gold window' on August 15th 1971, Exter realised that the entire world was now on a fiat paper money standard. It was the first time in human history you couldn't find any money anywhere backed by gold. He called it 'IOU nothing' money.
'We Are Heading Into Catastrophe.'
Some investors are value investors. Others are technicians. But I like to incorporate all facets of history, economics, finance, and politics when analysing the stock market. I call it 'Emergent Analysis'.
Emergent Analysis (EA) is an off-shoot of the chaos theory that burst on to the scene at the Santa Fe Institute when I was at St John's University. To my knowledge, no other financial analyst is applying the principles of emergence to markets.
It's based on a simple idea: in the world of investment things are connected in ways that are not obvious. It's about synthesizing lots of different factors in order to figure out what's going on in the world and how to profit from it.
Securities analysis: This is the key skill inherent to all investing; evaluating the current value of a business and its ability to produce future earnings.
Technical analysis (TA): In other words, looking at price charts. Prices communicate information. They may not tell you everything that's going on, but it's indicative of activity underneath the surface.
Credit cycle analysis: Economics is the study of human action, the study of the decisions people make with money over time. Knowing where you are in a business cycle - late, early, or middle - is a distinct advantage. This will directly affect the success or failure of your investment strategy.
Systems analysis: The world is a system of systems. A transportation system...a financial system...a power generation system...a monetary system. All of these systems obey certain laws and have a certain kind of operating logic. But understanding each system is not enough. You also have to understand how these systems interact with each other.
Experience: Ultimately any decision is influenced by your own experience. 15 years of analysing markets in the US, UK, France and here in Australia have taught me that when your gut tells you something, you should listen - because you've picked up on something important - you just haven't realised it yet.
Maintain your thirst for knowledge: Look for cross-disciplinary clues. Most economic phenomena have equivalent instances in the real world: in music, books, culture, architecture, and science. Be constantly alert. Sometimes the best investment ideas come when you're not thinking about money at all.
Exter knew that a worldwide system of paper money would allow for an almost infinite expansion of debt. This led him to what I call his prophecy. His prediction of a collapse in the financial system. Exter said:
'That's why we are heading into such a catastrophe: the whole world has gone off gold. Without central banks, such a catastrophe could not be possible. Single paper currencies without gold backing have collapsed, going way back to John Law in France, our own continental dollar, and the French Revolutionary Assignat, all in the 18th century. This was Exter's prophecy.
'This will be a deflationary collapse rather than an inflationary blow-off because creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid...'
One giant sell-off, starting with the least liquid debtors - stuff like credit default swaps, mortgage-backed securities and collateralized debt obligations.
Exter predicted they'd get liquidated first. He was right. That's already happened.
Then the crisis worsens as creditors move DOWN to less liquid debtors - businesses, real estate, corporate bonds...to the stocks you own...and...eventually...even the cash in your wallet.
It's all foretold, in the symbol I will reveal in just a second.
Exter knew that a currency collapse was inevitable. He also knew that in such a crisis, gold would be king. That's why he put all of his money into gold. Gold is the ONLY asset in the entire monetary system that cannot default.
I know it's hard to imagine the collapse of our money system. But as Exter explained, it has happened before - many, many times.
In fact every single world reserve currency since the fall of Rome has ended with debasement, devaluation, and eventual destruction.
Since 1971 the whole world is on a fiat paper money standard - meaning that when that paper money devalues and collapses, it could bring the entire global economy down with it.
Right now the major central banks of Japan, Europe, and America are actively devaluing their currencies. As you'll soon see, it's a very real possibility that a major monetary collapse could happen as soon as 2013.
Let's now take a look at the symbol Exter used to help visualise the way the financial system works...and why he believed it would inevitably collapse. As you'll see, it's a modern version of an ancient and powerful symbol that recurs in human history...
Exter developed a symbol to represent his idea of what would happen in a monetary crisis where all the nations of the world had gone off the gold standard. This symbol shows you how such a crisis begins, progresses, and ultimately ends. It's a symbol that goes hand in hand with Exter's financial prophecy. By looking at it we can understand how the crisis has progressed so far, and more importantly, where it will go from here.
Exter used his decades of insider knowledge to come up with what's been called 'Exter's Inverse Debt Pyramid' or 'Exter's Golden Pyramid'. To keep it simple, let's just call it Exter's Pyramid.
Understanding how the pyramid works unlocks the secret to how all financial crises begin and end.
An early version of the pyramid is below. Unlike most pyramids, Exter's pyramid is 'inverse', or upside down. That signifies how the financial system actually works. The pyramid is made up of all the assets in the financial system. At the bottom is gold, an asset that cannot default.
The Inverse Gold Pyramid
Gold is the foundation of the Pyramid. It's real money and bedrock wealth. As you work your way up, the assets slowly change.
You go from real money (gold), to paper money (cash), to government bonds.
In Exter's time, the top of the pyramid was risky debt. For example, loans made by big banks to Latin American countries occupied the top of the pyramid.
Today we call it 'emerging market debt'.
But the point is, anything at the top of the pyramid is actually someone else's promise to pay you. It's usually debt, not real, tangible wealth.
An Updated Version Of Exter's Pyramid
A more up-to-date version of the pyramid is shown above. In this version, the pyramid is made up of six levels that represent different categories of assets. At the top you have 'claims on real wealth'. These assets are heavily based on trust as you don't actually have any 'money in hand', so to speak.
You're trusting someone else to pay you at a later date - all you have is an IOU. This makes them risky and illiquid - meaning they're hard to sell in a hurry.
At the bottom of the pyramid you again have 'real wealth'. Assets at the lower level of the pyramid are closer to actual money. You don't have to trust anyone else to pay you, because nobody owes you. These kinds of assets are liquid - they're easy to sell or exchange.
If you think about it another way, the further you move down the pyramid, the less the assets are things you can buy with your money and the more they are what we think of as currency or money.
But even paper money is reliant on a promise to pay. That's why gold is at the very tip of the pyramid. It is real money. It's an asset that isn't anyone else's promise to pay. The lower you are on the pyramid, the more secure your claims on wealth are.
How The Crisis Begins
Up until now, I've shown you what Exter's prophecy is and how his pyramid both explains and predicts the coming crisis. But I've left out an important part.
How does the crisis actually begin? How will you know when it's time to move 'down the pyramid' into more liquid assets and more tangible wealth?
According to Exter, a crisis in the fiat money-based system occurs when the assets at the top end of the pyramid become too far removed from the collateral and real wealth at the bottom. For example, a credit boom leads to high levels of speculation. The top of the pyramid becomes bigger and bigger with risky assets.
But eventually the unproductive assets do not generate enough cash flow to pay the interest on the debt accrued. When this happens creditors flee the top of the pyramid and move towards the bottom, to more secure assets, and more secure claims on real wealth.
This is exactly what's been happening in financial markets since 2007.
The global financial crisis began when high risk assets of companies like Lehman Brothers went bad. Those assets were related to America's sub-prime housing boom - an era filled with fraud, greed, and trillions of dollars in loans that should never have been made to people who were never going to repay them.
Those loans were packaged up into assets held by companies like Lehman. When the housing bubble burst, it forced Lehman to sell off other assets to cover their losses. A vicious spiral of lower prices and more selling ensued.
This was the beginning of the deflationary collapse Exter had prophesied.
It started at the top and moved its way lower.
The more illiquid the assets were (for example mortgage backed securities), the cheaper they had to sell them to find a buyer. But that meant they had difficulty raising enough money. So they had to start selling better quality assets further down the pyramid. This sets off a chain reaction, bringing all asset prices down. As prices at the top of the pyramid fell, creditors moved their money lower down - into bonds, currencies and gold.
How The Crisis Progresses
For most of the 20th century, the above process would have been painful. But it wouldn't have been a crisis that threatens the entire world economy. During Exter's career at the Fed, Treasury bonds were backed by the full faith and credit of the government, and paper money was backed by gold.
The risky assets at the top of the pyramid would collapse, and the pyramid would rebalance. The economy would never be threatened by a speculative boom in risky assets. The economy was too big. The bad loans and bad assets were too small to threaten the whole system.
The problem we have now is that a fiat currency allows central bankers to print as much money as they like in order to prop up the top of the pyramid. They want to delay the collapse for as long as possible (or at least until their term in office is over).
This is what the Fed and its central bank partners have been doing since 2001. They stepped in to prevent a wider destruction of paper wealth by creating more paper wealth and buying everything.
As creditors fled assets at the top of the pyramid, the Fed was forced to come in and buy or refinance. It provided emergency liquidity and kept markets from melting down (to gold).
The result is nearly $2.75 trillion in assets on the Fed's balance sheet.
And it's not just the Fed. The combined assets of the world's eight largest central banks have nearly tripled since the beginning of the financial crisis, from $5.5 trillion to over $15 trillion.
The last five years have seen a concentrated campaign by the Keynesians to prevent deflation (or a flight from risk to safety in Exter's terms).
By artificially keeping the top of the pyramid inflated, the central banks are hoping to reassure investors and lure them back into risky assets.
But it's not working...
How The Crisis Ends
Since the dawn of civilisation the pyramid has stood as a symbol of mystical power. From Asia, through the Middle East, Africa, Europe and the Americas, pyramids have been constructed throughout history to honour the dead and worship gods.
Even today, some people believe that pyramids project what they call 'pyramid power', a mystical force that can do anything from sharpen razor blades to mummify corpses.
The most iconic pyramid in the world is the Great Pyramid of Giza in Egypt (also known as the Pyramid of Kufu or Cheops). Constructed over 4,500 years ago, it still stands today, although it has been stripped of its polished limestone exterior.
Researchers speculate that the original white limestone would have reflected the sun so brightly that it would have been visible from the moon. Although studied by countless amateurs and professionals with cutting-edge technology, the pyramid still baffles researchers. Perfectly aligned to True North, it is built with an unknown type of mortar that is still unable to be reproduced today. In fact how the pyramid was ever constructed remains a highly debated issue.
The giant 20 tonne stone swinging door to the King's burial chamber is said to be so perfectly weighted that it can be pushed open by a single person - and once closed, the stone aligns so perfectly with the wall that it is impossible to pry open from the inside.
Dozens of mathematical and astrological constants have been found within the measurements of the Great Pyramid - from locations of distant stars, calculations for the speed of light and relationships to the geometry of the Earth. Some of these are so complex and advanced that some believe the Ancient Egyptians must have had help from 'higher forms of life' to construct the pyramids.
There is also widespread speculation about why the Great Pyramid appears on the US one dollar bill - topped by a floating all-seeing eye. A symbol often attributed to the Illuminati.
Investors aren't taking the bait and are sticking to the lower half of the pyramid. That's why we've seen 'safe' assets rally so strongly over the last five years.
The problem is getting worse. Central banks are printing so much money to buy bad assets at the top of the pyramid that they are rapidly devaluing the value of their currencies.
The US is already running annual deficits of $1 trillion dollar - a number that may be even larger after December 31st 2012. Why?
If the US Congress and President Obama don't agree on a compromise before the end of the year, a host of tax increases will hit the US economy. These increases will lower consumer spending and lower government tax revenues. The deficit will grow even larger.
The only way for the government to pay for this deficit is to print more money, devaluing its currency even further.
Where is all this money going to come from?
That's right. The printing press.
The economic term for when a government starts buying its own bonds is called 'monetisation'.
Without the newly printed money, the government can't borrow. It might not even be able to pay interest on its outstanding debts.
This is why debt monetisation is always the sign of a government whose finances have fallen into terminal disrepair.
The United States government is in danger of becoming a financial failed state.
After The Global Financial Crisis
According to Exter's Pyramid a money crisis occurs over four stages.
1 - Easy credit inflates the top of the pyramid.We are currently on the verge of stage four...but what happens next?
2 - The pyramid becomes unstable and debt markets (the top of the pyramid) collapse.
3 - Vast amounts of money are printed to prop up the debt markets.
4 - The currency sharply devalues and collapses.
The US is the heart of the world's financial system. And the US dollar is the heart of the US system. A fiscal crisis in the US and a government debt crisis are necessarily a dollar crisis.
The recently announced open-ended QE I mentioned earlier could very well mean the Fed will soon be buying all US debt. When that happens you can expect the dollar to drop sharply in value.
At that point trust in US bonds and the US dollar will collapse. And because the US dollar is the reserve currency, it will have repercussions for the entire world.
You can expect to see most assets prices plummet. A large portion of the world's wealth will likely be wiped out.
Investors will flee from all paper assets including bonds and currencies and look for somewhere else to keep their money safe.
If we look at the bottom half of Exter's pyramid and remove bonds and currency as 'safe' places to put your money, we're left with just one. Gold.
What You Need To Do To Prepare
If you're still with me then it's safe to assume you believe that Exter's prophecy at least partly true.
So does that mean you should copy his investment strategy and move your portfolio into 100% gold?
No...at least not yet.
I don't believe you should put all of your money in just one asset - it's far too risky, even if a prophecy says you should.
Because in my 15 years of analysing the markets I've discovered that no matter what, one rule always holds true...
The market never does what you expect it to.
You cannot underestimate the lengths central bankers will go to prevent a deflationary depression.
There is no theoretical limit to the Fed's ability to expand its balance sheet. The only limit is the credulity of investors and the public.
I expect the Fed to keep expanding until trust is gone, at which point all asset values will deflate (except gold).
When that time comes, putting 100% of your money into gold may very well be the right thing to do.
But that could be years away. The Fed has already managed to delay the final stage of the crisis by five years. What's another five? Or even ten? What if they follow Japan's path and we're in the same place twenty years later?
The point I'm trying to make is that a lot can, and will happen before the global financial crisis finally comes to a head.
Stocks could go on a multi-year rally or plummet to historic lows. We could see rapid inflation like Argentina, or a painfully slow deflation like Japan. There's no telling what could happen.
That's why you need to have a strategy in place that allows you to prepare for a crisis, whilst also allowing you to take advantage of any profit opportunities that arise in the meantime.
In the last few years, I've adopted an investment strategy that can do just that. It's called...
The Permanent Portfolio
Forecasting The Big Change
I've been watching and commenting on the markets for over 15 years now. Over that time I've made a number of big predictions. Did they play out as I said they would? Take a look and decide for yourself...
The Decline of the US Dollar, JANUARY 2001:
'The seemingly strong U.S. dollar is built on a rickety scaffolding which is about ready to crash over the heads of investors.'
6 months later the US Dollar Index (DXY) peaked at just over 120, and then plummeted 41% over the next 7 years.
The Commodities Bull Market, FEBRUARY 2001:
'Much of the capital that flees the United States on the heels of a weak dollar will find its way directly into commodities markets.'
Over the next 7.5 years commodity energy and metal prices soared by an average of 309% (World Bank Commodity Price Index).
A golden buying opportunity, APRIL 2001:
'There are many external threats lining up to broadside the market. If the Fed does what it always does and responds to these threats by lowering rates, the first beneficiary is gold.'
Since then gold has gained 467% on the back of monetary madness by the Fed.
The US Housing Bust, APRIL 2004:
'The stage is set for a day of reckoning for the Fannie Mae and Freddie Mac. But not many investors know, or perhaps care to know, exactly what is going on.'
Four years later the subprime crisis broke into the public consciousness with the catastrophic failure of Lehman Brothers and the nationalisation of Fannie Mae and Freddie Mac.
The Global Financial Crisis, SEPTEMBER 2007:
'We are at the end of the longest, largest and most irresponsible credit bubble in history. That's why I'm putting sell recommendations on the all the North American and U.S. stocks. It's time to say goodbye to them. The fallout from the credit bubble could wipe out many years of gains in solid resource stocks. The only way to prevent that is to take profits now.'
18 months later the S&P 500 had shed 50% of its value, but those who heeded my advice had pocketed their profits and were ready to pick up undervalued shares at the bottom of the market.
Before I continue, let me be clear about one thing. The investment strategy I'm going to share with you isn't going to make you a millionaire overnight. I haven't discovered any loopholes in the system or figured out some miracle trading system.
It's a straightforward, modest strategy that aims to steadily grow your wealth while making sure it's protected from any foreseen and unforeseen threats.
To put it another way, it's a strategy that lets you rest easy at night knowing your money is in the safest parts of Exter's pyramid. It's called the Permanent Portfolio because once you set it up it requires very little maintenance, and you can be confident it's working regardless of what the wider market is doing.
It's already delivered a +24% return for investors over the last 19 months - over that time the ASX 200 has fallen by -10%.
The strategy is based on a simple idea - you cannot know the future.
During any given period in time there is always a ruinous asset class that will destroy wealth. And there's always a profitable asset that will generate a lot of wealth. The problem is you can't know which those will be.
So you need to have a portfolio that is immune to crisis but positioned for profit.
In order to do that you need to build your portfolio to be able survive and grow in the face of four basic scenarios: inflation or deflation, growth or contraction.
And the best way to do that is to spread your money over the bottom half of Exter's Pyramid.
Scenario 1: Growth - Profit With 25% Stocks
If you've got more than 25% of your money in stocks I recommend you think about scaling back. Most Australians (whether they know it or not) are over-exposed to growth stocks and commodities through their own investing or their retirement fund.
In fact Australians have the highest allocation of retirement funds in shares in the entire world. It's the equivalent of having all your investment eggs in one basket.
Having just 25% of your money in stocks allows you to reduce your exposure in the event of a market crash, while also allowing you to take advantage if it moves higher.
Of course you need to be very careful when it comes to picking which stocks you have in your 25% allocation - more on that in a moment.
You might wonder if investing in stocks really is a good idea considering they're close to the upper end of Exter's Pyramid.
But the thing to remember is that we've seen stock markets surge after every round of government stimulus.
There's no telling if the Feds recent 'never-ending QE' announcement could in fact push stock prices to all-time highs over the coming months and years.
While Exter placed stocks above bonds on his pyramid, I believe that positioning is a mistake. Stocks aren't real assets in the way gold is, but I do think that they are closer to real assets than bonds.
Bonds are debt, and debt is debt no matter the credit quality of the borrower. But stocks represent a claim on the earnings of a company.
You have a stake in a real enterprise with real assets and the ability to generate revenues.
To me, that makes stocks a better form of wealth preservation than other assets lower down the pyramid, save gold.
But which stocks should you buy?
Having a 25% portfolio allocation in any old stocks isn't good enough. You need to be very careful about every investment you make. Owning fewer but more carefully selected stocks seems like the best strategy to me.
Most stocks on the ASX are connected to either the industrial commodities sector, which is in a cyclical downturn, or the banking sector, which will fail catastrophically when the debt collapse arrives.
You should look for stocks that will perform well due to an event or trend independent of the wider market.
A good example is the Aussie shale gas sector. I started writing about its potential in my investment newsletter The Denning Report in the first half of 2011. Back then shale gas was still seen to be a crackpot idea that had little chance of success.
The three Aussie shale gas stocks I recommended then are now sitting on gains of 55%, 98%, and 253%.
The reasons for why the shale gas revolution is likely to remain a long, and powerful trend and too long to go into detail here. But it can be traced back to the origins of the oil industry in Saudi Arabia and Persia (modern day Iran) - and current geopolitical movements that will have a profound effect on global energy markets.
The exact details of these three stocks and the story behind the shale gas trend is in a recently updated 67-page report I published called Revolution in the Desert. I'll show you how you can access the report in a moment.
Here's the thing...
In April of next year, I expect an announcement to be made that could send these shales stocks much, much higher. One of the key companies drilling for shale gas in Australia will reveal a crucial piece of information. This piece of information will tell the world whether Australia could have a shale gas revolution like America.
You'll want to know the names of the companies I've tipped well ahead of time. And of course, if the information revealed next April is not positive, then the stocks could very well go down. But owning stocks that have a chance to up many times on positive news flow is one of the best reasons for having a punt in today's share market.
Now, aside from capital gains, getting income from your shares is also important, especially in hard time. Right now high dividend paying firms like Telstra are the darlings of the investment world. But even a good dividend doesn't offset the money you lose when a stock goes down.
What you need to do is only buy shares that have a better-than-average chance of holding their value even if the wider market crashes.
I currently have my favourite income generator in Australia listed as 'buy' in The Denning Report. It's consistently paid over 50 cents in dividends. It's one of Australia's largest pipeline network owners. And on top of the dividends, the share price is up 38%.
Of course in a real liquidity crisis, all stocks, even those of top multi-national blue chips will get sold off...
And that's why the next scenario is important.
Scenario 2: Contraction - Be Ready With 25% Cash
The biggest reason to have cash on hand is so you're ready to buy stocks when they hit rock bottom.
As the pyramid collapses downwards, debtors will have to sell off whatever assets they have to cover their losses - including shares.
This will drive down the prices of even quality companies to historic lows.
You want to be the one with the cash when all the assets must be liquidated by distressed sellers.
The assets of the company won't have disappeared. Their customers or clients won't have disappeared. And their profits won't have disappeared. But their share prices will be dirt cheap.
If you have the courage to buy stocks when things look their worst, you'll have a once-in-a-lifetime opportunity to buy at low prices.
Market bottoms don't last long so you're not going to have enough time to sell off assets to raise cash - especially when everyone else is trying to sell as well.
When the time comes you want to have money on hand, and ready to make a move.
Then as the market recovers, all you have to do is sit back and watch your stocks soar in price.
Investors who were prepared to buy when the market crashed at the start of 2009 made huge amounts of money as the ASX surged 1,800 points over the next 10 months.
The next crash will be much more severe, and the profits to be made as the markets recover much larger.
Scenario 3: Deflation - 25% Income ETFs
ETF stands for exchange traded fund. The important thing to note is that an ETF is not a bond. It's a security that's been designed to imitate some other sector.
In other words, you're investing in equity, not debt. This is an important distinction when you're talking about an upcoming debt collapse.
I've found a number of intriguing ETFs that could profit from a flight to safety.
Scenario 4: Inflation - Protect With 25% Gold
When the currency collapse does come gold may be the only asset that survives.
It's the safe haven of last resort - the one asset that no one else can claim is theirs.
A steady trickle of money has already been working its way into the tip of Exter's Pyramid, pushing gold to new highs each year for the last 11 years - a performance it could repeat again this year.
But when the currency crisis kicks off that trickle will quickly turn into a flood.
It's likely to be very similar to the gold rush in the 1970s that blasted the gold price near vertical from $35 to $850 an ounce - a 2,329% increase.
Gold's current bull run began at $250 an ounce. If we see the same kind of price action this time around you're looking at $6,073 an ounce.
Even if you start buying today at $1,660 an ounce you're still looking at a big, triple digit gain.
Start factoring inflation and the endless money printing that's going on and the seemingly outlandish predictions of gold at $10,000 from people like Peter Schiff, President of Euro Pacific Capital, John Butler, CIO of Amphora Capital and Nick Barisheff, CEO of Bullion Management Group could very well become a reality.
Either way, when it happens, it will happen quickly - so make sure your portfolio has a 25% gold allocation.
And that's basically what the Permanent Portfolio is.
Like I said, it's pretty straightforward.
If you're confident picking investments yourself, then please feel free to start applying the strategy to your portfolio right away.
But if you feel that you don't have either the time or experience to find and research shares and bonds for yourself then I'd like to invite you to try out my investment newsletter, The Denning Report.
Implementing The Permanent Portfolio
The Denning Report will help you guide your existing investment portfolio, or if you're just starting to invest, build it from scratch.
Aside from the major four asset classes of the Permanent Portfolio, I'll also help you with how you can sub-allocate your holdings within each class.
The gold and cash allocations of the Permanent Portfolio are easy for anyone to set up, but it gets a little trickier with stocks.
I'll give you recommendations for the stocks that I believe are best placed to grow over the coming months and years, and are most likely to survive any crisis.
You'll also learn which fixed income stocks and ETFs aren't vulnerable to a market crash - unlike most of the popular dividend stocks - so you can secure a steady income stream.
If this sort of investment advice and guidance sounds like something that would be useful to you, I'd be delighted if you decided to take a look at my newsletter.
You can access all of my research and current stock recommendations, as well as a number of special reports like the Revolution in the Desert which I mentioned earlier, by taking a 30-day no obligation trial subscription of The Denning Report.
The trial offer means you'll need to pay upfront, but you can get all of your subscription money back at any time in the first 30 days if you feel that it's not what you're looking for.
Also, if you order today you can claim a 33% discount on the subscription price. The normal price is $299. But since you and I don't know each other, I'm happy to offer you an introductory one-year subscription price of $199.
That gives you a full year to thoroughly review my work and determine if it's right for you.
If you're happy with The Denning Report at the end of that year, your subscription will be automatically renewed for another twelve months at the discounted annual price of $278. Your subscription will continue to be renewed at this price each year until you decide you no longer want the service.
You can claim your 30-day no obligation trial of The Denning Report here.
You'll immediately get access to my latest report, and the full archive of all past issues. You'll also be able to find out all of my current share recommendations, and learn exactly how to apply the Permanent Portfolio to your own investments.
The Best Investment You Ever Make
The Denning Report?
As investment strategies go, the permanent portfolio is very straightforward.
You divide your investments into four equal allocations - gold, cash, stocks and bonds.
You only need to rebalance the portfolio once a year. And it's both low-cost (no trading) and low volatility (the historic performance has seldom deviated from the market averages).
The cash and gold portions are easy enough to implement, but it gets more difficult choosing which stocks and bonds you should buy.
That's why I created The Denning Report
. It's a monthly investment newsletter based on a simple investment strategy, but tweaked to suit our current economic conditions here in Australia.
I look for the most exciting and fastest growing sectors that move independent of the wider market, and recommend the companies most likely to succeed. And I try to put those stories in a bigger context for you to help you understand what's going on in the world.
The portfolio has achieved an average return of +22% since April 2010. During that time the ASX has lost -5.7% of its value.
Investing in such an unstable market is difficult work. Stocks could benefit from Fed money printing, but then again they might not.
Nobody really knows because we've never been here before.
The big question is whether the Feds can pump money into the system faster than liquidity leaves it. When liquidity leaves, it destroys asset values. The asset values closest to the core of the system - the tip of Exter's Pyramid - benefit the most.
But asset values are just part of the story here.
The expansion of the central bank balance sheets is fundamentally undemocratic. It transfers power from elected leaders to unelected bankers. QE is not unorthodox monetary policy. It's a certain road to disaster.
As I said earlier, we are at or near the last stage of a financial system in decline.
The weight of the debt has become so great it can't be supported.
When you reach this point, the system usually collapses. That collapse begins with asset values but it extends to the real world. To that extent, it's something we should never wish for, but always plan for.
A lot of money was destroyed during each depression and market crash in the past. But the biggest cost wasn't financial. Losing money doesn't just end with your bank account. It extends into your life and the lives of those around you.
This is why I'd encourage you to think about and build what I call 'non-financial wealth'. I wrote about it this year in the June issue of The Denning Report (How to Create Non-Financial Wealth and Personal Security).
Money is not wealth. It is just a means to the personal happiness, security, and fulfilment we all seek in our own lives.
You can't do anything about the stock market or central bank policy. But you can think about what will make you and your family more secure, happier, and less dependent on things beyond your control. That will be the best investment you ever make.
The Permanent Portfolio has already delivered +24% over the last 19 months. But its biggest strength lies in the fact that you can spend less time worrying about where to invest your money, and more time enjoying the important things in life...
If this sounds like the kind of strategy you'd like to try for yourself, I invite you to join me here.
Editor, The Denning Report
PS: I hope you'll take advantage of the first-year introductory offer to The Denning Report and decide for yourself if my big picture views can contribute to a more comfortable life and retirement.
But if you'd rather not, that's fine too. I just want to make sure you're not without some guidance in the challenging investment situation we have today.
|Calculating Your Future Returns: The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you've invested. While useful for detecting patterns the past is not a guide to future performance. Some figures contained in this report are forecasts and may not be a reliable indicator of future results. All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. All figures accurate as of 01/01/2013.
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