joseph insight 2012-09

7/31/2019 Joseph Insight 2012-09

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In This Issue

News and Analysis 1

Re-leveraging 1

Economy & Market 2

Major DemographicInvesting Shifts 4

Peak Oil is Dead 5

Who wants to be aBillionaire? 6

Early Signs of BankTroubles 7

European Crisis toReawaken 8

Europe Update 9

Weird Weather 11

Gregs Market Outlook 13

Investment Themes 15

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Welcome to this Issue of Joseph Insight!

Its time to make your plans now for our national finance and economicsconference, Prospering in Changing Times, in Kansas City Nov. 8-10th

This is a must attend event for anyone interested in finance or economicsWe will have leading experts and prophetic voices, who will tell us whathey are seeing for 2013. If you cannot attend, this event will also be web-streamed live.

Every Blessing, Bob Fraser

NEWS ANDANALYSIS

Re-leveraging

Total US debt is again on theincrease, exceeding pre-crashlevels:

As you can see, householdsand corporations are reducingtheir debt. But overall debt isrising due to extraordinary in-creases in government debt.

Obamas Amazing Debt Leg-acy

Most people think of Bush orReagan as big-spending presi-dents. But Obama will close hisfirst presidential term in record

setting fashion: Obama deficits have aver-

aged $1.5T/year

During the Obama years,we will have added $6T topublicly 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.

September2012

02
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Economy & Market

The Economy: Slowing DownAnd Picking Up

If you are like me, you have seen a mix of strongand weak economic news. So which is it? Thereare several manufacturing indexes in the US. The

latest data clearly shows weakness. Here is a chartof new orders in manufacturing:

But Citibanks Economic Surprise Index tells adifferent story. This index looks at the economicnumbers and measures whether they came in bet-ter than expected, or worse. It clearly looks like ithas bottomed and is turning stronger:

There are some positive indications for US em-ployment as well. US firms are hiring temporaryemployees. Temps are usually the first to be let goin a recession and the first to be hired when thingsare picking up. Temp hiring continues to accelerate:

DEBTSUPERCYCLE WATCH

We are in the midst of an economically domi-nant Debt Supercycle for more backgroundon this, read the article, What is the Debt Su-percycle?. Here are the 7 phases I am ex-

pecting:

1. Boom (complete): Excess speculation andleverage, asset prices (real estate, stockmarkets) rise.

2. Bust (In progress): Debt decreases; assetprices drop (housing, stocks); banks fail;and economic growth slows.

3. Government spending (in progress in US,Europe, Japan): Public debt increases; aneconomic boomlet due to spending (in

progress).

4. Bond crisis (in progress in Southern Eu-rope): interest rates rise as creditors loseconfidence; rising interest rates causestocks and bonds to fall; inflation begins;government budget crisis as borrowingcosts rise.

5. Currency crisis (soon): governments try tosolve crisis by printing money, currenciesplummet; interest rates rise; inflation soars.

6. Austerity (In progress in Europe): govern-ments restructure debts and entitlements,cut spending, raise taxes and head towardbalanced budgets.

7. Normalization (not yet): economic rebuild-ing and prosperity.
http://blog.josephinternational.org/2012/05/02/what-is-the-debt-supercycle/http://blog.josephinternational.org/2012/05/02/what-is-the-debt-supercycle/http://blog.josephinternational.org/2012/05/02/what-is-the-debt-supercycle/http://blog.josephinternational.org/2012/05/02/what-is-the-debt-supercycle/http://blog.josephinternational.org/2012/05/02/what-is-the-debt-supercycle/http://blog.josephinternational.org/2012/05/02/what-is-the-debt-supercycle/


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So how do we interpret these numbers? Here is mytake: The European debt crisis is causing a deeprecession there. Because the economy is global, allmanufacturers, including the US and China, areseeing a slowdown. However, 70% of the USeconomy is consumer demand, and US-basedconsumer demand continues to be strong.

Stocks

It was a fairly disappointing earnings season. TheS&P 500 is an index of the 500 largest companiesin the US. Here is how earnings looked:

Estimates for S&P 500 earnings continue to be re-vised downward, just like they were in 2000-1 and2007-8, suggesting the stock market may be at anintermediate term peak:

However, election years are usually good forstocks:

Stock valuations are right at their historical aver-age:

The Fiscal Cliff

The fiscal cliff the expiration of the Bush-era taxcuts and stimulus is looming large, January 2013


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If the cuts are not extended, it promises to be aneconomic cliff swan dive. On this chart fromGoldman Sachs, the gray dashed line below showsthe impact on economy (GDP) if all the items areallowed to expire:

The fiscal cliff debate will be complicated by the

fact that we will be hitting the debt ceiling again byyear end. Hopefully the US congress can cross thepartisan and ideological divide and address theseissues.

Major Demographic Investing Shifts

A major megatrend shift in investor habits is un-derway. This will affect the markets for decades tocome.

Investors are increasingly exiting the stock market.In the late 90s, investors flocked to stocks (the blueline) to play the tech bubble. But since the financialcrisis in 2008, investors have exited equities andhave been moving heavily into bond funds (redline):

The biggest factor in this transition is changing de-mographics. The generation of Baby Boomers isabout one quarter of the population, but controlssome 80% of financial assets. This giant population

wave is getting ready to retire and hence are in-creasingly investing in bonds.

The second factor is the disappointment in themarkets. Increasingly investors believe that the sys-tem is rigged against them: with the MF global de-bacle, HFT trading, the flash crash, hedge fundmanipulations, etc. Facebooks high profile, mega-

flop IPO will probably prove to be a turning point ininvestor rejection of the stock market.

As clear illustration of this megatrend, total stockmarket volume also continues to drop to recordlows (Bloomberg) in the last several years:

Yet in spite of decreasing volume and high outflowssince 2009, the stock market continues to rise:

Moreover, the market has consistently moved high-er on low volume. This interesting chart from Bespokeshows the performance of the S&P 500 (blueline) compared to the performance on high-volumedays alone (red line).
http://www.bloomberg.com/news/2012-01-23/stock-trading-is-lowest-in-u-s-since-2008.htmlhttp://www.bloomberg.com/news/2012-01-23/stock-trading-is-lowest-in-u-s-since-2008.htmlhttp://www.bloomberg.com/news/2012-01-23/stock-trading-is-lowest-in-u-s-since-2008.htmlhttp://www.bespokeinvest.com/thinkbig/2012/8/27/a-low-volume-bull.html?utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_082712http://www.bespokeinvest.com/thinkbig/2012/8/27/a-low-volume-bull.html?utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_082712http://www.bespokeinvest.com/thinkbig/2012/8/27/a-low-volume-bull.html?utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_082712http://www.bespokeinvest.com/thinkbig/2012/8/27/a-low-volume-bull.html?utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_082712http://www.bespokeinvest.com/thinkbig/2012/8/27/a-low-volume-bull.html?utm_source=Triggermail&utm_medium=email&utm_term=Money%20Game%20Chart%20Of%20The%20Day&utm_campaign=Moneygame_COTD_082712http://www.bloomberg.com/news/2012-01-23/stock-trading-is-lowest-in-u-s-since-2008.html


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To many, this is a sure sign the stock market ismanipulated higher. But the truth is a little morecomplicated. The composition of stock market in-vestors has changed dramatically in the post-warperiod:

Households and mutual funds used to own nearly95% of stocks, but today only account for 54% ofstock ownership.

The next eye-popping chart comes from the NewYork Federal Reserve themselves and shows theimpact of the Feds announcements on the stockmarket. The blue line shows the S&P 500 and thered line shows the S&P 500, but subtracting themarkets move from 2pm the day before the Fedsannouncement to 2pm the day of. Without the Fed,the market would be almost 50% lower.

Bottom Line

Demographics will continue to drive money flowsaway from the stock market. However, the action ofthe Fed and other non-household market partici-pants will continue to drive the markets high-erreason to be cautious shorting the markets.

Peak Oil is Dead

For many years I have subscribed to the Peak OiTheory. This theory was advanced by oil analysM. King Hubbert in 1957, correctly predicting thaoil production would peak in the US in 1970:

For years I have forecast higher oil prices based onincreasing oil demand, especially from China andIndia, and decreasingly supply, based on decreas-ing oil discoveries:

However, I am now changing my view. A revolutionin oil extraction technologies is extending the life ofold oilfields and unlocking millions of barrels in non-traditional new fields.

The new technology is hydraulic fracturing and hor-izontal drilling. Contrary to popular perception, oideposits are not underground lakes; they are de-posits of oily rock. If the rock is porous, the oil iseasily extracted through traditional methods. Buwhen traditional extraction methods are finishedtypically 70% of the oil is still in the ground. Hydrau-lic fracturing fractures the deep rocks, causingmore of the remaining oil to flow. Horizontal drilling
http://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.htmlhttp://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.htmlhttp://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.htmlhttp://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.htmlhttp://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.html


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allows clusters of smaller oil deposits to be ac-cessed cost-effectively.

These new technologies have reversed the longdecline in US oil and natural gas production.

US oil reserves have grown sharply since 2009:

These new technologies have been pioneered byUS oil companies and perfected on US oil deposits.But the same technology can be applied elsewhereacross the globe and will release billions of barrelsof new oil.

This technology will give the globe 20-30 moreyears of oil. We will still face oil shortages at somepoint, just not anytime soon. It is possible that

technology will continue to advance, even furtheextending the time horizon before we face a globaoil shortage.

I expect oil to continue to be plentiful but thadoesnt mean it will be cheap. This new technologyis very expensive. I think oil below $80/barrel isprobably a thing of the past, unless we have an

economic depression.

Middle East oil producers have greatly benefittedfrom higher oil prices. Most have used these hugerevenue increases to spend freely, increasingly onsubsidies and giveaways to placate the populaceThis chart shows the price of oil required by eachcountry in order to maintain their fiscal budgets.

Again, this points to the increasing likelihood oil wilremain near the $100/barrel level.

Who wants to be a Billionaire?

On black Wednesday, September 16, 1992, the UKgovernment withdrew the pound sterling from theEuropean exchange rate mechanism. They hadpegged their currency at an artificially and unrealis-tically high level.

On that day a billionaire was born: George Sorosmade an estimated $1.1B in profits. He is calledthe man who broke the bank ofEngland.

Today, a similar but even better opportunity isavailable, thanks to the Swiss National Bank (SNB)

Anyone want to be a billionaire?

The SNB just released their Q2 2012 balance sheetdata, and it is eye-popping indeed. Their foreign


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

The Swiss currency had been skyrocketing sincethe beginning of the Euro crisis due to its safe-haven status. But the stronger currency was creat-ing havoc with the Swiss economy, pricing Swissgoods and services too high. So the Swiss decidedto peg the Swiss franc to the Euro at 1.20. Sincethe Swiss franc is freely traded in the open market,the only way they can maintain this peg by sellingSwiss francs and buying Euros in the open market,accumulating huge amounts of Euros in the pro-cess.

Denmark too has a currency peg, and it too will endas all pegs do.

At some point they will stop this practice, and theSwiss Franc will jump, in a day. Who can say whenthis will happen? It could be when they simplychoke on owning so many Euros, or when leader-ship changes. But it will almost certainly be whenthe Euro is restructured. In fact, this is one of thecleanest ways to play a Euro breakup.

If you live in the Eurozone, you should immediatelymove your money and as many of your transac-tions as possible into Swiss Francs. As long as thepeg is in place, it will cost you nothing. And whenthe peg is removed, you will have a sudden windfallgain of perhaps 10-20%. Speculators can simplybuy and hold Swiss currency futures. As long asthe peg is in place, this trade is locked in neutral itwont gain or lose anything. But when the peg islifted, overnight it will gain.

Swiss citizens can simply short the Euro; again itwill cost nothing to hold this trade as long as thepeg is in place.

US and other non-Euro investors have a little morework to do. You have to go long the Swiss francand short an equal dollar amount of Euros. As longas the peg is in place, this will be the most boringtrade you ever did. But one day it will jump in valueYou can do this in the futures market, but you haveto be careful to balance the trade in the US marketsit would be 6 long Swiss contracts against 5 shortEuro 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 youhave to have a lot of capital for this trade and prob-ably a lot of patience too. Hopefully some of youcan make some money on this wonderful gift fromSwitzerland!

Early Signs of Bank Troubles

A year ago I was writing every month about in-creasing pressure on the banking system in Eu-rope. I am not exaggerating when I say the bankingsystem was on the verge of collapse. Then in De-cember 2011, ECB president Mario Draghi savedthe world the banking world at least. The ECBloaned $1.3T to European banks for 3 years at 1%interest.

But of course more debt cannot really solve a debtproblemonly postpone it. Now we are again see-ing very early signs of more pressure on the banks.

After dropping earlier this year, the Federal Re-serves swap line with the ECB is again beingtapped by European banks:

This is a clear sign that many of the Europeanbanks are again having a US dollar shortage andthat the money markets are freezing up.

The second piece of data comes from the FederaReserve. For the first time since December 2008


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the Fed initiated repos, which is essentially givingcash to banks in exchange for assets (WSJ). For3 years the Fed has done the opposite, removingliquidity from the banking system; but now suddenlythey are once again adding liquidity. This meansthere is at least one bank in dire need of liquidity rumors are pointing a finger at banking giant Mor-gan Stanley. However, I do not think we are at apoint of crisis yet, this is just an early warning.

European Crisis to Reawaken

In Europe everything is put on hold for the summer.Europe is well-known for its extended summer holi-day traditions continent-wide. It means nothingmuch happens in the summer. But that is likely tochange soon. September will bring more high-drama out of Europe. Here is a summary of Sep-

tember events from Megan Greene of RoubiniGlobal 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 willthen 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 asecond 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

from the EZs bailout fund, the European Financia

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 stil

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-of

center majority government. Consequently, coalition

negotiations are likely to be protracted. The left-wing

euro-skeptic SP may win enough votes to be the second

biggest 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 SeptemberGiven 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 Portuga

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 wil

eventually need support as well.

By the time you read this, ECB President MarioDraghi is going to release his bailout proposal tothe national central bankers. It will probably beleaked. Stay tuned on my blogblog.josephinternational.org for midmonth updatesBut his proposal, if it is anything, will involve moneyprinting. This is why gold and silver took off at theend of the month, in anticipation of the ECB and theFeds money-printing.
http://online.wsj.com/article/BT-CO-20120802-714959.htmlhttp://online.wsj.com/article/BT-CO-20120802-714959.htmlhttp://online.wsj.com/article/BT-CO-20120802-714959.htmlhttp://www.roubini.com/http://www.roubini.com/http://www.roubini.com/http://blog.josephinternational.org/http://blog.josephinternational.org/http://blog.josephinternational.org/http://www.roubini.com/http://online.wsj.com/article/BT-CO-20120802-714959.html


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Europe Update

Spanish and Italian Rates Ease

The last month has been good to the bellwetherSpanish interest rates, which have retreated below6.5%, on speculation that the ECB will step in andbuy Spanish debt to suppress rates:

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

Italian Debts Levels Hit Record

Italy announced an all-time record government debtload as it continues to pile on debt at a record pace:

Prior to 2000, Italy was adding about 2B/month indebt. Between 2000 and 2007, it increased to

3.8B/month; and since 2008 it has been adding6.4B/month.

Funding Trouble in Spain

Spains funding outlook is troubling. For the re-mainder of 2012, Spain needs to sell bonds totalingaround 8B per month, or 4B per auction some

thing it hasnt done since March.The situation gets worse in 2013 Spain will needto redeem 60B in maturing bonds in addition tocovering its 45B deficit, 15B in Spanish regionadebt, and another 3-4B in FADE agency bondswhich means it will have to sell around 120B inbonds. That is 40% higher than 2011. It simplycannot happen.

Without a bailout, Spanish interest rates will soongo stratospheric.

European Economy Slowing

The European economy is contracting, as is Chinawhile the US economy is growing slowly. Here arethe manufacturing indices; a number below 50 indi-cates contraction:

The manufacturing sectors of most of the majoeconomies are now showing contraction:


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Most concerning is that global growth engine Chinahas now shifted to contraction in its manufacturingsector, both according to HSBCs proprietary PMIreading and now Chinas official data as well:

More Banking Problems Surfacing

France just nationalized its second-largest mort-gage lender(ZH).

Spains banking situation is rapidly deteriorating.For months I have shown you bank depositors flee-ing Greek banks; now it is happening too in Spain:

Loan delinquencies in Spain are accelerating:

And here is a final chart that defies the imaginationand graphically illustrates the insanity that currentlypossesses global bankers, European bankers inparticular. It shows that largest 25 global banks anddepicts the size of their loans (assets) relative to

the size of their countrys economy.What business does UBS have making loans equato 3.76 times the Swiss economy? Notice that eve-ry bank above 50% is headquartered in Europe:

As bad as this chart looks, it understates the fulmagnitude of the problem. The biggest banks areactually leveraged far higher than their balancesheets indicate. Banks are able to take huge risksand hide them through the clever use of deriva-tives. Just like AIG which blew up in 2008, theyhave written huge financial insurance policies

which, they do not have to report. It baffles me howin the midst of the most stifling regulatory environ-ment we have ever seen, the most critically neededregulations are ignored. Banks must be required toreport in detail their derivatives positions. Thegrowth of derivatives has been gargantuan, dan-gerous, and completely unregulated:
http://www.zerohedge.com/news/september-arrives-does-french-dexia-moment-france-nationalizes-its-second-largest-mortgage-lendhttp://www.zerohedge.com/news/september-arrives-does-french-dexia-moment-france-nationalizes-its-second-largest-mortgage-lendhttp://www.zerohedge.com/news/september-arrives-does-french-dexia-moment-france-nationalizes-its-second-largest-mortgage-lendhttp://www.zerohedge.com/news/september-arrives-does-french-dexia-moment-france-nationalizes-its-second-largest-mortgage-lend


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I appreciate the comments of hedge fund managerPaul Singer:

Public data reporting: Decades ago, the balance sheets of

the Financial Institutions contained most of theinformation 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

regulators more or less forced on them with lenient risk

weightings. These banks are stuffed with paper that

private investors would not buy

Weird WeatherThe following chart from NOAA shows just how ho2012 has been. This shows the temperature differ-ence from normal for every year since 1895.


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Corn is hitting record highs as are soybeans:

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

This chart from JP Morgans research note showsthe US soybean crop condition index (CCI): TheCCI is calculated using weekly data from theUSDAs crop condition ratings (2*proportion of croprated excellent plus 1*proportion of crop rated good

plus -1*proportion of crop rated poor plus -2*proportion of crop rated very poor):

My farmer friends are very concerned about the USharvests this year. US exports will be far smallerthis year. They are carefully watching the Braziharvests this year. Brazil is huge agricultural pro-ducer and they will have a huge planting this yearIf Brazil has a strong harvest, then crop prices wilnormalize. But if Brazils harvest is also hit, pricescould skyrocket from here.

In the west, higher crop prices mean a slightly big-ger bill at the grocery store. But in the third worldfood accounts for a much larger portion of the fami-ly income. Many forget that the Arab Spring uprisings were sparked by high food prices.

China is very sensitive to food prices. FromWSJ:
http://online.wsj.com/article/SB10001424053111903703604576587070600504108.htmlhttp://online.wsj.com/article/SB10001424053111903703604576587070600504108.htmlhttp://online.wsj.com/article/SB10001424053111903703604576587070600504108.htmlhttp://online.wsj.com/article/SB10001424053111903703604576587070600504108.html


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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.

Any increase in soybean prices will affect ChinasCPI. Look at the correlation of soybean prices toChinas CPI:

While soybeans are something few westernersthink about, it is one of the most important globalcrops, especially in China.

Soybean oil is the most important edible oil in Chi-na with more than two-thirds of cooking oil con-sumed in China coming from soybeans - and mostof those soybeans are supplied by the US (morethan half of US exports are to China and the US isChina's number 1 supplier). The Chinese devotemore than 20% of their income to food (three timesmore than Americans - according to the USDA).

This means the dramatic rise not just in grain pric-es, but in the up-stream prices of meat, eggs andmilk.

If China does experience high inflation, it will not beable to do the monetary easing as the marketshope today.

In many ways the fortunes of the globe are tied tothe farms in the US Midwest

GREGS MARKETOUTLOOK

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

Drought, Hurricanes, & the U.S. Elec-

tion

Midwest Drought

Conditions in the drought stricken areas of theMidwest have alleviated as more normal weatherpatterns have prevailed the past few weeks. How-ever, to get the drought label removed, a major rainevent will be needed to deal with the deficit andmoisten back up the soil conditions. There havebeen many major prayer initiatives and I havethought all along that the most obvious solution wasfor a tropical system to make its way north from theGulf of Mexico. It seems that is what is about tohappen with the remnants of hurricane Isaac. Thiswill be a good first step for the Eastern portions ofthe drought area. The upper air pattern is setting upsimilarly for the next few weeks so another stormtracking like Isaac is certainly not out of the ques-tion.

The Lord continues to honor the Isaiah 58:12 pat-tern. Every issue that arises seems to be met withan answer in due time. The Midwest drought situa-tion has seemed to take a bit longer than othersand I went to the Lord about this delay last monthHe immediately brought to mind the enemys plan

to form conditions that would bring fear of anotheGreat Depression and that Isaiah 58:12 was theLords promise to stand against the enemy with. Inthe past week Ive asked the Lord to clarify whythere was an open door for the enemy to work inthis area related to ethanol and the corn crop thatsupports its production. The Lord immediately saidto 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


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p 14 Joseph Insight

52. I encourage you to read through these verses.The issue deals with the condition of the fruit of theland and results in a judgment of drought.

The past few years, I have had the great honor ofworking with many prophets/intercessors who arecalled 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 theland grabbers as they mistreated Indians andrushed to farm this rich soil in the Midwest. The re-sulting curses from much innocent bloodshed setupa very difficult spiritual climate from the very begin-ning of American rule. It doesnt take much re-search to realize how important the care and re-spect of the land was for most Indian cultures. Thismovement took this stewardship away from them.We have spent much time traversing this territoryand repenting/standing in the gap and breakingcurses. In fact, much of the tornado chasing that I

do in the Midwest is a mission where God usestheir locations and tracks to show me where curs-es/altars still exist that have been unchallenged.We have had many amazing encounters and comeup against incredible warfare. Along the way in this

journey I began to research ethanol production andwas greatly confused as to why corn became themost prominent source. Please dont get me wronghere, I believe in ethanol as a replacement forMTBE and for legacy vehicles and even as a bridgeto other more efficient fuel sources. I just dont be-lieve corn was the answer for feedstock. The pio-

neers of the ethanol movement like Vinod Khoslaonly saw corn as a short term bridge to better feed-stocks. Instead, we saw a land grab with a spirit ofgreed shrouding it as speculators rushed in. Thesalesmen and promoters continued to use Brazil asa great example of successful ethanol productionbut fell short of making it clear that they usesources like sugarcane and not corn. Many losttheir way and ended up entertaining a familiar spiritunawares and did much damage to the soil in theMidwest by forcing continuous corn on much farm-land. The ideas of crop rotation and giving the land

rest went out the window for many as fertilizercompanies thrived with ways to replenish soils withnitrogen/potash. I am not talking about those whouse responsible, sustainable techniques to properlycare for their land. Much of this mistreatment wasalready occurring, but the corn ethanol movementseemed to take it to a climax point. An interestingessay was written by Richard Manning entitled TheOil we Eat. It was published in 2004 in Harpersmagazine and the Lord spoke to me through this

paper and I was given an opportunity to repent andback away from trading corn ethanol related stocksUnfortunately, I heeded the warning for a seasonand then returned and lost much in many of thenow bankrupt corn ethanol producers. Though was not a farmer, I was aligned with the movementand had to deal with judgment and where this famil-iar spirit had attached to me, it was a rough time.

Coming back to this seasons issue with drought, see the Lord opening the window for many to re-pent. The Lord desires the restoration of Isaiah58:12 to go throughout the farmlands. We are pray-ing for farmers to have visitations and to awaken totheir need for change. God desires to reach themall, even the hardest of hearts. I have heard manystories of farmers who have heard from the Lordand made it through this terrible season with little orno issue, they are now the evangelists with a testi-mony to share for those who were devastated

Lord, bring revival out of the ashes and barrennessand may the testimony of those who follow YourWays faithfully spread throughout the land. May thesuffering servant, Jesus, and Your plan of redemp-tion outlined in Isaiah 52 be our prayer! We standon Isaiah 58:12 as our promise of restoration in Je-sus name.

Hurricanes & the U.S. Election

Hurricane Isaac has been quite the unusual stormThe name Isaac means he will laugh; many fore-casters have felt as if this storm was laughing at

their forecasts! As expected, many refineries havebeen disrupted along the Gulf coast and gas priceshave risen back to near the earlier highs from thespringtime. Refiners stocks have been on fire withmany rising 50 70% or more the past few monthsWhile I believe the bull market will likely continueseasonally it is the right time to be taking someprofits.

Earlier in the year the Lord showed me that thisyears election results would be influenced by aspike in gas prices in the summertime. I immediate-

ly began thinking about hurricane season. Partlybecause of what transpired in 2004. Heres theshort version of the story: At the end of 2004 afterFlorida was ravaged by 4 major hurricanes I metanother storm chasing prophet who specialized ingoing up against hurricanes in Florida. At the timewe met he was in deep repentance and travail. Hehad led teams of intercessors in FL for many yearsand no major storms occurred as long as they wereactive. Then he moved out of the state and the very


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first year, 4 major storms nail FL. He inquired of theLord and was told he failed to train anyone to takehis place and the enemy had access again. It was avery revealing time for me as I grew up in Florida,actually in Palm Beach county and was followingthe canes closely as well as the election and theresults and infamous hanging chads controversy inPalm Beach county. Little did I know at the timethat the Lord was about to use me to show Hisgrace and mercy towards this prophet. As I studiedand prayed over the election issues, the Lordshowed me how the first 3 major hurricanes, Char-ley, Frances and Jeanne all crossed the samecounties near the Orlando area. This is where thisprophet had lived and operated from! As I wentdeeper, the Lord showed me a political report anal-ysis that said the Florida results were only closebecause of the mysterious change in 4-5 countiesin central FL that historically went Democratic butthat year went Republican and shocked the political

tracking community. When I saw the county namesI almost fell out of my chair! Yes, it was the samelocations where the storms all crisscrossed. Lateron, the Lord showed me that it was the relief effortthat turned those counties as Pres. Bushs brotherJeb was Governor of FL and spent much face toface time helping the people in those counties. Thisincredible revelation from the Lord was an amazingpicture of the Lords grace towards a prophet whomissed it on one count, but the Lord had a plan an-yway!

With this story in mind, I am seeing dj vu as wehead into this years election. We have a hurricanenamed Isaac making landfall in southern Louisianaon the 7 year anniversary day of hurricane Katrina.This Isaac while on its way through the Gulf of Mex-ico causes devastating flooding in Palm Beachcounty FL! Now the storm is likely to move incredi-bly slowly, causing major flooding from Louisianaand points north into the drought stricken areas ofthe Midwest. The storm is also shutting down a lotof refining capacity at a crucial time. I dont knowwhat it all means yet, but I know in my spirit that

this election is being influenced by this and that Iam to pray for the Lords will to be done in it. I willshare more as I receive it, pray I can hear clearlyand interpret accurately!

Finally, I leave you with a word of encouragementthis month: Maybe youre like me and youve bat-tled in the past and even recently with a spirit ofgreed; maybe youre a farmer whose done yourbest to follow the Lord but know youve fallen short

in some areas; maybe youre dealing with cursesthat had nothing to do with you yet you have to deawith their effects; maybe youve been called into adark place and finding it hard to stay pure. I havegood news, Jesus already died for all of us and foall of these things. I encourage you to simply re-pent, stand back up, and speak into whatever at-mosphere your sphere of influence encompassesJust like the prophet who missed training another inFL, God knew it would happen and already had aplan, an amazing one! He has an amazing plan foryou and for me too! As it is written, eye hath noseen, nor ear heard, neither have entered into theheart of man, the things which God hath preparedfor them that love Him! 1 Corinthians 2:9.

INVESTMENTTHEMES

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

Time for Caution

Systemic risks abound, especially in Europe andJapan, but also in the US and many other nationsUnstable debt dynamics make for a difficult invest-ment environment. Conservative investors whowant to invest for the next 5-10 years should exitthe stock and bond markets, and move into cashand hard currencies (not in the US Dollar, the Euroor the British Pound) and gold.

Equities

I wrote in July, The bias now is certainly to the up-side, but it might be a bumpy ride. I expect themarkets to rise, but investors should remain cau-tious as Europe continues to boil. The marketshave been moving according to script, but look de-cidedly weak in the short term. I expect volatility tocontinue as the markets respond to the crisis and

bailout hopes.


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p 16 Joseph Insight

I expect the crisis out of Europe to continue to buildin intensity through the remainder of summer andautumn. However, the authorities in power haveused everything at their disposal to defend the sys-tem, and I expect them to continue to do so.

Gold and SilverGold and silver fluctuate between being commodi-ties and currencies. When governments are re-sponsible, they become commodities for use in

jewelry, electronics, etc. When governments areirresponsible, they become currencies. Gold andsilver are now firmly in the process of becomingcurrencies. They remain the best bet against gov-ernment fecklessness.

Gold and silver are your best defense against theirresponsible monetary policies being madly pur-

sued across the globe. Here are some of the fun-damental reasons Gold will rise:

1. Governments across the globe are pursuingmoney printing schemes to devalue their cur-rencies. Gold and silver cannot be printed andwill hold their value relative to all debasing cur-rencies.

2. Negative real interest rates. Today interestrates, after adjusting for inflation, are negative.This means there is no incentive to hold cash,and thus the relative cost of holding gold and sil-ver disappear. Whenever real rates are nega-tive, gold and silver always rally.

3. Inflation. Gold and silver are historically the besprotection against inflation. While governmeninflation statistics are reporting artificially low in-flation numbers, inflation actually quite high.

4. Uncertainty. Banking crises and sovereign debt

crises mean there are no safe places to storewealth. Gold and silver are the best way to storewealth and will benefit through most crises.

So far my forecasts for gold have been fairly good. forecast gold would hit $1,360 by December 2010It handily beat my forecast, topping $1,400. I alsoforecast gold would see its 2011 low in May, andthat this would be a good time to buy, which it in-deed turned out to be. In January, 2011 I forecasgold would hit at least 1900 by December 2011. Inmy August newsletter I said, I would not besurprised to see weakness this month, and on

August 23 gold hit my target or 1900 and I wrote inmyblog postfor traders to take profits.

Gold has plunged on the back of a strong USdollar, firmly breaking its 3 year uptrend, but hasshowed its resiliency, and last month rose sharplyindicating it is resuming its long-term uptrend:
http://blog.josephinternational.org/2011/08/23/frasers-daily-find-8-23-11-gold-and-silver-update/http://blog.josephinternational.org/2011/08/23/frasers-daily-find-8-23-11-gold-and-silver-update/http://blog.josephinternational.org/2011/08/23/frasers-daily-find-8-23-11-gold-and-silver-update/http://blog.josephinternational.org/2011/08/23/frasers-daily-find-8-23-11-gold-and-silver-update/


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p 17 Joseph Insight

Silver moved lower in sympathy with gold, butbounced off its major support zone at $26 and isnow clearly moving higher:

If you have not subscribed to my blog feed, youshould consider doing it. On 8-3I issued a buy alerton silverwhen it was at $27.62, thenreiterated it on8-6 and again on 8-20 with a target of $30.50,which it promptly met, for a quick 10% gain:

Gold miners have also broken down from key sup-port levels, but are also clearly reversing direction:

Gold miners are on sale. Gold mining companiescontinue their brutal decline. But the cheaper theprice of the stock, the greater the value becomesWith mining companies, we must not only measureearnings and cash flow, but also the value of theprecious metals in the ground. This has been calcu-lated courtesy of Bank of America, and you can seethis chart of price to Net Asset Value (NAV):

Precious metals miners profits continue to growstrongly with the price of the metal. The result isthat something historical is happening: miners are

becoming bargain stocks. Among these few seniogold miners, the 2013 estimated P/E ratio is 7.8and the price to cash flow is 5.1:

P/E Price/Cash Flow

2010A 2011A 2012E 2013E 2010A 2011A 2012E 201

Barrick 10.6 7.5 7.4 7.2 8.5 6.2 5.0 5

Kinross 12.6 9.5 7.8 7.2 5.5 5.2 5.0 4

Newmont 11.3 9.9 9.4 9.0 5.4 5.2 5.7 5

Average 11.5 9.0 8.2 7.8 6.5 5.5 5.2 5

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 sharplywithout some consolidation. Cycle corrections ingold typically last 6-12 months. Gold is now in its9th month of correction, and silver its 13th.

2. The dollar has been very strong on Euro weak-ness. Remember, the dollar is the anti-Euro. Eu-ro 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 tomoney-printing expectations, but today, few areanticipating any new LTRO or QE. The Bank ofJapan is engaging in a mammoth money-printing scheme and buying its own debt, but themarket is largely ignoring it.

4. Gold is highly seasonal, and seasonality isweak. As you can see from the chart below, goldseasonally is weak through the summer:
http://blog.josephinternational.org/2012/08/03/silver-poised-for-breakout-frasers-daily-find-8-3-12/http://blog.josephinternational.org/2012/08/03/silver-poised-for-breakout-frasers-daily-find-8-3-12/http://blog.josephinternational.org/2012/08/03/silver-poised-for-breakout-frasers-daily-find-8-3-12/http://blog.josephinternational.org/2012/08/03/silver-poised-for-breakout-frasers-daily-find-8-3-12/http://blog.josephinternational.org/2012/08/06/its-time-for-precious-metals-frasers-daily-find-8-6-12/http://blog.josephinternational.org/2012/08/06/its-time-for-precious-metals-frasers-daily-find-8-6-12/http://blog.josephinternational.org/2012/08/06/its-time-for-precious-metals-frasers-daily-find-8-6-12/http://blog.josephinternational.org/2012/08/06/its-time-for-precious-metals-frasers-daily-find-8-6-12/http://blog.josephinternational.org/2012/08/20/silver-makes-its-move-frasers-daily-find-8-20-12/http://blog.josephinternational.org/2012/08/20/silver-makes-its-move-frasers-daily-find-8-20-12/http://blog.josephinternational.org/2012/08/23/silver-that-was-quick-frasers-daily-find-8-23-12/http://blog.josephinternational.org/2012/08/20/silver-makes-its-move-frasers-daily-find-8-20-12/http://blog.josephinternational.org/2012/08/06/its-time-for-precious-metals-frasers-daily-find-8-6-12/http://blog.josephinternational.org/2012/08/06/its-time-for-precious-metals-frasers-daily-find-8-6-12/http://blog.josephinternational.org/2012/08/03/silver-poised-for-breakout-frasers-daily-find-8-3-12/http://blog.josephinternational.org/2012/08/03/silver-poised-for-breakout-frasers-daily-find-8-3-12/


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p 18 Joseph Insight

Gold is now in its period of seasonal strength. I ex-pect gold and silver to rally into Novem-ber/December, though it may pause off its strongshowing at the end of August.

In 2007, we saw gold rise from $650 to over $1000in just 7 months. Then gold corrected for 8 monthsin 3 successive drops of 18%, 25% and 27%. Itthen rose from 700 to 1000 in just 4 months:

What is happening now looks amazingly similar tome. In 2011 we saw gold hit a record-setting $1900and has since been correcting since, in 3 waves of20%, 15%, and 15%:

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

Last month I wrote, it is time to buy this monthThe seasonal weakness persists through (August)You should finalize any purchases of precious met-als by the end of the month. That proved accurateand both gold and silver have rocketed out of thesebeautiful bases.

Gold will respond to any rumor of QE or money

printing schemes cooked up by the authorities torescue the world. We dont know when this will bebut you want to be invested beforehand.

For details on how to purchase precious metalsdownload my free Special Report on How to BuyGold and Silver.

Bonds / Interest Rates

In the long-term, interest rates are going up, due tosimple supply and demand. But in the short term

and intermediate term, I expect interest rates toremain low due to the ongoing financial crisis andstock market weakness. Bonds have continued tosoar in May and June on weakness in the equitymarkets and turmoil in Europe. As I have said inearlier articles, the US bond market will be the pri-mary beneficiary of the European economic crisis. expect bonds to remain strong for a while.

Currencies

The Euro and the US Dollar are racing each othertoward worthlessness. But it is difficult to short ei-ther of them, because shorting the Euro is essen-tially betting on the dollar; and shorting the dollar isessentially betting on the Euro. Investors need toexit positions in both the dollar and the Euro, andbe wary of all hidden dollar and Euro exposure.

The Euro is in trouble. The idea was untenablefrom the beginning and I have predicted the demise
http://www.josephinternational.org/Publisher/File.aspx?id=1000028929http://www.josephinternational.org/Publisher/File.aspx?id=1000028929http://www.josephinternational.org/Publisher/File.aspx?id=1000028929http://www.josephinternational.org/Publisher/File.aspx?id=1000028929http://www.josephinternational.org/Publisher/File.aspx?id=1000028929


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p 19 Joseph Insight

of the Euro since 2006. The Euro strips individualcountries of key financial policy levers: the ability tolower interest rates and the ability to devalue itscurrency. The only policies left are governmentspending and taxes. Several countries will defaulton their debts. Governments go bust when theyborrow in a currency they cannot print. Either theclub-med countries will leave the Euro to form anew weaker currency, or more likely, Germany willleave the Euro to form a new, stronger currency.There is simply no alternative.

Europe is also very sick economically because ofits socialism. Its social contracts are unsustainabledue to the large amounts of retirees relative toworkers. This will create terrible hardship as gov-ernment programs are forced to be slashed just asthey are now in Greece.

The best way protect against the demise of the Eu-

ro and the dollar is to buy well-managed currencies Switzerland, Norway, Singapore, Brazil, Chile andSouth Korea are my top picks as well as the onlyunmanaged currencies: gold and silver. Secondarycurrencies that will also do better than the dollar orEuro, but also have some problems are: Canadian,

Australian, New Zealand dollars, and the ChineseYuan.

I am recommending the Franklin Templeton HardCurrency Fund (ICPHX) as a simple way to buyhard currencies and earn a 6% yield. In the last twomonths the strength of the dollar has caused thisfund drop, making it a much better bargain. Bal-ance your exposure to this fund with the US dollar,which may continue to strengthen temporarily asthe markets unravel.

Oil and Energy

For years I have forecast higher oil prices based onincreasing oil demand, especially from China andIndia, and decreasingly supply, based on decreas-ing oil discoveries:

However, I am now changing my view. A revolutionin oil extraction technologies is extending the life ofold oilfields and unlocking millions of barrels in non-traditional new fields.

While oil is a good long-term bet, the slowing econ-omy will depress oil short-term, though if we do ex-

perience a currency crisis or a geopolitical crisis, oicould easily move to $150/bbl or more. This uncer-tainty makes it difficult to invest.

You can invest in oil prices through the ETFs USOand OIL which track the price of oil. You can alsoinvest in oil producers. My favorite oil producer isSuncor (SU) a huge Canadian Oilsands producerHowever, at this time I favor oil itself over oil pro-ducers, since any market correction will affect theproducers more than the commodities.

Food and Agriculture

Food and agriculture are on a long-term, irreversi-ble megatrend higher, due to 1) global populationincreases; 2) the amount of farmland globally is de-creasing 1.5% per year due to development; 3)rampant money printing of paper currenciesdrives up commodity prices; 4) Increase in meaconsumption: as third-world nations are growing


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wealthier, they are consuming more meat per capi-ta. It takes eight pounds of grain to produce onepound of meat.

The easiest way to invest is rising food and agricul-ture prices is via stock symbol DBA, which tracksthe 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 compa-nies more than the commodities. I think agriculturalcommodity prices will be strong in the long term,but in the short term will probably not perform well.

Real Estate

Real estate will continue its downward price correc-tion due to: 1) the huge supply of homes on the

market and in the foreclosure process; 2) the still-deflating price bubble; 3) coming higher interestrates; 4) the potential end of government subsidiesto the mortgage industry.

However, in the May 2012 newsletter, I updated myposition, calling real estate The Opportunity of theNext Two Decades. I stated, It is time now to getinto a position to purchase US homes in the nextfew years. I do not think we have seen the bottomyet, but that shouldnt stop investors.

I expect housing, especially in the US, to rise be-

cause: 1) the central banks of the world have com-mitted to an epic money-printing regime. They willcontinue to print money to bail out the banks andthe sovereign debtors. As the deleveraging com-pletes its course, excessive money-printing willcause asset prices to rise including real estate; 2)the easy-money policies are being directed at low-ering mortgage interest rates. For example, my sonis getting a first-time mortgage for 3%; 3) housesare selling for 50% below replacement cost. Atsome point the inventory of homes will diminish andhousing will return to build-cost.

Make sure to focus on extreme value real estatethat can earn income. Measure any real estate pur-chases by dividing the annual rent potential (afterdeducting taxes and other costs) by the purchaseprice. If it is above 10%, then it might be a goodpurchase. If not, wait. In some areas (Kansas City!)this ratio is well over 10%. Contact me if you are anaccredited investor and wish to find out more.

This newsletter is for informational purposes only and is not intendedto be a solicitation, offering or recommendation of any security. Thepublisher does not represent that the securities, products, or servicesdiscussed are suitable or appropriate for all investors. Any markeanalysis constitutes an opinion that may not be correct. Readers musmake their own independent investment decisions.

The information in this publication is not intended for distribution to, ouse by, any person or entity in any jurisdiction or country where suchdistribution or use would be contrary to law or regulation, or whichwould subject the publisher to any registration requirement within such

jurisdiction or country.

Any opinions expressed herein, are subject to change without noticeIn addition, there are many market, currency, economic, political, business, technological and other risks that are beyond our control. Wemake reasonable efforts to provide accurate content in these articleshowever, some content and some of the assumptions, formulas, algorithms and other data that impact the content may be inaccurate, out-dated, or otherwise inappropriate. In addition, we may have conflicts ointerest with respect to any investments mentioned. Our principals andour clients may hold positions in investments mentioned on the site owe may take positions contrary to investments mentioned.

All current and past market commentaries are protected by copyrightApart from any use permitted under the Copyright Act, you must nocopy, frame, modify, transmit or distribute the market commentarieswithout seeking the prior consent of publisher.

joseph insight 2012-09

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