Après Gotterdammerung (Twilight of the Gods) 46th Annual Contrary Opinion Forum David Fuller 8th October 2008

Governance is everything

Failures of governance are often due to a lack of ethics It is a top down process

The USA did not invent this process… “The budget should be balanced The USA did not invent this process… “The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.” Marcus Tillius Cicero 106-43 BC …but it took it to a new level

Too much regulation undermines capitalism… …but too little regulation is a recipe for anarchy… …in which ‘creative destruction’ risks becoming total destruction

Securities & Exchange Commission Removes Uptick Rule, July 2007 Ignores naked short selling

Leverage: the colossal problem The idea that one can make ever greater profits with ever increasing leverage, because all the risk is theoretically passed on to someone else, is totally daft. The perpetrators knew this. They just wanted to make a quick fortune, get out before the game blew up, and let the devil take the hindmost.

How do we get good regulation? Fullermoney suggestion: Ask Warren Buffett to Chair a Commission on Standards of Governance and Regulation

A consequence of US Credit Crisis USA has lost credibility and moral authority in terms of democratic capitalism What fills the void? Authoritarian capitalism, of which China is now the leading practitioner

What next for the US stock market? Bull points: Record oversold levels seen for sentiment Climactic selling has occurred Valuations are improving Cash levels are high Inflationary pressures are fading rapidly A massive effort is underway to rescue banks and reverse the credit freeze

What next for the US stock market? Bear points: Worst credit freeze since 30s Depression The economy is deteriorating Valuations are still well above historic lows Deleveraging continues Stock market indices are in downtrends The stabilization package may not be enough, give the size of the problem

“You can observe a lot just by watching “You can observe a lot just by watching.” Yogi Berra The most important chart today? The Ted-Spread

1987 Crash

The stock market is a discounting mechanism “Bear markets have always been temporary. Share prices turn upwards from one to twelve months before the bottom of the business cycle.” Sir John Templeton

Trend acceleration is an ending characteristic Current action for the US stock market is climactic

Bank indices are now showing relative strength! They are a lead indicator

Peak Oil? At $100 to $80 – global economy can cope At $80 to $60 – global economy prospers At $140 to $160 – global recession At $200 or above (as Goldman Sachs forecast for yearend 2008) global depression However, the global economy can adjust to gradually rising oil prices over time.

Back to the Future? Other global concerns are in retreat Commodity prices are falling The US dollar has rebounded Long-term government yields have fallen Conclusion: other than the west’s very serious credit freeze and its implications for GDP growth, other problems have waned.

Fire (inflation) vs Ice (deflation) 1998-2003 – fear of ice over fire 2004-2006 – ‘Goldilocks’ talk 2007-mid-2008 – fire over ice Current period – ice over fire Consequently, all governments will reflate, but which economies and markets will benefit the most?

Massive global deleveraging Evidenced by: Capitulating selling in stock markets Capitulation selling in commodities and many other assets Strength of carry currencies such as JPY But…following the deleveraging, people will resume investing as confidence returns.

Fullermoney forecasts: US and most other stock markets reach significant medium-term lows this month. Reversion to the mean (200-day MA) rallies to follow, carrying into 1Q 2009. Thereafter, pullbacks for base extension - some risk of new lows, pending events. Gold will remain volatile, but continue to show relative strength versus most other asset classes.

Fullermoney forecasts: Following base formation development in 2009, stock markets should experience 3 to 5 year bull markets, provided: Prices for crude oil and agricultural commodities do not spike higher, as we saw earlier this year. The commodity supercycle has been interrupted by recession but is not over.

Après le deluge - Fullermoney themes for the next up cycle: Asian-led emerging markets Commodities Leading industrial and agricultural shares Global infrastructure development themes Asian currencies, led by Chinese renminbi Precious metals