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Our Contentious Journey from Hubris to Humility By Kurt Kasun

January 6, 2015

So here we are at the start of a new year, and not only has the world not blown up, but we are at record highs for the most of the US stock indices, and what’s more , the economy appears to be finally kicking into gear after years of false starts and underperformance—especially given the unprecedented monetary and fiscal stimulus that has been thrown at the problem. The purpose of this report is fourfold: first, to evaluate the three most current and predominant economic views and how they have fared; second, to propose a framework from which to view our current economic situation within the twin contexts of the last three hundred years and the three components that foster real long term economic growth; third, to introduce how for four new technologies could save us from the debt-purging economic fate history tells us we deserve; and fourth, I will offer my synthesis and scenarios and make the case for optionality. Part 1: Evaluating Keynesianism, Soft Money Republican Conservatism, and Von Mises-inspired Austrian Economic Libertarianism For purposes of this discussion I am leaving out the “Occupy Wall Street” view for two reasons. One, I believe that, deep down, most of these folks are either anarchists or social utopians (or both) and are completely out of touch with human nature or how to channel it. Second, and more importantly, their predictive analysis has had absolutely no success, especially when it comes to investing. Perhaps somewhat slightly less removed from reality, we start with the followers of John Maynard Keynes. Keynesians place emphasis on ‘”aggregate demand” and believe they can intervene with the appropriate level of government spending, through ‘fiscal stimulus”, to stimulate the economy to achieve maximum output and overall economic well-being. Prominent Keynesians today include Paul Krugman, Larry Summers, and Jeffrey Sachs. If you look at the economic advisors President Obama and Hillary Clinton select, you have to conclude that they at least will govern as Keynesians. While they place their emphasis on fiscal spending, they also favor accommodative monetary policy (easy money), which is entirely consistent with the view that Ivy League PhD economists are uniquely qualified to make the necessary adjustments to correct the ‘market failures’ of a truly free economy. Unlike their ‘Occupy’ Democrat-Party brethren, they are mostly free-traders; more like them, however, they tend to favor a more heavy-handed government in terms of regulating American business. They are more likely to say “we are here to protect the American worker, protect the consumer, and to champion the middle-class laborer”, than you are likely to hear them say “lets unleash the power of the entrepreneur and private enterprise to get this economy humming on all cylinders.”

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You far more likely to hear the preceding platitudinal utterance from the ‘soft-money’ Republicans. In addition to unbinding the employer from excessive regulation, they also champion free trade (even more), but they, at least verbally, attack financial largesse. Notice I wrote ‘verbally attack’—their words go much further than their actions (voting), especially when it comes to military spending. If fiscal spending is the hallmark of a Keynesian, calls for tax reduction are the calling card of the soft-money Republicans. They never met a tax they didn’t want to cut, just as a Keynesian never met a government program they did not want to expand, as the saying goes. The Keynesians, for obvious reasons, only grudgingly support lower taxes, especially if they involve cutting taxes for the rich. Prominent soft-money economists include John Taylor, Milton Friedman ‘the monetarist’ (deceased), and Gregory Mankiw. While the soft-money conservatives make up the majority of the Republican Party, these Republicans are more adrift, if not totally lost, when it comes to defining an economic philosophy that they follow in terms of deficits and monetary policy. This stands in stark contrast to past generations of Republicans who were either supply-siders, monetarists, or up until 1970, mostly ‘hard-money” conservatives who believed in anchoring the currency to gold, balancing budgets, and at least desiring to balance the budget. For that you need to join with Austrian economists who we will get to in a moment. Most Republicans subscribe to budget and monetary philosophy “as long as my 401(K), IRA, and 529 Plan are moving higher, I’m for it”. These Republican politicians are merely reflecting the views of the majority of those in their Party who support them. Remember the budget show down in the early fall of 2011? The ‘courageous’ Republicans looked at the Obama deficits and a debt that had almost doubled less than three-years into his first term, and said “enough”. One week and three-thousand Dow Jones points lower, the Tea Party, the tip of the spear, prepared to make their first true assault on the debt in years, turned around they saw that there was no spear behind them. The vast majority of Republicans had abandoned them. “Sorry I’ve got kids to educate and a retirement to plan for.” Most Republicans either believe we can forestall the economic chickens from “coming home to roost” far into the future (at least far enough to get Johnny and Julie through college) or they simply aren’t ready for the economic sacrifice that would inevitably result. Many soft-money deficit-dove Republicans talk hawkish simply to appeal to the base that, though lower in number, are more likely to contribute (through money, activity, and voting). But when the stock market drops, soft-money Republicans are the first to turn tail and support the majority of the Party whose chief concern is the stock market (and who all of the sudden become passionate about political issues). One thing that has changed in the course of my life is that a crisis is not really a crisis unless the stock market starts crashing. I may be overstating their case a little, but not much. The last group I am evaluating is the Libertarian Austrians who subscribe to the philosophy of the early 20 th century Austrian economists--most notably, Ludwig von Mises. They like their Republican brethren, are also likely to point to the writings of Frederick Hayek (socialism is the ‘road to serfdom’) and Joseph Schumpter (gales of capitalism are

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the winds of ‘creative destruction’), but are sure to sharply part company with Milton Friedman. David Stockman, one prominent hard-money, deficit hawk who sides with the Austrians, wrote a piece titled, “Milton Friedman: Freshwater Keynesian” which can be found on the Mises Institute website, where he writes: “At the end of the day, Friedman jettisoned the gold standard for a remarkable statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income.” Alan Greenspan’s conversion appeared only years later—first as Chairman of the Board of Economic advisors for Gerald Ford and then as Chairman of the Federal Reserve for 19 years. Greenspan, an ardent early Ayn Randy disciple, writing in 1963 that “An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.” He followed that in 1966 with “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.” I will return to Stockman and Greenspan in a moment, but closing the loop on the other aspects of Austrian economic philosophy, we find that the followers of von Mises are likely to favor free trade and less regulation, but are only likely to favor tax cuts if they are paired with spending cuts—including defense, if necessary. If soft-money conservatives tend to be war hawks and deficit doves, the hard-money cohort can be characterized as war doves and deficit hawks. The former group is more likely to fear Armageddon from ISIS or Russia while the latter from a currency or bond market collapse. And because everyone needs to have catastrophe to

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passionately rally around, the Keynesians believe that “Climate Change” is the biggest “threat to the planet”. I think they are clearly the quintessential pathological do-gooders. At least the Keynesians and Austrians are both intellectually consistent – they either favor tinkering with both fiscal and monetary or they do not. The soft-money Republicans of the monetarist ilk need go navigate giant intellectual hurdles in order to be supportive of all other aspects of free market economics while simultaneously ignoring growing deficits and advocating monetary policy that revolves around 12 people sitting in a room making decisions on interest rates and money supply. What, when, and how did this line of reasoning evolve and come to represent the mainstream Republican economic philosophy? After all, you just read what Alan Greenspan believed before he became “the Maestro”. Moreover, as recently as 2001, Jack Kemp, eight years before his untimely death, posited in a Wall Street Journal editorial titled, “Our Economy Needs A Golden Anchor ,” “How many more dashed hopes and false recoveries must we experience before politicians and monetary authorities accept the fact that our inability to manage fiat currencies is causing the global economic slowdown? They keep waiting for interest-rate reductions to kick in, yet more than six months after the Fed began lowering rates the economy continues to weaken. Waiting for the recently enacted tax cuts to provide ‘stimulus’ will prove futile as well. The economy does not suffer a lack of consumer demand, and more money in people's pockets will not revive the supply side of the economy.” If he were to write that today, he would be what? The simple answer is: he would be ‘spot-on’ correct. The real answer, however, is that he would be chastised out of the intellectual discussion by the Martin Wolfe’s (Keynesian) and the Marty Feldstein’s (Republican Monetarist) of the world for being too draconian. Sure we need to address our imbalances and debts, but not now. Instead, we need to continue to tinker (intervene) until the free market forces are strong enough to be allowed to steer our economy on their own (like waiting for Godot). Writing for Forbes, Nathan Lewis contributed an article titled, “Though It Nearly Strangled Reagan's Revolution, Soft Money Conservatives Revive Friedman's Monetarism.” He begins to make the case that both Keynesians and Friedmanite monetarists are two interventionist economic philosophies that are cut from the same cloth there are clearly distinct from hard-money, truly free market advocates: “Friedman slipped something new under his cloak of old-time libertarianism: a monetary framework that discarded conservative hard-money principles entirely, and relied instead upon a system of economic management via currency manipulation. Indeed, Friedman cheered the end of the gold standard system in 1971. “Today, monetarism is dead. Or, perhaps you could say, it has become so indistinguishable from Keynesianism that it is easier just to lump them all together in the same pot of soft-money advocates.”

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“The hard-money advocates want a currency that is as stable and reliable as possible, a universal constant of commerce, by which people can interact to everyone’s greater benefit. In practice, this has always meant a gold standard system.” If Lewis begins to make the case, them Stockman drives it home, stating on several occasions that the current prevailing Republican economic practices are merely “gussied-up” forms of Keynesianism. He writes in his book The Great Deformation: The Corruption of Capitalism In America: “As we now embark upon the apotheosis of Keynesianism it can be well and truly said that the conservative party in America brought this baleful condition to its present estate. First, with Nixon’s abominations at Camp David in August 1971; and then with the horrid economic legacy of the Bushes who brought the Keynesian destroyers to the killing rooms of the Eccles Building.” I wish to make three points on Stockman’s quote. First, referring to the Eccles Building, where the Federal Reserve meets, he points out that supposed free-market Republicans have a lot of intellectual contortions to go through before they can reconcile 12-person control over the economy. Second, the reference to Nixon at Camp David in 1971 was where he secretly convened his advisors (even wives were not permitted to know) to address the fact that the US was almost out of gold reserves, and they had to de-link the dollar to gold or face default. So there you have—an easy fix—we don’t need no “stinkin’ gold standard. Why didn’t we think of his years ago? Richard Nixon must be the most brilliant economist of all time. The dirty little secret is that practiced economics is 99% political expediency and 1% economic theory. Keynes understood this better than anyone and Greenspan became a quick learner Something surely should have smelled rotten in the state of Camp David on that fateful August weekend in 1971. You know, and I know it, the American people know it, and the most strident of all Keynesians know it. Channeling my inner Bob Dole here a bit--a great soft-money Republican who hadn’t much of a clue on economics. But this leads to my third point. As much as we talk about being principled, the prevailing American sentiment is no more principled and process-oriented than the most backward third-world Republic. We both seek short-term preferable outcomes over high-minded principles like life liberty and the pursuit of happiness (or perhaps liberty, fraternity, equality for those on the left) . More shamefully, most which support a rule by fiat dictate as long as it appears to benefit them or agrees with their view. The damn of fiat money waiting and wanting to flood the world was released by the single courageous stroke of a Richard Nixon pen. Richard Nixon had the courage of Pontius Pilate—“who am I to stand in the way of what the people demand”. There is more to the story than that, which I will address later, but it is important to understand that when the final link to gold was completely severed the moneyed-interests of the financial elite were far better served than everyone else—by having

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the first access to the cheap money, by being able to take advantage of inflation through investing, and being exclusively-positioned to take advantage of the overall ‘financialization’ of the economy that would replace “industrialization” (especially for the West) as the driving force behind the economy. Furthermore, increasing the debt allowed both mainstream Democrats and Republicans to pursue and achieve their policy objectives. Cutting taxes, borrowing to spend on preferred programs and blowing out deficits, ran part and parcel with ‘compromise’ and money printing. And here I think David Stockman articulates the case against the mainstream of both parties very well: “Needless to say, the more central banks hit the “print” button, the more the fiat credit disease flourishes, and the greater the distortions in the financial system. Central bank created fiat credit is inherently fraudulent because it amounts to “something for nothing”. And, as a practical matter, it causes debt to be underpriced because increasing demands for its issuance do not need to be greenlighted by savers asking for high interest rates in order to defer current spending. Instead, it is greenlighted by monetary central planners who are inherently prone to an occupational disease. Namely, the unfounded belief that they can generate higher societal growth and wealth by keeping interest rates persistently and systematically below free market clearing levels. “In any event, the artificial boost to credit availability and ‘growth’ in the Keynesian GDP accounts that results from ever increasing amounts of central bank manufactured fiat credit is a one time parlor trick. At length and inevitably, it is stopped cold by the limits of ’peak debt’. “Suffice it to say, that almost everywhere on the planet that condition has now been reached. The mountainous rise of total credit outstanding—household, business, government and finance— in the US economy since 1971 is not remarkable merely owing to its magnitude, as shown below.

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“In short,” according to Stockman, “peak debt means that the one-time Keynesian parlor trick of fiat credit fueled GDP growth is over and done.” It appears we have gone as far a debt can take us as seen in below chart which shows relatively linear growth compared to clearly exponential credit growth…or has it?

Just as we thought we were at “peak oil” around 2005 I think it is likely premature to call the death of the growth of debt. More on “peak oil” later in this report, but

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regarding peak debt, their exists an economist whose views are rooted in Austrian economics but whose desire to understand reality has trumped the ideological underpinnings that many in the economics profession tend to become wed to. My 2004 my macroeconomics professor at George Mason University, Li Gang-Liu sensing my own proclivities toward the Austrian economic view, recommended that I write a paper on Richard Duncan. Gang-Liu was friends with Duncan and I first became aware of his view after reading his book Dollar Crisis and I followed him closely ever since. In 2008 in the highly-esteemed Feer Eastern Economic Review, Duncan wrote an article titled, “Time to Dump the Dollar Standard,” where he concluded: “The Austrian School of Economics has long warned the dangers of fiat money and excessive government spending. Their warnings are mostly ignored in the Anglo -Saxon world. The 37-year experiment in fiat money and floating exchange rates has just come to a disastrous end. The lesson the policy makers must learn from that experiment is that “free market” capitalism under a paper money regime does not produce the same benefits as true free market capitalism (free fro m government created money) does under a gold standard. Instead, it corrupts or overwhelms a country’s institutions and regulators, and ultimately ends in catastrophe.” Later that year he wrote an editorial in the Financial Times titled, “Bring back the link between gold and the dollar .” But something happened on the road to “Debt Damascus” for Duncan. Over the next few years, he came to realize that the patient, the economy, had simply become too addicted to credit growth to be removed, lest our entire economic system would crash, sending our civilization into a collapse without precedent in modern times. This strongly contrasts with the view held by purely principled Austrians who believe that Stockman got it correct in his contention that there “was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke.” They would undoubtedly point towards Jim Grant’s recent release The Forgotten Depression: 1921: The Crash That Cured Itself, where the title reveals the moral of the story. But just what is involved in Duncan’s economic conversion and just exactly what is he converting to? First he is no Keynesian. He has stated on several occasions that he agrees with what capitalism is and how it benefits a society – agreeing with this David Stockman quote: “In a stable, productive and honest economic system, spending always and everywhere comes from income. Workers earn incomes through the act of production, and then “spend” the major part of it on their current cost of living and save or pay taxes with the rest. “Likewise, businesses distribute some of their net income or profits to shareholders/owners and then reinvest the rest—along with newly raised capital obtained from household savers. Government’s also “spend” a fair amount on goods,

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services and transfer payments, but obtain the financing via levies on the pre -tax incomes of households and businesses. “And that’s all there is; there ain’t no more in an honest free market economic system. Investment spending is obtained from current savers; debt is one form by which savings are channeled to investors along with equities and various hybrids.” Keynesians, socialists, and economic leftists of all sorts love freely giving money to the masses to spend, and they have convinced themselves that consumption and a focus on aggregate demand--rather than on savings from profits and income to be used to further invest--is the keystone of the economy. Duncan, unlike the Keynesians who celebrate the growth in government and debt, says that we should be absolutely embarrassed by our level of debt and spending. But the reality of the situation, as explained by Duncan, lies in his comparison of our economy to a rubber raft that is inflated with credit instead of air. Furthermore, according to Duncan, propped up on top of the raft are stocks, bonds, gold, and seven billion people. The raft is fundamentally defective with holes on all sides as entities deflate and default. The natural tendency for the raft is to deflate (sink). In his 2012 book The New Depression, Duncan charts how credit became synonymous with money, growing 50-fold in fifty years, far outpacing economic growth. There is no way back. Not only must credit continue to grow, it must grow at an accelerated pace. In saying its too late for austerity as the root of a solution, I’m certain this makes his Austrian brethren cringe; though it does sing a similar note of Ray Dalio’s “beautiful deleveraging” circa 2011: not too much austerity, not too much default, and not too much inflation—just the right mix to inflate our way out of this mess. The Fed’s program of financial repression—keeping the economy afloat long enough to allow the debt to become more serviceable through suppressed interest rates and hope for economic growth (really stick-it to the savers)—is also somewhat rooted in this logic. Duncan says that we haven’t had capitalism for years. And those who are nostalgically waiting for its triumphant return will be sorely disappointed. The transition from capitalism to creditism began 100 years ago. His response to an interviewer’s question: “More generally, how has the ‘dollar standard’ affected the US economy itself?” “Once the constraint was removed of the US needing to have 25 per cent gold backing for every dollar that it issued, it also lifted any constraint on how much credit could be created. It had been easy for the US to maintain gold backing in the first post-war decades, because it owned most of the world’s gold. But with multinationals relocating industry abroad and growing government spending, it finally came up against that binding constraint in 1968. So Congress simply changed the law, at Johnson’s request, removing any requirement for a gold link. But with no restraint on credit, either, credit growth exploded. Of course, credit and debt are simply two sides of the same coin. In the US, total debt—government, household, corporate and financial-sector debt, combined—expanded from $1 trillion in 1964 to over $50 trillion by 2007. Credit growth on this scale has been taken for granted

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as natural; but in fact it is something entirely new under the sun—only made possible because the US broke the link between dollars and gold. This explosion of credit created today’s world. It made Americans much more materially prosperous than we would have been otherwise. It financed Asia’s strategy of export-led growth and it ushered in the age of globalization. Not only did it make the global economy much bigger than it would have been otherwise, it changed the nature of the economic system itself. I would argue that American capitalism has evolved into something different—in my latest book, The New Depression, I call it ‘creditism’. “So, much of the credit going to the private sector is also wasted. Since the 1970s, private sector growth rates have gone down. Shackled to trillions in debt… duct taped with regulations and restrictions… deceived by phony financial signa ls from central banks… they will probably remain low and sink lower for the foreseeable future. Grow your way out of debt? Not likely.” In other interviews Duncan makes the case that capitalism has been in a state of transition since World War I when nations had to go off of the gold standard, issue bonds, and print more of their own currency in order to finance the war. This led to the roaring 1920s and the bust that followed and the Great Depression of the 1930s. The Second World War and the resultant deficits fueled the next credit-based boom for the American economy and this drew it out of the Depression. And Duncan believes that the Reagan deficits in the 1980s actually fuelled (unwittingly at the time) much of the boom during that decade. I will show in Part 2 of the report how there is a little more to the story than that, but I am in complete agreement that but not for 50-fold rise in credit since the 1960s and the de-linkage of the dollar to gold in 1971, material prosperity had have been marginal at best. The question going forward is: “at what future cost”? On this point, I believe Duncan and Stockman would find common ground with the latter saying, “Anybody who had financial training before 1970 would instantly recognize this as Ponzi economics. It is only because of the last twenty years we got so inured to prosperity out of the end of a printing press and massive incremental debt that people lost sight of the fundamental principles of sound money, which, there's nothing arcane about it. “It's just common sense. It is not common sense to think that 50, 60, 70% of all the debt that's being created by the federal government can be bought by the Federal Reserve, stuffed in a vault, and everybody can live happily ever after.” As Duncan sees it, we have only three options. One, we could choose austerity and we would die today. Slightly more appealing, is option two: we can continue down this money printing gambit for perhaps another five to ten years and meet the same fate as and then collapse. At some point interest rates (today around 2.11% on US 10-year bond and .44% on Japanese 10-year bond) become too low for pension plans, annuities, and life insurance company guarantees—and the whole system descends into the same deflationary death spiral as option 1, just at a later date. Option 2 is the path we are on. The third option is a possible way out due to extremely (low) interest rates he expects for years to come. In his own words:

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“Option number three is for the US government to keep borrowing and spending aggressively, as they’re doing now, but to change the way they spend. Rather than spending it on too much consumption, and on war, for instance—the US government has so far spent $1.4 trillion invading Iraq and Afghanistan—they should invest it; not just in patching up the roads and the bridges, but invest it very aggressively in transformative 21st-century technologies like renewable energy, genetic engineering, biotechnology and nanotechnology, on a huge scale. The US government could put a trillion dollars into each of these industries over the next ten years—have a plan to develop these new sectors. A trillion dollars, let’s say, in solar energy over the next ten years: I’m not talking about building solar panels for sale in the market; I’m talking about carpeting the Nevada desert with solar panels, building a grid coast-to-coast to transmit it…” This option contains a peak into the technologies that will undoubtedly shape our future, but it displays a misunderstanding of how technology is born, develops/evolves, and is successfully implemented and adopted. This is I will deconstruct and critique in Parts 2 and 3 of the report. But I would like to conclude here that I think Duncan offers a plausible Austrian-rooted explanation for the economic and market forces have radically changed. And almost all of the Austrian Libertarian types who were poking fun at Keynesians and soft-money Republicans for having ignored their warnings/predictions of the twin real estate and housing market collapse in 2007, 2008, and 2009, have, with some exceptions, completely missed the predicting how the market and the economy would rebound in the years that have followed to today. Year after year, without an ounce of remorse or embarrassment for having missed in predicting doom and collapse in the previous year, they simply double-down on their conviction that the collapse will occur in the year to come. You can mark your January calendar to see these forecasts for collapse resurface. I am not going to mention the websites by name, but you know the ones to which I am referring—I too wrote for them in 2007 and 2008. I am going, however, sharing a list I made in January 2014, highlighting the views of 16 Austrian-Libertarian authors/investors here. I decided that after misguided calls for collapse in 2011, 2012, and 2013, it was time to begin monitoring these 16 random (some very well-known, others not) authors and strategists. I have stripped the individual names because the point I am trying to make is that they too, have fallen prey to the same kind of intellectual hubris that they that are so fond of attributing to the attaching to mainstream conservative and progressive economists:

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My sense is that they will be as wrong in 2015 as they were the previous four years and I will present a similar chart in January 2016. I think Duncan is correct (and as a corollary they will be wrong year after year, merely rolling over the same erroneous predictions) -- we can and will continue down this path of credit creation far longer than most think. I will discuss this in greater detail in Part 4. Part 2: From Capitalism and the Industrial Revolution to Creditism and the Quest for a New World The growth of the world had been relatively flat until the end of the 18 th century -- in terms of population, innovation/productivity, and economic growth. The first blip was the advent of modern civilization in Mesopotamia (“the fertile crescent”) where we began to settle in communities centered on substantive agriculture rather than continuing down the path of a subsistence and nomadic existence. The world experienced its second growth blip in population gains and economic growth during early days of the Roman Empire. The world mostly flat-lined for a millennia and then, during the Renaissance which followed the twin plagues of the 14 th century, western civilization to finally came to escape the Dark Ages. The following15th, 16th and 17th centuries—the Ages of Commerce, Exploration, Discovery, Science, and Reasoning, with the discovery of new lands (Americas), sciences (printing press, microscope, Newtown, Pascal, Descartes), political and economic philosophy (Machiavelli, Hobbes, Locke)--laid the foundation for the world’s first real sustainable explosion in productivity and innovation, population, and in economic growth. Fueled by an explosive confluence in economic philosophy—the individual hand of the free market to best serve the greatest good (first Adam Smith then, John Stuart Mill in the later 19th Century)-- a tiny democratic republican experiment called the United States of America--and perhaps most importantly of all, the discovery of a cheap and abundant supplies of carbon-based fossil fuels (coal then oil), an entirely new age of power, technology, and industrialism was born. Born out of this 300-year “growth miracle”, is this mythical sense that America will always reign supreme and that this growth in population, productivity, and GDP can continue into perpetuity—kind of a “Divine Right of American Exceptionalism”. This kind of lies at the foundation in the confidence we place in central bankers and policy-makers to be able to guide us out of any amount of debt, or financial crisis, or any set of troubling circumstances. The US, in any case, has over 200 years of history on its side to bear this out. A central debate right now is whether the growth, productivity, and population lull we are experiencing now is a momentary speed bump on the path to resumed or even greater growth, or has the ‘economic sclerosis’ (a favorite adjective both George Gilder and Art Laffer, two prominent “supply-side” Republican economists during the 1980s-90s, used to describe Europe while subtly boasting of US technological and economic supremacy) that Japan and most of Europe have both been experiencing now terminally metastasized to the US? In order to engage in that debate I turn to two experts who have greatly pondered the subject, both economists and university professors. First, Tyler Cowen, writing in his pamphlet The Great Stagnation… and later in his follow-on book Average is

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Over: Powering America Beyond the Age of the Great Stagnation , basically contends that most of the low-hanging fruit of the industrial revolution—through one-time gains in technology, medicine and in education and in achieving equality of opportunity (where most can reasonably expect to achieve their own maximum economic potential)—has already been plucked. The future will brighten for the few who can take advantage of technological and IT-based productivity gains at the expense of those who cannot. If you have STEM skills (science, technology, engineering, mathematics), you’re in luck; if not, you might want to consider a profession that can’t be replicated by a robot or software program and that also serves the rich—landscaper, nanny, hairdresser, personal trainer, and the like. Even more contentious are the views expressed by Robert Gordon, who, in a paper he released in August 2012 (an NBER working paper) titled, “Is US Economic Over…”in addition to advancing Cowen’s case that most of the big “one time” gains have already fully been captured by the American economy, posits that: “The frontier established by the U.S. for output per capita, and the U. K. before it, gradually began to grow more rapidly after 1750, reached its fastest growth r ate in the middle of the 20th century, and has slowed down since. It is in the process of slowing down further.” The fist two paragraphs of his abstract offer a good summary of his view presented in the paper: “This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. ‘The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers, the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.”

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If Cowen makes the distinction between the winners (owners of capital and those who master the technology) and losers (everybody else) of productivity gains in our economy (less people getting a piece of the pie and increasing their standard of living)…

…Then Gordon makes the case that the rate of productivity growth in general is forever falling, resulting in the pie expanding at a much slower rate, or one even shrinking, in the following two charts:

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The conventional wisdom is that Gordon is wrong – that we have yet to fully exploit the new technological innovations, especially those related to IT, and we will resume old-style growth once again over the next couple of decades. These

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optimists point to the lag that occurred between the discovery of electricity and the years it took before the economy could fully take advantage and reap its benefits. And every major financial institutional investment firm has a chartbook like the one McKinsey presented a couple of years ago, touting how there’s never been a more revolutionary period to be alive in terms of technological change:

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And they just can’t get enough of the word ‘disruptive”. It means industry-shattering, economy-transformative, if the bridge to existential metanoia—

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especially if you work in the marketing department or are a CEO. It is the most mis/over-used adjective invoked by the investment community. Think about it. They must “hype-it-up” in order to draw your investment dollars? You don’t want to miss out on the next big thing do you? According to them we are perpetually living in the most transformational and disruptive of times. The debate over whether we can return to pre-1970 productivity levels looms large. Huge gains in productivity are kind the magic behind or the ‘raison d’etre’ of capitalism. Unlike printing money to fund endless deficits, implementing technological innovations that truly “disrupt”, create real new wealth by creating completely new industries that displace less efficient business processes and operations, increase end-user demand for new products and services, and improve the lives and overall economic well-being of society. I will return to this debate at as I conclude Part 2 of this report, but now we should investigate the other two major sources of long-term growth—demographics and availability and cost of your primary energy source. There is little dispute over demographics—what was a massive tailwind for the economy during the 1980s and 1990s is in the process of reversing , and becoming an equally colossal tailwind on the way down:

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What’s worse, the chart above likely understates the magnitude of the problem; the size of the labor force is in currently stuck in a state of relentless decline:

And what’s worse than that (it just keeps getting worse) is that the backbone of the American economy—and note the peak spending and peak working productivity occurs at age 47.5—males between the ages of 18-54 are shedding jobs faster than any segment of the population--with one-in-six in that segment currently out of work. And the rebound in employment since the 2009 high has been masked by the fact that the majority of jobs recovered pay less, are less stable, and offer less benefits:

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If demographics are a headwind, and if the resumption of strong productivity is debatable at best, then the last hope for growth is the third-leg of the growth triangle—a bountiful supply of cheap energy. The world began its radical transformation in the latter-half of the 18th century with the burning of coal and the development of the steam engine. The industrial revolution was born when Adam Smith’s economic principles were allowed to flourish in the tow centuries of exponential productivity and population growth that would follow—only fuelled by a plentiful supply of carbon-based fossil fuels. The last component—energy—deserves a more diligent discussion because it remains the most underappreciated and misunderstood. I find Robert Gordon’s views—that the industrial revolution can be divided into three phases or periods, that the second phase was the most powerful and that future gains in innovative and technologically-induced productivity growth, though positive, will pale in comparison, very compelling and equally troubling. Keep in mind that our entire debt-laden world economy is predicated on increased ingenuity, and on advances in technologies that will yield another explosion in end-user demand for new products and in productivity. So far they have only succeeded in yielding much stock market hype and hope amongst the venture capital community, who are still longing to reignite the glory days of the 1990s. If coal and the steam engine were the trademarks of IR #1, then an even more dense and powerful energy source—petroleum—along with steel and the assembly line, are responsible for the second and most impressive phase of the entire 300-year

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industrial revolution. What’s more, the effects would shape the world economy deep into the 20th century. IR#3, the IT-revolution which began around 1960, though much more glitzy and glamorous in its gadgetry, is merely an aftershock compared to the advances achieved in the prior two revolutions. And this has macroeconomists completely confused. Many of the measurements they use show immense growth in many of their statistics—most notably GDP—either do not properly discount the numbers with inflation by the way it is measured, or there metrics are far more “mean-oriented” than “median-oriented”, statistically-skewed by high numbers enjoyed by the very few at the top of the spectrum. But even more blurring is the failure to properly account for the enormous pile of debt we have amassed during the economic growth we have experienced over the past half-century. And it is here that I wish to make a crucial point of understanding. Three things largely account for the gross inability of most to properly explain the last fifty years in economic terms: first, as just-mentioned, computers, software, and networked communications, while having a positive revolutionary effect, did not have as strong of an effect as IR #2 did. Second, energy became much more expensive during this period – a fact that can be shown by looking into the concept of Energy Return on Energy Invested or “EROI”. And, third, in order to maintain the standard of living gains that resulted from IR#2 that extended well into the 1960s, it was necessary to substitute credit growth in order to compensate for rapid declines in EROI and for a lower second derivative growth function in productivity. And now, this has been further exacerbated by declining demographics, requiring even more credit and money expansion. Most of the economic growth has been illusory and has required massive borrowing from the future in order to be achieved. And now, we have breached the tipping point for debt. Richard Duncan is correct: attempts to reduce credit-growth, never mind debt reduction, will be met with severe economic convulsions, and this will require an ever-greater rate of credit growth. When you here a Keynesian or optimistic soft-money Republican talk about “green chutes”, “economic escape velocity”, or any form of economic “normalization”, you should brace yourself for the next financial market spasm. The analogy of the drug addict requiring an even greater fix (with credit) truly applies here. 1970 was THE PIVOTAL YEAR FOR AMERICA. If you go back and look at the charts presented earlier in this report you will notice that the peak for many economic measures were reached in 1970 have been descending ever since. Real median wages (adjusted for inflation) peaked, for example. Mean wages have fared better because they are sharply skewed by gains achieved by those at the top; and household income peaked later only due to the influx of women and dual-income families in the workforce. Already discussed at length, the slope of productivity gains also began to turn negative in 1970 as well. Gordon writes: “The growth of productivity (output per hour) slows markedly after 1970. While puzzling at the time, it seems increasingly clear that the “one-time only” benefits of the Great Inventions and their spin-offs had occurred and could not happen again. Diminishing returns set in, and eventually all of the subsidiary and complementary

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developments following from the Great Inventions of IR2 have happened. All tha t remained after 1970 were second-round improvements, such as developing short-haul regional jets, extending the original interstate highway network with suburban ring roads, and converting residential America from window-unit air conditioners to central air conditioning.” But missed on the great insights of Duncan (to explain why credit creation was needed as a substitute) and of Gordon (for a better explanation of why economic growth was slowing since 1970) are the understanding and the paramount importance of EROI, mentioned briefly just earlier. The concept is rather simplistic—it is another way of saying or measuring “energy yield” or energy output per energy input. In other words, the higher your EROI, the better your energy yield. And the better the energy yield, the better it is for society in terms of having more of a cheap and abundant supply of energy to be exploited. Unfortunately, all of the really cheap oil and gas was captured during IR#2. This is illustrated in the chart below:

The debate over peak oil has been highly contentious since the early 2000s. Soft-money Republican optimists tend to have a visceral hatred to the concept because they believe virtually anything can be tackled by American enterprise and ingenuity. CNBC host Joe Kiernan frequently berates the “peak oilers” on his Squawk Box show. He points to the fact that world oil and natural gas production did not peak around 2005 when many of the peak oil community said it had. And recently, in a

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discussion with US energy magnate T Boone Pickens, Kiernan was stomping all over the graves of peak oil theorists, proclaiming that the debate had been settled with the price of oil having plummeted from over $100 to almost $50 in less than a year. What Kiernan and other like-minded permanent optimists miss is the fact that the production of conventional oil did peak in 2005, and only more costly sources (and technologies to get at them) have enabled us to increase production since. Thus, I think it is more accurate to say we have achieved “peak ‘Cheap’ oil”. As represented in the chart immediately above, EROI is in permanent decline, and the speed and magnitude of decline represent an overall greater threat to economic growth, especially given growing levels of debt we still need to service, than both declining demographics and plummeting productivity growth. In producing the chart below I am borrowing a concept (oscillating plateau) and a phrase from Dr. Nathan Hagens-- “The Bio-Physical Gautnlet”:

Here is an easy interpretation of the chart: Many shale fracking-credit holders are watching their bonds lose value and wells are now being forced to shut down; we are clearly seeing a floor emerge beneath which the next marginal barrel can profitably produced. The big understanding here is that we may return to $50/oil (or maybe even lower over the short- term) but we are not headed back to sustainable sub-$30/ oil. As more time goes by, the input costs to produce oil rise and the remaining wells to be discovered are more costly to dig; Thus, we can only expect the price producers need to produce to increase over time. More importantly, and more to the real point of the debate over “peak oil”, we appear to

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be headed on a collision course where the price of oil society can afford to pay for oil exceeds the price producers need to sustainably produce. The obvious question to ask is: what about alternative sources of energy—like renewable, non-fossil-fuel energy? Unfortunately, the concept of EROI is equally if not more applicable when discussing these other sources. Consider your favorite renewable in the chart below:

The renewable du jour is solar (represented as ‘photovoltaic’ in the chart). Note that the EROI is struggling to achieve double digits. Despite all of the hype and hoopla you see over solar, it will not be able to have a meaningful impact on delivering a less-costly forms of energy. Participants in the technology game are infamous for over-promising and under-delivering on what is known as “cost-curve reduction”. The idea is that costs are high at first in the early adoptive phases of a new technology, but as mass production grows cost and production efficiencies are achieved, the cost-benefit reverses for the benefit of all. We may see a slight increase in he EROI for solar but, again, nothing to materially change our overall biophysical gauntlet EROI plight. And every other energy source, except the one I am going to discuss in Part 3 of this report, is nothing more than a pure EROI fantasy.

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Part 3: Four New Disruptive Technologies If Robert Gordon has essentially lost all hope based on technology to lift us at of our economic quagmire, then Richard Duncan’s solution is quite quixotic by comparison. Echoing similar sentiments of “never letting a good crisis go to waste”, Duncan doesn’t want to “let a good financial repression go to waste”. He wants to take advantage of these suppressed rates, which he expects to last for at least a generation, and, rather than spending to maintain the status quo of things, to instead take advantage of he low rates to invest in things that will fundamentally transform our energy source and create completely new industries. In saying, “they should invest it; not just in patching up the roads and the bridges, but invest it very aggressively in transformative 21st-century technologies like renewable energy, genetic engineering, biotechnology and nanotechnology, on a huge scale…” his prescription offers a partial path to escaping of our current hellish course, but he veers tragically off-track in a couple of respects. Before I get to them I am going to briefly introduce a tremendous insight (one among many) I learned after reading all three of Andrew Lees’ (former UBS commodity strategist) reports presented at his AML Macro website: As harmful, scandalizing, paralyzing, dire (however you wish to describe) our debt to growth gap widening is, far more detrimental to our economic growth has been and continues to be the fact that the substitute debt for real making real progress. This is the easier fix politicians chose and the electorate they represented demanded--50 years of guns, butter, and goodies. For Lees, the far bigger economic sin was and continues to be the failure to pursue and develop the technological solutions into which we would have otherwise been forced. And we would have already implemented them to get as back on the course of real economic growth. Instead, the illusory elixir of our massive multi-decade credit injection has somewhat intoxicated us, preventing us from feeling the requisite pain necessary to developing a new sources of energy with higher EROIs and technologies that deliver cancer cures, longer lives, better crop yields, cleaner air, water, and a better overall environment; rather, we buy into the social media type of advances we confuse for real positively disruptive change. But for the crutch of credit, I am convinced we would have already been on the other side of the necessary painful inevitable debt purging we still need to experience, led out by real technological solutions. I attribute are chosen path as much to ignorance as I do to political expediency, because trying to identify these paradigm-changing events in real time is daunting, if not impossible. But it is a lot easier to miss if you believe in Keynesian or Freidamanite economics. Returning to how Duncan veers off track, the first way in which he does, lies in his emphasis and reliance on solar (which he calls “free energy”), the cornerstone of his entire plan to utilize cheap (near zero interest rates) to invest in the kind of productivity-enhancing technologies Lees describes in his reports that will create the wealth needed to restore sustainable, non-credit-based economic growth. As discussed earlier, the unfortunate rebuttal to the type of solar-based solution

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Duncan envisions is that the fact that the energy yield for solar is so low comp ared to the yields we enjoyed for energy during IR#1, and especially in IR#2. Lost on him (and many others) may be the concept of EROI. The energy that the sun emits may be free but the cost to capture, harness, store, transport, and distribute is not. Talk of blanketing the US deserts with solar panels only potentially hurts his case. At some point the cost of materials for such and expansive project (especially if demand is ramped up over a very short period of time—far faster than producers are prepared to supply) could actually cause the energy return on energy invested for solar to drop. The second way he swerves off course is that he kind of turns into Tom Friedman (the Keynesian of world affairs”) for his confidence in the ability of government to discover, develop and steward new technological innovations. If the credit bubble was about not feeling the requisite pain to force us into real new technological solutions, thereby causing us a dangerous delay their adoption, then Duncan’s plan is about making up for lost time and cramming it down our throats with government programs to try to make up for lost time. Democrats, and especially Keynesians, are fond of invoking the example of the Manhattan Project when they feel passionately about developing and deploying a technology for which they have the best of intentions and for which they sincerely believe will advance the better interests of society. They also point to DARPA, the Marshall Plan and the like. But for each one of these successes co nservatives can counter with many more DMVs, Post Offices, and Solyndra’s. The Manhattan Project example really only applies only if you believe our existence is in threat. Sorry, but we don’t. You need a heck of a lot of motivation to overcome government inertia of bureaucracy, inefficiencies, in-fighting, politicking, etc. that comes with the territory in all projects funded by tax-payer dollars. Those challenges exist in private enterprise, but are far less prevalent when you are answering to specif ic actual shareholders than you are to a faceless entity, “the collective of the American taxpayer”. Publicly funded research, however, does have a crucial role. But it is critical to understand the role it can successfully play and the ones it cannot. Take DARPA, for example. It is credited (correctly) for developing the Internet. In the 1960s there was a need to construct a highly decentralized networked communication infrastructure that could withstand a nuclear attack. Academia kind of picked up the ball in the 1970s and 80s connecting more labs and universities, and developing new protocols and applications, including a web browser. So, collectively, they kind of advanced the ball from their end zone to the 20-yard line over the course of three or four decades. When the private sector got involved to finally commercialize the Internet, in the 1990s, they moved the ball straight into the end zone in less than half a decade. That’s how it works. Emerging on the immediate horizon are four potentially disruptive technologies, that, if properly developed in government research labs and then mostly advanced in the private sector, could possibly (emphasis on possibly) allow us to cheat the painful deflationary (credit-cleansing) economic fate we kind of deserve. The four

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technologies are nuclear fusion, artificial intelligence (AI), synthetic biology (synbio), and space exploration/travel. Beginning with fusion should be an obvious choice. Unlike solar, fusion almost really is “free energy”. Its EROI is potentially almost infinite, leaving even the best early “Jed Clampatt” days of oil in the dust. Andrew Lees’ reports “Global Exhaustion” and “The Right Game” – especially if your initial reaction to fusion borders on the mindset – “but haven’t they been working on that Holy Grail for years…” strongly make the case: “Yes, that is his point”. We could and should already have nuclear fusion as our major energy source – for many of the reasons already discussed in this report. Instead, we boast about 40-chartacter messages. Would anyone seriously argue that that the other so-called ‘disruptive’ technologies in McKinsey’s graph presented in Part 2 of this report (Goldman, Merrill Lynch, Morgan Stanley, UBS, and every other major investment all have a similar graphs) deserve to even be mentioned in the same breath as nuclear fusion? So where does the technology actually stand? Two major developments were achieved last year (2014) that arguably move the ball past the 20-yard line. First, for the fist time in our 60-year history of trying to harness the energy that powers the sun, scientists at a fusion power facility finally were able to create more energy out of a fusion reaction than had been absorbed by the fuel used to spark it. And second, though somewhat more suspect (nuclear fusion has its own share of ‘hypesters’), Lockheed Martin said in mid-October that it had made a technological breakthrough in developing a power source based on nuclear fusion, and the first reactors, small enough to fit on the back of a truck, could be ready for use in a decade. The next disruptive technology, artificial intelligence (AI), is already starting to infiltrate software and other forms of information technology. The aforementioned DARPA, for example, started development for an AI-form of technology which became the predecessor to SIRI, the voice recognition and response technology Apple now uses in their iPhones. In an article appearing almost a year ago in The Atlantic, the author echoes my sentiment, mocking today’s trumped up technologies, which pale in comparison to a technology like AI, writing: “The advances we’ve seen in the past few years—cars that drive themselves, useful humanoid robots, speech recognition and synthesis systems, 3D printers, Jeopardy!-champion computers—are not the crowning achievements of the computer era. They’re the warm-up acts. As we move deeper into the second machine age we’ll see more and more such wonders, and they’ll become more and more impressive. How can we be so sure? Because the exponential, digital, and recombinant powers of the second machine age have made it possible for humanity to create two of the most important one-time events in our history: the emergence of real, useful artificial intelligence (AI) and the connection of most of the people on the planet via a common digital network.

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“Either of these advances alone would fundamentally change our growth prospects. When combined, they’re more important than anything since the Industrial Revolution, which forever transformed how physical work was done.” After years of promise we are finally beginning to see large investments for and commitments to internally develop AI from our large tech-leading companies like Facebook and Google – both by providing venture capital to fund other newly-formed AI-focused companies and by developing the technology themselves. Like AI, or perhaps even combined with it, synthetic biology (synbio) threatens to totally dismantle the existing structure of things--literally. Of the four disruptive technologies, synbio will probably take the longest to flourish, but could easily have the deepest impact. Unlike genetics, which involves the re-engineering of genes, synbio involves re-writing life—creating living cells which can solve problems, accomplish objectives, or do just about anything we want the new forms of life to do--from scratch. We will be able to reprogram cells in order to manufacture the food, fuel, and medicines we will need in the future. One an easily see that many of tomorrow’s environmental problems will (perhaps only) be solved by synbio —by creating polluting-eating organisms or by perhaps creating whole new forms of products which emit limited or no pollutants. Scientists are now beginning to construct a list of the “bio -bricks” of life, similar to the most basic elements that make up chemistry’s Periodic Table. No one has come closer to commercially advancing the prospects for synbio as Craig Ventor, the scientist who was the first to map the human genome. He and his also was the first to synthetically replicate a bacterium cell. His firm, Synthetic Genomics (private) showcases the promise of synbio: “[Meeting] The world[‘s] increasingly difficult challenges today. Population growth resulting in the growing demand for critical resources such as energy, clean water, food and medicine are taxing our fragile planet. To fulfill these needs we need disruptive technologies. We believe genomic advances offer the world viable, sustainable alternatives. “At Synthetic Genomics Inc. we are creating genomic-driven commercial solutions to revolutionize many industries. We have started by focusing on energy, but we imagine a future where our science could be used to produce a variety of products, from synthetically derived vaccines to prevent human diseases to efficient cost effective ways to create clean drinking water. The world is dependent on science and we're leading the way in turning novel science into life-changing solutions.” Ventor (and others) look to achieve this by paring life down to its most basic components, digitizing them, and then regenerating (or generating from scratch) new life out of the digital world. If the first three disruptive technologies are each capable of creating transformation on the scale of a new industrial revolution on a standalone basis, then the fourth, space travel/exploration, is the catalyst which can demonstrably accelerate their

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growth and adoption trajectories. This is because space exploration really needs all three technologies in order to take it to the next level. As the four technologies mix , they have the potential to ignite a new revolution, greater than even the Industrial Revolution, and rapidly transform our economy and our civilization. I am stealing a little thunder from Part 4 here, but herein lies the possibility for combining fusion, AI, synbio with space exploration:

In exploring how fusion, AI, and synbio are all three extremely synergistic with space exploration, the link between fusion and travel is probably most apparent. First, just to briefly mention the status of space exploration, it is key to understand that there is tremendous demand from the ‘mega-rich” to spend hundreds of thousands, if not millions of dollars to travel deep into space. It is becoming the “penultimate status symbol”. And many private companies are getting into the game such as Richard Branson’s “Virgin Galactic”. Unlike the future disruptive technologies of tomorrow-AI, synbio, and fusion--many companies that build and launch rockets for deep space are already profitable. Of Elon Musk’s three companies, only his privately-owned SpaceX is profitable; publicly-traded Tesla and Solar City are not. And call he a ‘homer’, but Orbital Sciences, Northern Virginia-based and also already profitable, is merging with another profitable (P/E of 10 to be precise) Northern-Virginia company, Alliant Techsystems (ATK) to create the next space exploration juggernaut. ATK's inert launch abort motor and attitude control motor were part of the Launch Abort System for the Orion capsule, which is designed to fly atop NASA's Space Launch System (SLS). The mission marks a major milestone toward America's exploration of deep space.

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Nuclear fusion technology aims to reduce travel time to Mars from months to days by using a proposed “Fusion Driven Rocket (FDR) is a 150-ton system that uses magnetism to compress lithium or aluminum metal bands around a deuterium-tritium fuel pellet to initiate fusion. The resultant microsecond reaction forces the propellant mass out at 30 kilometers per second, and would be able to pulse every minute or so and not cause g-force damage to the spacecraft's occupants.” (The Register). Perhaps Lockheed Martin, making revolutionary breakthroughs in fusion technology mentioned earlier, can transfer their this technology to the United Launch Alliance (ULA), a joint venture between Boeing and Lockheed Martin to provide space launch services to the government. In a very provocative development, just a few months ago, ULA announced that it would invest heavily in a new rocket engine being developed by Amazon founder Jeff Bezos and his company Blue Origin. Turning to the link between synbio and space, from R&D Magazine: “Not only does synthetic biology promise to make the travel to extraterrestrial locations more practical and bearable, it could also be transformative once explorers arrive at their destination,” says Adam Arkin, director of Berkeley Lab’s Physical Biosciences Div. (PBD) and a leading authority on synthetic and systems biology. “During flight, the ability to augment fuel and other energy needs , to provide small amounts of needed materials, plus renewable, nutritional and taste-engineered food, and drugs-on-demand can save costs and increase astronaut health and welfare,” Arkin says. “At an extraterrestrial base, synthetic biology could make even more effective use of the catalytic activities of diverse organisms. And lastly, the link between AI and space travel is already occurring. From Discovery.com: “In the near future, advances in artificial intelligence will allow scientists to travel well beyond the limits of 20th-century space travel and explore more of the universe beyond our solar system. Today, NASA relies on unmanned shuttles to explore distant galaxies that would take years for humans to reach. Driverless land rovers also allow researchers to explore and photograph Mars and other planets, where inhospitable conditions make human exploration impossible. These smart vehicles sense obstacles, like craters, and find safe paths of travel around them before returning to the shuttle [source: NASA Jet Propulsion Laboratory]. “Artificial intelligence technology will also help scientists react more quickly to emergencies during manned flights. For example, a radio message from Mars takes roughly 11 minutes to reach Earth. Rather than waiting for advice from scientists on the ground when trouble arises, astronauts will work with onboard software systems to spot and prevent problems before they happen [source: Bluck].”

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Part IV Synthesis, Scenarios and the Case for Optionality Over the past three decades I have been an active trader and investor in financial markets. One the things I have attempted, it turns out in vain, (my own personal quest for the Holy Grail!) is to simply identify the most successful investors with the best track records and to copy their strategies and stock picks to the maximum extent possible—to simply freely ride their brilliance. This has failed for one reason: nobody has been able to consistently maintain a high level of success over a long period of time. Warren Buffet is great at finding and investing in individual companies and in constructing portfolios, but he is no macroeconomist, and I believe that he would be totally blind-sided, if we did have a collapse, one worse than in 2008. He has been one of the biggest beneficiaries of our illusory 50-year period of inflated prosperity. Let’s consider how the last three decades have unfolded. Take the 1990s for example. In that decade we saw many flash-in-the pan one-time wonders (Alberto Villar of the Amerindo Investments and the MunderNet Fund, standing out as perhaps one of the most prolific) and the guy who “beat the S&P 500” every year, William Miller of Legg Mason in his Value Trust Fund. After the tech bubble burst in 2000 Vilar was forced into philanthropy, which is actually better than the outcome others experienced (Henry Blodget, Jack Grubman, and others who have basically been banned from the industry.) And I think that it is correct to say that William Miller did not beat the S&P 500 for one decade in the 2000s, verbally bashing commodity investments the entire time that they were the best performing assets (from 2000-2008)--talk about “reversion to the mean”. In the 2000s, we saw the American heroic stock names of the 1982-2000 bull run lag (if not continue lower, especially tech and financials) the entire decade while precious metals, commodities and many emerging markets exploded higher—at least until 2008 when the wheels came off for just about everything.. The decade was the glory days for the Austrian hard-money types who got just about everything right, ranting against the US Dollar, recommending that everyone get out of the dollar, and plough those ill-fated instruments into hard assets and stocks and bonds in foreign countries. And it was a bane of an existence for the mainstream who continued to sing the praises and the USA (and related investments) and who were completely blind-sided by the sub-prime pricking of a housing bubble that triggered the financial avalanche, threatening to bring the whole system down. What’s worse, they should not have been blind-sided. They turned a deaf ear to the Austrians warning them. The mainstream economists on both the right and the left at least show a little deference and respect toward one another (they all have prestigious PhD degrees from top economics universities), but they completely dismiss the Austrian hard-money conservatives as “kooks”. And the kooks were rubbing their faces in the mainstream mud until about 2011. In the late spring of that year a chart on Sentiment Trader appeared which showed that, while the US Dollar was making a low, it was a higher low than the one registered a few years prior to that. The real coup de grace was that, though the

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Dollar made a “higher low”, a fact technically bullish in and of itself, the sentiment for the US Dollar made a “lower low”. A few months later, the positive prognosis for gold and the negative view on the declining dollar staged a monumental reversal for the ages, and has been the defining driver of financial markets ever sense. US Dollar strength has been the fundamental underpinning of the investment environment for the last four years. A truly objective hard-money Austrian would probably concede that they, as a group, had underestimated the fact other countries were in worse shape than the US. You have probably heard the phrase “the US is the cleanes t shirt in a dirty laundry bag” or “the best house in a bad neighborhood” in terms of which currency to hold and where to invest. No Austrian came close to predicting that the S&P 500 index would triple off of its lows (on its way to quadrupling), that gold would be down 40%, silver 70%, and precious metal stocks 90%, or that the dollar rally (as measured by the “DXY”) would extend above 90 (from the mid-70s lows) at the expense of Euro, Yen and—especially-- the other hard commodity currencies. I was sharing a car ride with one of the most prominent Austrian Libertarians in the summer of 2011, and, after listening to him rollover his monthly futures-markets currency bets (mostly in the commodity currencies—this guy practices what preaches which is commendable), I asked him if thought it crazy that the Yen had rallied to below 70 (it was off-the-charts strengthening against the US Dollar). He simply stated that all he knew was that the dollar was headed lower . He said it like he was reciting the First Commandment or the first line of the “Pledge of Allegiance” . Like Bill Miller, this person was seen as a financial genius in the first decade (though never acknowledged as such by the mainstream financial media) in the early 2000s, but has struggled to get most forecasts right for the first-half of this decade. The geniuses today are the mainstream buy-and-hold investment houses--more likely to be recognized touted by the mainstream financial media than the hard money alternative investors were credited for getting the prior decade “right”. But I give them very little credit for having any sort of a vision or predicative capability. After all, they, across-the-board, always working from the canvas, paint a perpetual optimistic picture for the future, because nobody wants to invest when the future is bleak. So just by virtue of the fact that the market has moved higher only makes them correct by association, much more so than as a result of forethought or explanation. Two letters account for how we were able to rescue the economic patient from cardiac arrest in 2009 and for goosing the stock market into a triple-bagger in less than six years, and those letters are “Q” and “E” – shorthand for quantitative easing (money printing to fund debt). I have well chronicled the hubris and misunderstandings of the soft-money types and the Keynesians for most of the report of this report. I have to be a little tough on the hard-money types here because their failure to grasp the current environment figures heavily to my investment strategy today. What do I mean? Other than the fact that I don’t wish to be counted among the “Sour Sixteen” in the chart on page 12, who have mostly missed the investment boat for the last-half decade, I want to see if I can at least partially--vaccinate myself against the economic and investment blind spots that have resulted in their flawed analysis over the past few years.

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If Keynesians find hubris in their belief in the ability to model and affect positive change with limited unintended consequences, and soft-money conservative optimists find theirs in an unyielding confidence in tax-cuts and deregulation, then the Austrian blind spot stems from being limited in their flexibility to deal with uncertainty or a broken or unwieldy system. A simple application of Myers Briggs I believe offers insights into how Keynesians, optimistic Republicans, and hard-money Austrians could be more born into their views and their investment fate than they are educated into it. In applying Myers Briggs, there are four categories used to determine a person’s psychological profile and each category breaks into one of two groups. Therefore, there are sixteen profile possibilities. Take the first indicator – “extroverts versus introverts”. People who prefer extraversion (E) draw energy from action: they tend to act, then reflect, then act further. The can-do, make-it-happen, “get-government-off-my-back”, action-oriented Republican optimists tend to be extroverts (among a couple of other attributes). “The extravert's flow is directed outward toward people and objects, and the introvert's (I) is directed inward toward concepts and ideas.” Both Keynesians and Austrians tend to be directed inward to their models and worldviews. Authors’ note: the text in quotes in this discussion on “Myers Briggs” can be attributed to Wikipedia. Sensing (S) and intuition (I) are the information-gathering (perceiving) functions. “They describe how new information is understood and interpreted. Individuals who prefer sensing are more likely to trust information that is in the present, tangible, and concrete: that is, information that can be understood by the five senses. They tend to distrust hunches, which seem to come ‘out of nowhere’. They prefer to look for details and facts. For them, the meaning is in the data.” This easily describes Keynesians who seem to feel compelled to econometrically model everything. “On the other hand, those who prefer intuition tend to trust information that is less dependent upon the senses, that can be associated with other information (either remembered or discovered by seeking a wider context or pattern)”. This describes the lens through which Ludwig von Mises developed his ‘praxeology’ in Human Action. To the Austrians, there are certain a priori economic principles that are to be deduced and not tested or experienced. For them (Austrians and Intuitives), “the meaning is in the underlying theory and principles that are manifested in the data”. The third category is thinking (T) versus feeling (F). “Thinking and feeling are the decision-making (judging) functions. The thinking and feeling functions are both used to make rational decisions, based on the data received from their information -gathering functions (sensing or intuition). Those who prefer thinking tend to decide things from a more detached standpoint, measuring the decision by what seems reasonable, logical, causal, consistent, and matching a given set of rules.” I would bet that 90% of Austrians are off-the-chart “thinkers” on the spectrum of this

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category, whereas 90% of Keynesian champions for the “plight of the middle class”, conversely, are “feelers”: “Those who prefer feeling tend to come to decisions by associating or empathizing with the situation, looking at it 'from the inside' and weighing the situation to achieve, on balance, the greatest harmony, consensus and fit, considering the needs of the people involved. Thinkers usually have trouble interacting with people who are inconsistent or illogical, and tend to give very direct feedback to others. They are concerned with the truth and view it as more important.” Austrians, displaying this strong “thinking” trait, are so passionate and “direct” about objectively arriving at the truth, that they upset the normal protocol of genteel discussion on financial cable television, and many have literally become “banned” from returning to certain financial programs. It is a little more difficult to tie the three economic types to the fourth category judging (J) versus perceiving (P), but when you broaden the analysis to apply all sixteen-personality types (by combining all four categories), you begin to see patterns that reflect the breakdown of voting population – most are either Keynesians or soft-money Republican optimists at heart. One particular personality type, of the sixteen, a small group comprising less 3% of Americans, “INTJ”, is the psychological category that best fits the Austrians. Ayn Rand was and Alan Greenspan is an INTJ-type. The fact that INTJs are one of the rarest of the sixteen psychological types, making up approximately only 1-2% of the population, might play a role in why they are dismissed: because others are not like them and have difficulty relating to them—and they find it even more difficult to deal with others. Two of the most common names used to label this group are the “Masterminds” and the “Rationals”. They are so rational that many Libertarians are accused of having Asperger’s Syndrome, and some do. INTJs (Austrian or otherwise) also, until very recently, tended to make good investors and hedge fund managers. “They are independent, decisive, are highly-self confident, and have a quick, imaginative, and strategic mind”. But most Austrians who are INTJs suffer from one major debilitation that is almost driving them insane in the current investment environment. “They can be overly analytical and inflexible at times. A recurring theme with INTJs is their analytical prowess, but this strength can fall painfully short where logic doesn't rule ” - such as the new world where creditism seems to have displaced capitalism. “When their critical minds and sometimes neurotic level of perfectionism (often the case with Turbulent INTJs)” are applied to today’s financial markets and in trying to deal the unprecedented level of distortions and uncertainty, they tend to believe that because the system is not discernable or no longer follows the precepts of the past, that it must be doomed to failure. On rare exception, some of the Austrians, like Richard Duncan, can breakout overcome this shortcoming. Another such Austrian-type who has managed to partially evade some of the traps the Austrians have recently fallen into and who possesses a penchant for objective critical analysis, often questioning the conventional views of everyone, including his affiliated group, is Jim Rickards. He basically believes that the whole world is now almost completely indiscernible in applying the old rules of the past—primarily because we have never, in the history of the world, been through such an

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experiment of global explosion of money and credit creation. For Rickards, some rules should still apply, but some might not apply in exactly the same way. He is a top expert on the resultant currency and financial wars that appear to be flaring up and escalating, describing them as somewhat unavoidable now that all countries are approaching the end of the road of our debt-laden path. One man’s serfdom results in Nirvana for some others—those few who can make sense of things. He is “Number 15” of my “Sour Sixteen” chart on page 12. Not everyone on the chart got it all wrong. Rickards half-way subscribes to Duncan’s view that they money printing can continue, but while Duncan believes the credit orgy could last for another decade, Rickards believes the time frame is more likely only 3-5 years, and that it could easily begin tomorrow. He is fond of saying that the conditions for the avalanche have already been set. He pokes fun at how others are drawn into the game of trying to predict what could cause the collapse and how its unfolding with look like. This is unknowable and somewhat of a silly indulgence that makes for good conversation and maximum pride points f(or those few lucky ones who guess right). Just understanding an avalanche is likely coming is far more important. And the corollary to that is that most strategists tend to be focused on future policy errors. Rickards believes this is equally as wrong--the errors have already been made; we are simply waiting for the consequences to become manifested. For investing, Rickards calls for ‘optionality’ and diversification, which is another way of saying humility. This is anathema to the big-swinging masters of the market. These “masterminds” are used to being in front of almost everyone else in making big secular investment bets. Another part of the problem for these former market masters is that machines (by way of artificial intelligence), through their algorithms, tend to disrupt, re-route, and otherwise “mess up” the normal rhythms of he markets by exhausting and truncating investment trends. So we have a created a world of uncertainty that even the Austrian INTJs find difficult to understand. Stripped of this power they once held, they are forced to join the ranks of the majority of investors who blindly diversify and/or rely on chart reading-- at least for now. This is like telling Babe Ruth he needs to “choke up” on the baseba ll bat and bunt from time to time. We have seen countless former legendary investors, with solid best track records, look like fools. Before transitioning to the discussion for my scenarios and on investing, I want to end the discussion on sociologically profiling political-economic groups with a point of clarification. Clearly not all INTJs are Austrians, nor are all Austrians to be classified as INTJs—though I would bet that a surprising majority of Austrians are INTJs--shocking, given they are only 1-2% of the population. A lot of economists, including Ben Bernanke are INTJs, for example. Of the four traits that combine to form INTJs (NT “Rationals”), the strong reading on the “T”—component—“thinking” is what tends to distinguish Austrians. The “N” combines with the “T” to form their somewhat rational rigidity. Having recently joined the ignominious ranks of the investment mortals myself, stripped of my own INTJ powers, it is with all due humility that I offer the following three possible investment scenarios to conclude this report.

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The first scenario, one that the doomsday websites are certainly on board with, logically follows from the chart I created in shared in a report over the summer:

The chart basically says that you can forget about the four great disruptive technologies to save us from our economic predicament. Like clockwork, we are coming up to the next scheduled major market top--to be followed by the next market crash in the early spring of this year. To my credit, while many others (Austrians, in particular) kept saying that the collapse was just around the corner (as they almost always say) all throughout 2014, I allowed that the market had further to run. I also, perhaps incorrectly, offered the chart above as a kind of rebuttal to the Merrill Lynch chart below which shows the S&P 500 stock index clearly breaking out. I wrote that the breakout was suspect because the this “break”, in contrast to the period of consolidation in the 1970s, did not have as healthy of a period of consolidation, a prerequisite, before a sustained breakout can occur:

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The breakout could indeed prove to be ‘false’ in technical parlance. And the 7.5 -year cycle may remain in affect and the lofty valuations, Russia, Greece, cyber terrorism, and all of the other horrible things you read about on the doom websites could actually see one or more coming true this year, creating a crash. In this case, the Austrians would get to watch their most favored scenario play out as indicated in my chart below. Notice that their (and my) desire to finally cleanse this rotten system of all of its excess, purging the debt, could allow us to reset and then to refresh and start anew – perhaps led out by the four new disruptive technologies:

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Scenarios 2 and 3 would both be consistent with the Merrill Lynch chart implying a sustained breakout with the former presenting a scenario not last seen since the year 1720. There is kind of an historic rhythm and precedent to Scenario 2. In the first couple of decades in the 1700s, 60 years before the massive use of coal-powered steam engines ignited the Industrial Revolution, the world had moving at a nice pace. But it was starting to stagnate much like we saw in the US in 1970. The Banque de France, led by John Law, said “hey, we don’t need no stinkin’ gold standard”, and embarked on Europe’s first massive money printing scheme for all of France. This lasted 20 years, culminating in a stock market scheme (Mississippi Land Bubble) that occurred at the same time as the “South Seas Bubble” in England. It was a boom for everyone. The French term “Millionaire” was born. And after rising almost 10-fold in less than 20 years, the bubbles collapsed taking the whole system down with it, requiring massive repair—to the tune of about fifty years, when the Industrial Revolution occurred, lifting the world out of a massive multi-decade depression. Depicted below is a scenario in which the four disruptive technologies are not ready for primetime, bet ready ‘enough’ to draw huge investment and to catapult the stock market to highs that even the most optimistic soft-money Republican could begin to envision –perhaps ending in ‘Mars Land Scheme” or “Milky Way Seas Bubble”:

MAR 2015

Artificial Intelligence and the new

age of space exploration

SCENARIO #1: Collapse, Reset

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The third scenario, probably the least likely, but certainly the most hopeful, is that perhaps at least two of the four disruptive technologies I have drawn to your attention are ready to take root before the end of this decade and before the credit-induced collapse would otherwise occur:

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This scenario was discussed at length in Part 3. Certainly there are other scenarios, and the conventional view is that a new secular bull market began when the market bottomed in 2009. This would mean that we are five years into a 15-20 year bull market with a very bright future ahead. A variation of this view could still entail some sort of an intermediate-term topping at the end of the first quarter this year, but instead of crashing as per my “scenario 1” on page 39, we will merely experience a 20-30% correction—which would be viewed as “healthy” for wringing out market excesses, allowing the market begin the next leg of its secular advance. And those who hold this conventional view also believe that financial market gains will find their way to the overall economy, bringing workers back to higher-paying jobs. So far this has proven to be painfully elusive:

The chart above shows the labor participation rate declining as the stock market storms to new highs. Though the trend has more pronounced since the recovery from the 2008 collapse (and launched the career Thomas Picketty, making him the new hero of the Keynesians), it is evident that this trend—the fortunes of Wall Street and Main Street decoupling, between those with assets and those who don’t—began long ago, around the year 2000. Many of the technological advances in the McKinsey chart support Tyler Cowen’s view (presented at the beginning of Part 2) --that robotics and software will benefit the few at to the detriment of many—and at some point the distribution of wealth becomes unsustainable as asset appreciation comes to dwarf any gains in income. Three of the disruptive technologies I presented—AI, synbio, and fusion--would only serve to exacerbate this trend, but the fourth, space exploration could bring a resurgence of manufacturing to America – by the production of rockets. We can see the potential for manufacturing jobs to proliferate, reading an excerpt from a recent ATK press release “Supporting Deep Space Exploration Milestone”:

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“The inert launch abort motor (manufactured in Promontory and Bacchus, Utah) and attitude control motor (manufactured in Elkton, Maryland) are solid rocket motors designed to ensure crew safety…Orion was also equipped with state-of-the-art, ATK-produced composite Ogive panels (Iuka, Mississippi.) The Ogive panels are the exterior skin of the crew module that provides protection from the extreme temperatures of space. The Orion ablative heat shield includes 35 composite components produced in Promontory, Utah: six supporting the primary heat shield, with the remainder on the back-shell. The Orion spacecraft's hydrazine diaphragm tank and an ammonia diaphragm tank were also produced by ATK (Commerce, California). In addition to supporting the Orion spacecraft, ATK products played an important role on ULA's Delta IV rocket. These include the rocket's eight booster separation motors (Rocket City, West Virginia), the diaphragm propellant tanks (Commerce, California), three nozzles for Aerojet-Rocketdyne's RS-68 engines (Promontory, Utah) and 12 key composite structures including thermal shields, centerbody structures, nosecones, two medium and one heavy skirt on the three Common Booster Cores, the composite center interstage (Iuka, Mississippi) and the composite X-panels interstage (Clearfield, Utah).” And even David Stockman, the deficit hawk with the sharpest beak, supports the “Space Program” as one of the few worthwhile government programs that deserves further investment. Concerning your investments, as I have written for the last forty-two pages, it’s a bit tricky. A crash would obviously result in taking all stocks down, including the ‘disruptive’ company stocks; you, therefore, need to attempt to incorporate the likelihood of and timing for this possibility (and its corresponding magnitude and duration) before constructing a portfolio strategy. In preparing for all of the aforementioned scenarios, I would indeed choke up on the back, check my ego at the door, and be prepared to execute “stops”—more Pete Rose, less Babe Ruth. That is a fancy way of saying sell early to preserve your capital if the investment starts turning against you. The obvious alternative to my strategy would be to buy low-cost passive ETFs that enable you to diversify across asset-class, market cap, and geographical region. This is the strategy to follow if you believe the status quo can be maintained. I have only been able to find one publicly traded synbio company with tremendous potential, and a couple of publicly traded rocket makers that deserve a good look. All three of these companies are already profitable, and could achieve staggering returns, if their industries do in fact take off. Your best bets for 2015, however, are likely to be US long-dated bonds and precious mining stocks. As per the Richard Duncan’s “Option 2” path-- kind of the default path we have chosen to follow, with credit forever expanding as world economic growth grinds to a halt, it is probably a good bet that the bull market for US long-dated notes and bonds continue to rally. Jim Rickards mentioned this as one of his strongly favored trades for 2015 in a December 31, 2014 Bloomberg TV appearance. It is probably a good bet that the US 10-year note and 30-year bond make new all-time highs. Gary Shilling, who correctly spotted this trend in the 1990s and correctly predicted it

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would last for decades, thinks that we are headed yields below a 1% yield on the 10-year note, and below 2% on the 30-year bond. Does this mean that holding a 30-year US bond getting under a 3% yield will be a good investment for 30 years? Certainly not; rather, it simply means that in this warped and distorted world, where yields of the bonds of most of the G-7 countries are already way below 1% (Japan’s are 0.33% on their 10-year), it is probably a safe bet that the US bond yields will close this gap. Lastly, I think that gold and silver both deserve to be owned in various forms at least for protection, if not for outright speculation (at least for Q1 2015). To his credit, Rickards, unlike many other goldbug types, has consistently advocated never having more than 10-20% of your portfolio in the metals. I tend to agree, though I think that there are occasions where owning a higher percentage over the short term, as a trade, is warranted. Today, I would aim toward investing upwards of 20% of most portfolios in precious metals, depending on all the other important investment factors that specifically pertain to an individual’s situation. We see in the chart below that, similar to what occurred for the US Dollar in 2011 (see pages 32-33 for discussion)--where the dollar hit a ”higher-low” at the same time that sentiment registered a “lower-low”—we are now seeing the same phenomenon occurring in the senior gold miners, as represented by the ETF GDX, forming a “higher-low” while sentiment has descended to a new “lower-low.” This is very bullish for the gold miners from a contrarian perspective:

Will result in the same dramatic, market-defining moment, when the US Dollar and gold reversed fortunes in the second half of 2011, occur this year? Well, yes and no.

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Yes in the sense that it is possible that gold’s 3 ½-year bear market has ended. And no in the sense, that if gold has bottomed and is preparing to launch into a new bullish phase, then this time it will likely have to do so in conjunction with a strengthening US Dollar. This the most heretical of thoughts for many stubborn hard-money Austrians. I would encourage them to get a bottle of their favorite beverage and, as for them to as objectively as possible, take into consideration the powerful technicals presented in the following chart:

To give myself a little credibility here, I should point out that on May 4, 2014, I released a note where I urged caution and patience for goldbugs, providing the following chart and then forecasting the following:

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On May 5, 2014 I wrote: “Gold's action has been very disappointing after its strong rally which began earlier in the year, and saw the gold and silver miners move 30% in the first quarter. Since the blast off which extended well into the first quarter, the rally has clearly fizzled, precious metals have resumed under-performance, and are threatening to move back down to retest support levels at $1270/oz. for gold…The above analysis is much more important than anything else you read about-- to be sure, gold cycles, seasonality, geopolitical events, gold-to-silver ration, miners-to-gold ratio, are still pertinent, but pale in comparison to the sentiment vs. price analysis I have provided. “What we want to see, and one day will see, before we can be bullish again, is a "lower low" in sentiment than the minus 55% we experienced last June --ideally occurring with the price registering a "higher low" than we saw then or at the end of the year. Even better, following that, we would want to see, unlike 2H 2013, sentiment lagging the rise in the price of gold. Why does this work? It is a combination emotion trumping reason and 'herdish' activity usually being wrong. Smart investors recognize this and exploit it.” It took some time, but sentiment has finally plunged beneath the reality of the price. With all due humility, I find it time to buy gold—even while the US dollar rallies. It is still to early to tell whether gold has hit “THE Bottom”, but I am confident that it at the very least offers a “tradable bottom” today. The precious metals should do well in all three of my described scenarios, and even in the more conventional scenarios. I am no longer on board with the Rickards view that gold will move to the $8000/oz. range. I think that remains a possibility, but is highly unlikely. Rather I believe gold will meander higher until the end of the decade. Gold’s seven-fold rise from 2002-2011 has since corrected 30%, and silver,

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as expected, corrected even more. Regardless of whether gold explodes higher or not, the miners represent value, now trading at levels last seen in 2002 when gold was $250/oz. Despite the debt they have amassed, they trade at compelling valuations if gold moves higher from here. As evident in the chart above, sentiment has become excessive and somewhat irrational. Does this mean mining stocks will turn around on a dime? No—after all it took and additional four to six months for the US dollar and gold to reverse fortunes after the similar non-confirming higher-low occurred for the dollar in 2011. But I don’t think that we need to wait as long for gold and silver to turn. January and February are seasonally strong months for metals, and just as they shot strong out of the gate in 2014, after a final push to new lows with tax loss selling at the end of 2013, we are likely to see trader money come into the oversold precious miners. What remains to be seen is whether, like 2014, 2015’s gains are all lost and the gold and silver stocks make a giant round trip back to zero for the year. Conclusion: The last fifty years has been a contentious journey where all groups, in trying to make sense of the world the best way they now how, have kind of all fallen prey to their congenital and somewhat inescapable psychologically-centered flaws and biases, and, as a result, have experienced the highs which accompany hubris and the agony that comes with the humility that follows. I think that our only real hope to overcome our insurmountable growing debt-to-growth and declining demographics predicament is to develop truly disruptive technologies that cause productivity to once again soar and allow for wealth gains to be more widely distributed throughout society. I am not saying that this will happen; odds are kind of against us. What I am saying is that our current debt-laden path, our political status quo, and our relying on and concentrating in investments in technologies that focus on taking of selfies, posting instant pictures, and jumping around with a camera-on-a-stick in order “to grow our way out of this”, are not going to get it done.

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