Profit in the Investment Ecosystem: Catherine Austin Fitts

The Gold Report: According to your website, your mission is to provide the "deeper intelligence" investors need to succeed in this environment. From your perspective, what are the top two or three issues that most investors don't understand because they don't have that deeper intelligence they need to make better investment decisions?

Catherine Austin Fitts: Our goal is to help readers, subscribers and clients build family wealth. We believe that the success of the family depends very much on the success and the building of community wealth. In other words, it's very difficult for people to build wealth if everybody is making money in ways that destroy the greater economy. So we focus both on family wealth and on the wider community wealth.

My fundamental paradigm is economic warfare. I believe we have a group of people intentionally trying to centralize the economy in a way that shrinks wealth. As a result, literally every household in every country is, if you will, being harvested. I'm very interested in helping people see that game of economic warfare, see the harvesting and then, whether it's their health, their time, their financial assets, take steps to protect themselves from being harvested.

For example, I do a lot with precious metals, as I'm very concerned about debasement of people's assets. I call it a slow-burn process, whereby our incomes generally decline but our expenses generally rise. We're watching monetary supply inflate but as that inflation happens and our expenses increase, our incomes and our assets aren't keeping up. Consequently, my recommendations are very much organized around what people need to do within this prism of economic warfare to avoid debasement of their assets, their time and their other resources.

TGR: How do they avoid the debasement?

CAF: It's different for assets than for time. So, for example, it's extremely important that everybody in the family builds skills at endeavors that either lower expenses or allow them to generate income in something sustainable. We're watching a tremendous bifurcation in the economy between industries going through a creative destruction process and industries that have a future. One of the most draining things to see is the tremendous number of young people—our children and grandchildren—spending a fortune for college and graduate school education that really doesn't prepare them for the future. They study things that were useful 20 years ago but not what they need for careers in robotics or advanced manufacturing. Putting money and time into institutions that train people for yesteryear as opposed to tomorrow is a very poor investment. That's an example in terms of intellectual capital where we're trying to protect people from debasing their assets.

In terms of time, we work hard to get people to understand there is no more important issue than the quality and the integrity of the people they do business with. For instance, I constantly ask people why they use any of the large banks that engage in all these financial frauds. I tell them to find a really great local community bank or credit union they can trust because across this society, as we go through this debasement process, more and more people find themselves wasting time dealing with all sorts of scams, padded bills and problems in the quality of service because they're dealing with organizations that aren't trustworthy.

Then, in terms of assets, instead of industries and demographics that are aging or not involved in primary trends, investors should look at industries and parts of the world that are growing, where the demographics are winds in their sails. I try to help people identify the primary trends and how to invest in them in a manner that will protect them from the dirty tricks of the insiders. For example, I never want to see clients keep their money in one place. In fact, we recommend against ever putting more than 50% of your money in one place. I'm very big on both geographic and industry diversification. To me, diversification also means not having all your money in one broker's account. That's the opposite of diversification.

TGR: Can you highlight the top one or two primary trends investors should focus on?

CAF: Number one is the shift from paper assets to tangible assets. If you go back through history, you'll see cycles from when paper assets rise in value versus tangibles and tangibles rise back up. I used to work in the energy finance group at Dillon Read, a Wall Street investment bank, and we regularly tracked how much it would cost to acquire a barrel of oil exploring in the oil patch versus how much it would cost to buy it on the floor in the New York Stock Exchange. There's historically been this arbitrage, if you will, between owning real things and paper.

What have we done for the last 20 years? We've printed lots and lots of paper, currency and government bonds and all sorts of other instruments, and piled it up with derivatives. We're going through a reset between the value of real things and the value of paper because the paper is very bubbled and overvalued, and it's being reset down to the real thing.

TGR: What is another trend we should be watching?

CAF: I focus a lot on technology. As we get this reset between paper and tangibles, and we have more and more people on the planet with a fixed, limited supply of resources, the pressure is on to use technology to help us figure out how to do more with less. There has been tremendous investment globally in new technology and, of course, we're certainly experiencing the explosion in digital and telecommunications technology and the shift from the desktop to the smartphone, with billions of people going online and communicating in unprecedented ways. We're also looking at very exciting new developments in advanced manufacturing and other material technologies. One of the most important issues going forward is how much technology will permit us to make fewer resources go much further. That's going to affect fundamental pricings of this reset between the paper money and tangibles.

TGR: The way that you're describing that reset makes it sound as if we're going to experience deflation not inflation.

CAF: I call it the slow burn because some things are inflating and other things are deflating. We're inflating the money supply but we don't feel hyperinflation because labor is being devalued. We've been doing it for the last 20 years—particularly since the creation of the World Trade Organization—completely resetting the historic relationship between capital and labor in a very ugly way. That's part of the wealth destruction that's coming with the centralization that's occurring.

TGR: How long does a reset take?

CAF: That's a political question. In a market economy, it doesn't take long at all. But in a political economy, it can be a managed process. It's amazing how much of this has happened without it seeming traumatic. Let me give you an example. At the beginning of 2003, if you put $10,000 in a five-year bond making 5% and pulled your money out at the end of five years, you would have received almost $2,000 in interest. If you put that money in precious metals instead, pulled your money out at the end and paid your taxes, you would have had about $18,000. That's pricing in U.S. dollars.

But let's price that in terms of something that the average household uses every day—gallons of gasoline. With your original $10,000, you could buy 6,897 gallons of gasoline. When you took your $10,000 out of the bond five years later, you could buy half the amount of gasoline, or 3,215 gallons, because the dollar's purchasing power diminished by 50% over that five-year period. If you'd invested your $10,000 in precious metals, after converting it into dollars and paying taxes five years later, you could still buy 6,524 gallons of gasoline. You hadn't made any money, but you held your purchasing power.

That's an enormous reset, because that's just talking about gasoline. What happens if you count up the lost purchasing power across the board? Using 1998 dollars, I've estimated that between 2003 and 2008, a median family in San Francisco lost $250,000 in purchasing power. Extrapolating that out, a county of 100,000 people lost $3.3 billion in purchasing power and a county of 200,000 people lost $7 billion.

TGR: Early in our conversation, you referred to investing in areas and industries that provide a net positive total return—not just return on investment but also return to the network. Could you expand a bit on that net positive total return concept?

CAF: I have discovered over the years that if a company that is doing things that are harmful, whether to people, the environment or in a variety of other ways, it produces a negative total economic return. It's not surprising that over time these companies pose real risks and run into very serious political trouble. The pushbacks that ultimately come hurt investors. I remember when everybody was buying Enron stock. My attitude was, well, first of all, nobody can understand what they do, but second, they're a bunch of scumbags. Why would anyone want to invest in Enron? Sure enough, things came around and that total negative return turned into a negative return for investors. It's a perfect example.

TGR: And your approach avoids such scenarios.

CAF: I'm very keen on finding companies, products and services that add value. That can be a telephone company, an educational company—you name it, it's the bread and butter of what businesses do. Whatever the arena, I want assurance that every company or every activity we invest in has a fundamental economic purpose and makes the pie bigger. It adds to the economic value of the world. It doesn't have to be dramatic. So I look at total economic return and I use it as a navigation tool.

Basically, my philosophy is looking at the total economic return of a company as a navigation tool to help me find companies that I think can really perform over the long term for investors. There are really great companies that add tremendous value over time. They create wealth of some sort, which gives them the juice to create wealth for investors. In addition to being a navigation tool and serving investors' interests, of course, over time it has served to be a way to avoid certain risks.

I started doing precious metals in 2000 and the way I found that opportunity was through looking at the total economic returns. It was through that analysis that I concluded that we were going to see a very dramatic shift between tangibles and paper. I came to gold and silver as a way to help people take their assets from here to there and do well in the process.

TGR: At that point, most people considered gold a silly investment. What did you see in 2000 that led you to that conclusion?

CAF: The government was printing currency, government securities, promises and contingent liabilities as if there was no tomorrow. The Constitution, laws and all sorts of rules say how the federal government must manage its money, and it wasn't doing it. I was part of a group of people during the Bush Administration who got a law passed requiring the federal government to produce audited financial statements, and a process began in 1995 where they started saying why they weren't going to comply. In 1998, they started to report vast amounts of money going missing. In between fiscal 1998 and 2001, more than $4 trillion in undocumentable adjustments were reported.

Now that we've had bailouts of $12 trillion plus, $4 trillion doesn't sound like such a big deal. But if you consider the amount of currency and securities the government was printing, the money that was disappearing and the clearly illegal activities, it didn't take much to figure out that they were pulling all the money they could out of Dodge before things turned.

TGR: Who's they? Are where did the money go?

CAF: Well, that's the $64,000 question. This is not the kind of money that goes to making a few people rich. This is much more than what is needed to have umpteen offshore accounts and Ferraris for lots of rich folks. This is the kind of money that builds endowments for private armies and space programs. We're talking about the black budget.

TGR: Empires growing and crashing has been a societal norm for centuries, but what you say sounds more like a multi-decade plan by organizations than an evolving social, historical process.

CAF: Ever since Kennedy was assassinated, a remarkably constant group of people has been doing everything they can to centralize political and economic control into very tight hands. All of these are part and parcel to that process. In the 1980s, George H.W. Bush referred to it as moving wealth into "tighter and righter hands." I wrote an online book, Dillon Read and the Aristocracy of Stock Profits, to help people understand what was going on in Washington during the 1990s, because most intelligent, educated people had trouble fathoming that bubbling the housing and debt markets, and suppressing the gold price—two critical pillars of the strong dollar policy—were very intentional.

It's very important to understand that this was an intentional plan. It's not as if this was a one-page plan, but it also didn't evolve organically. Make no mistake about it—the centralization of the economy is being engineered with government money and government credit. One of the reasons we're feeling so much pain is that the process is incredibly destructive of human living and financial wealth.

TGR: If it is a conscious plan by a small number of people, how does a more educated population begin to shift the balance of power?

CAF: That's exactly the right question. I go back to my focus on family wealth. If the process I'm describing is draining family wealth, then my goal is to help people see the politics enough so they can withdraw and start to build family wealth despite what's going on. The more of us who withdraw and not allow ourselves to be harvested, the more the whole dynamic shifts in a much more positive direction. That we're centralizing wealth is not the core problem; the problem is that we're shrinking wealth and we need to expand it.

This all comes down to how investors answer this question: "Am I using my time, attention and assets to do things that are wealth-building for my society, my community and me? Or am I doing things that are destructive to my community and society?" If we all make money doing things that harm and drain each other, how long will it take before none of us is making money?

TGR: In an article about returning to a gold standard, you wrote about the importance of being careful because currency systems are part of a governance system. Can you elaborate on that viewpoint?

CAF: This comes back to looking at the world through the prism of economic warfare. If I have great leadership and a process for governing a country or a planet—which is not only in the highest and best interest of all concerned but also where there is consensus and communication with the people being governed—I can use lots of different currency systems. Some will be better than others.

But our problem right now is not a problem of the currency system but a real problem of leadership. Rather than face that problem, we point to the currency system or the debt system. We look at what things, not who things. It is an adult's fairy tale to think that the problem is the currency system and we're going to solve it by jiggering the currency system.

Any change in the currency system or the financial system can be used for political end. For that reason, we need to be very clear about who the leadership is and how things are being run. We need to talk about how we want to evolve our financial models, including our currency systems, within that context. Without doing it in context, we'll end up with something that could be unbelievably ugly.

TGR: Will you be discussing some of these the topics at Cambridge House's California Resource Investment Conference, Feb. 11–12, 2012, in Indian Wells, Calif.?

CAF: We talked earlier about debasement as the number one risk investors are facing, and I'll go through a series of principles that can help investors navigate that and other risks. But for the most part, our conversation today has been more on a macroeconomic level than what I'll be talking about at the Cambridge Conference. There, I'll focus on natural resource investing for retail investors, where the opportunities are, what risks are involved and how to approach the sector in a planned, disciplined manner that can protect and grow assets. So my discussion will be much more geared toward the investment sector and stock level.

TGR: Can you highlight some areas where investors get tripped up in the natural resource sector?

CAF: The number one way is their fear of volatility. If you look at the equity markets today, we're talking about unprecedented volatility. I always use as an example a scene from "Rambo III" where Sylvester Stallone plays in the Afghani game, buzkashi. Have you ever seen this game?

TGR: No.

CAF: Omar Sharif does in "The Horsemen," too. Buzkashi is the forerunner of polo. Two teams on horses go at each other. They play for the body of a dead lamb, and the goal is to get the body and ride it around the other team's goalpost. The riders carry whips, and the rules are that there are no rules. So if you're a rider who manages to pick up the carcass, the other team can try to whip you so hard that you release it. That's what investing in natural resources is like today.

TGR: As nasty as it sounds, I'm not sure the parallel is clear.

CAF: You get yourself a position in gold or silver, and the next thing you know, someone is driving the price down and trying to convince you that the bull market is over, it's all over. They're trying to get you to sell your gold for cheap. Or as we saw last April, you have a bunch of people trying to pump the silver market. They have a variety of institutional reasons why you can make money from silver, so they put together an exchange-traded fund and run it up. And when it hits the high, they sell out.

So whether it's the pump or the dump, people try to talk you in at the top and get you to sell at the bottom. Their systems use powerful, powerful technology and psychological techniques to encourage people to fall for these things, so it's very easy to get tricked into the short-term swings or to be so frightened by them that investors decide to just sit in bank deposits and Treasuries.

So volatility is with us, and with volatility comes all sorts of games that magnify the swings in the market. In this environment, it's very important to have a good sense of where you want to go, understand what the values are, and not let yourself be tricked by short-term volatility or talked out of the market. Earlier I mentioned the example of precious metals between 2003 and 2008. The long-term primary trend held during that time, but there were plenty of short-term swings, where gold went down 20–30% and silver 50%. So if investors can keep their heads, stick with the primary trends and see the dips as opportunities to buy, there are great things to be done.

TGR: Thank you for your insights.

Catherine Austin Fitts, president of Solari, Inc. since 1998, publishes The Solari Report, hosts its website, serves as managing member of Solari Investment Advisory Services, LLC since 2006 and of Sea Lane Advisory, LLC, which she co-founded. In 1991, Fitts founded Hamilton Securities Group, Inc., a broker-dealer/investment bank and financial software developer with offices in Washington D.C., San Francisco and New York, serving as the firm's president until 1998. She has designed and closed more than $25 billion of transactions and investments and has led portfolio and investment strategy for $300 billion of financial assets and liabilities. In addition to being an investment adviser and entrepreneur, Fitts has served as an investment banker and government official. Having joined Dillon, Read & Co. Inc., a Wall Street investment bank in 1978, she was managing director and member of the board of directors when she left in 1989 to become assistant secretary of housing and federal housing commissioner at the U.S. Department of Housing and Urban Development during the administration of George H.W. Bush. A graduate of the University of Pennsylvania (Bachelor of Arts in history, 1974) and the Wharton School (Master of Business Administration in finance, 1978), she also studied Mandarin Chinese at the Chinese University of Hong Kong, attended summer schools at Harvard (1969) and Stanford (1970), and spent a sabbatical at MIT (1995). Fitts publishes a column, "Mapping the Real Deal," for Scoop Media in New Zealand as well as a blog on solari.com. She's also published The Myth of the Rule of Law or How the Money Works: The Destruction of Hamilton Securities Group in 2001 and in 2006 Dillon Read and the Aristocracy of Stock Profits. A regular speaker and talk show guest, Fitts' next engagement will take her to Indian Wells, CA, for the Cambridge House California Resource Investment Conference Feb. 11–12, 2012.

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