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John Galt Research Introduction A forecast into the future, with quantitative models that are precise and accurate. This has been the result and output of our research and analysis. Over the next few pages we will interpret our findings and provide insight into what our analysis says you should consider as a business executive, leader or investor. What are cycles and why do they matter? If you think about what constitutes a cycle, it is applicable to almost everything in life. From a micro perspective, the most fundamental building blocks of matter have cyclic aspects to them, in that atoms contain electrons that move in energy shells of varying distance around protons and neutrons – they operate in cycles. Now scale up as far as we humanly can conceive and think of our universe and solar system. Through astronomy and scientific discovery from the enlightenment age, we know that planets, stars, moons, solar systems move in cyclical patterns as well. If we know that from micro all the way up to macro things operate on cycles, it isn’t inconceivable to believe that everything in between operates in cycles as well. To further explore, we can look to current society and the reality that economics and life in general operates from the same calendar driven play book. Weekly and biweekly paychecks start the consumer lifecycle, in which non-durable goods and services are consumed. These components then feed into the monthly and quarterly business cycles that then feed into the market and macro economic data that moves in quarters, years and decades. These of course also parallel and feed the political cycles that occur in yearly, two year and four year cycles. These components holistically result in cycles of global affairs and war that occur in years, decades, centuries and more. By understanding the cyclical patterns that have statistical significance, fundamental regression analysis can be leveraged to determine the strength of relationships between patterns and cycles. In scenarios, in which cycles and patterns can be identified and determined to statistically significant, a reality that cycles have peak and down periods can be observed. With this observable reality, we can forecast with incredible accuracy the directionality and severity of expected future movement. We have used these analytical techniques to create forecast models that are both precise and accurate for equities, macro econometrics, indices, currencies, commodity prices and many other data types. In 2012, we’ve been able to structure our models into a visual analysis that provides unique insight into the sequence of events that will occur. Before discussing our forecast; however, we must first frame a more fundamental understanding in human behavior. When we finally completed our analysis and visuals, we stepped back and asked the question: What makes our methods unique and why haven’t others done the same? The answer to this question was harsher than we realized. In reading John Paulson’s book, The greatest trade ever, it became very apparent that if everyone could see that a crash is about to occur, it wouldn’t be a crash. It is the human behavior aspect that separates the market fundamentals from reality, and is also what George Soros has spent a lifetime honing this concept in the form of his Theory of Reflexivity that was published in his book The Soros Lectures. Soros has made much of his fortune on the fact that human behavior will create additional inflation to asset bubbles until a negative feedback loop is substantial enough to highlight the separation between fundamental value and market value, at which point a significant deflation will occur.

Measurement The forecast models constructed for this publication selected based on the high accuracy, precision and continuity of the data sources available. For the equities, bond and corporate bonds yahoo data was used. For the bank prime rate, the Federal Reserve of St. Louis was used. Each data set was compared against three sources and in all scenarios was determined to a 100% match, and no missing data. This passes the requirements for accuracy, precision and continuity.

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research Methods Spectral Analysis: determines the amplitude of cycles present at regular frequency intervals from a single time series. If the interval is 1 then the result is similar to a Fourier Analysis. If the frequency is more than 1 then it has finer measurements than Fourier Analysis. Multivariate regression analysis: establishes the statistical relationship between one independent variable and two or more dependent variables. This form of analysis uses variance between independent and dependent variables to determine correlation and significance based on probability within specified confidence levels. For our analysis, we’ve used a 95% confidence level, which subsequently means a 0.05 beta. Visual representation for cycles: by using a proprietary algorithm derived from the methods above and additional factors, we’ve established a model that creates what we’ve termed as the economic heartbeat, which visually shows future patterns based on all known patterns, effects – both external and internal to the data, and finally the strength of the prior. Considering our opening comments, cycles and patterns exist in everything; however, they are only measurable by the known data that is available. The graphic below highlights both our theory and window of known data and the subsequent cycle types that can be created through our model.

This diagram illustrates that various types of cycles that could occur and be identified. As previously mentioned; however, cycles are only identifiable through the continuous data that exists. As such, many of the cycles indicated in the chart are simply unidentifiable and unpredictable, as the beginnings and ends of the cycles aren’t observable through data. The most obvious cycle that this reality applies to is that of the beginning and end of time cycle that is represented by the red line and text. The shaded box represents the window of time, which there is data to track the beginning and ends of various cycles. One very important point to highlight is that this chart is not a time series – it simply represents the size via duration between a beginning and end of any given cycle, which also indicates how many cycles can fit within other various cycle types.

In the next few sections, we will review and interpret the results of our analysis with respect to the forecast model explained above. These models are created using algorithms that identify and visualize observable cycles in a given dataset.

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research 2013 Forecast Models Equities In charts 1 and 2, the S&P 500 is expected to see a low and a potential crash in the second week of February. In addition, when looking at the long range forecast, a larger crash is expected in mid year 2015. Chart 1: S&P 500 (2012-2014)

Chart 2: S&P 500 (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research In charts 3 and 4, the Dow Jones is expected to see a low and a potential crash in the second week of February. In addition, when looking at the long range forecast, a larger crash is expected in mid year 2015. Chart 3: DJIA (2012-2014)

Chart 4: DJIA (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research In charts 5 and 6, the NASDAQ is expected to see a low and a potential crash in the third week of February. In addition, when looking at the long range forecast, a larger crash is expected in mid year 2015. Chart 5: NASDAQ (2012-2014)

Chart 6: NASDAQ (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research Debt In charts 7 and 8, the 5 year treasury yield is expected to see a high in the second or third week of February. In addition, the thick gray bands indicate that rates will remain – on average – at this higher point throughout 2013 into 2014 and will observe significant volatility in 2014, then level out in 2015 and 2016. Chart 7: 5 year treasury yields (2012-2014)

Chart 8: 5 year treasury yields (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research In charts 9 and 10, the 10 year treasury yield is expected to see a high in the final week of February. In addition, the long range forecast indicates a slow descent from the observed high that will extend into 2016. Chart 9: 10 year treasury yields (2012-2014)

Chart 10: 10 year treasury yields (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research In charts 11 and 12, the 30 year treasury yield is expected to see a high in the final week of February. In addition, the long range forecast indicates a slow descent from the observed high that will extend into 2016. Chart 11: 30 year treasury yields (2012-2014)

Chart 12: 30 year treasury yields (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research In charts 13 and 14, the AAA Corp Bond Rates are expected to see a high in mid February. In addition, the long range forecast indicates a reset in 2014, but then a gradual ascent through 2016. Chart 13: AAA Corp Bond Rates (2012-2014)

Chart 14: AAA Corp Bond Rates (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research In charts 15 and 16, the Bank Prime Rates are expected to see a high in mid February. In addition, the long range forecast indicates a slight reset in 2014, but then a gradual ascent through 2016 to a higher but steady state. Chart 15: Bank Prime Rates (2012-2014)

Chart 16: Bank Prime Rates (1999-2016)

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research 2013 Forecast Conclusions and Summary In the forecast models provided on pages two through ten of this document; we expect 2013 to be the first step in a major cultural and economic shift in America. With equity markets expected to slow substantially, and ultimately deflate in value, it will create a shockwave that will need to be absorbed by other assets classes. In our paper, America’s Reflexivity, we discuss how the laws of entropy apply to our US economic closed system. In past scenarios, a deflation of one asset class was simply absorbed by another class. For instance, when the dot com bubble resulted in the equities market crash of 1997 – 2000, the deflation of that asset class was absorbed by the real-estate asset class. This of course led to the inflation of yet a different asset class, the real estate bubble, which crashed in 2008-2009. If we look today across the various asset classes, as we’ve provided in our forecast models, we see that there aren’t any commonly traded asset classes that are projected to absorb the transfer of value. In analyzing the debt markets, near-term and long-term debt, we see that the rates associated to treasury bonds are expected to increase in Q1. This will have a significant impact on all other facets of the economy. Treasury bonds are commonly used in almost every financial model to determine the risk free rate. Risk free rate is a value that is used to determine other debt rates, valuation models, forecast models and much more. An increase in the in the treasury rates will result in a higher fixed payment for the federal reserve and government to service the rolling debt or treasury bonds that they currently hold – more specifically, the short term notes that are expected to roll into either new short or long term debt. This will ultimately force the Federal Reserve to do two things: (1) evaluate interest rates and (2) slow down the buying of treasuries. Additionally, an increased rate infers that the demand for bonds will be reduced and is a soft indicator that investors might not pursue the traditional flight to safety if the equity markets slow down. This shift in the treasury yield also signifies a deflation in a type of asset bubble that is not commonly discussed or titled as such, but is significant – the government is an asset bubble. The Federal Reserve has been using treasury notes as the mechanism to inject or inflate valuations of the US economy. Their tactics involve purchasing treasuries, of all types, and holding that debt on the Federal Reserve balance sheet. In this scenario, the Federal Reserve is subsidizing the role of US businesses by supporting the perception of money being returned to the system. In the past, money has been returned to the system by way of businesses reinvesting to yield future value. They often reinvest capital in many ways, such as hiring employees based on demand, purchasing new equipment to reduce costs and yield a higher profit, purchase software to optimize cost or increase revenue, etc. All of these techniques result in capital or currency transferring from a company to some other entity – whether it is an individual or another firm. The primary difference between the Federal Reserve subsidy tactics and business capital investment - and the exact reason why it doesn’t work - is that businesses invest real dollars and the Federal Reserve is manipulating figures on a balance sheet that doesn’t adhere to common accounting practices. The next asset class that would traditionally have absorbed value from a deflating asset class is that of the corporate debt market, of which our forecast model on page 9 provides the short and long range forecast for corporate AAA bonds. As indicated in that model we expect to see a rapid increase in the bond rate in Q1 that will extend into 2014, then level and begin a gradual ascent through 2016. This is very significant both in terms of the fact that this class will not absorb value and it supports the correlation to the Federal Reserve serving as the business capital investment subsidy. Businesses can be structure in one of three ways: equity, debt or some mixture of equity and debt. When firms look to improve or grow a business, they evaluate all three options to determine which option is the best to yield the greatest future value for the firm. When corporate bond rates increase, it removes debt as an option to fund improvement and growth.

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


John Galt Research As corporate bond rates increase, it will be too expensive for most organizations to afford the increased fixed fee associated to servicing the bond. In addition, we also know from previous forecasts associated to the equities market, it will not be beneficial in 2013 to issue new stock to the equities markets as the value of the equities markets will be substantially lower than it will be in the future. This lack of options will force businesses to look deeper and more internally into the cash available to fund improvements and growth. This, intern, will create higher demand for cash, which is of course is the most likely asset class to absorb value from all of these deflating asset classes. We will discuss this concept of demand for currency or the US dollar in more detail over the next few sections. The final class we forecasted is the one that impacts both businesses and consumers. In the forecast model provided on page 10, we have analyzed the short and long-term forecasts for bank prime rates. In these models we observe that the bank prime rates will increase in late February, with a slight possibility to delay until March, and will stay high through most of 2016. The prime rate increase will be felt by consumers as they try to restructure already high mortgage payments, or purchase a new car, deal with revolving credit, etc. This ultimately will cause fewer dollars to be in consumer pockets, which of course is the same as a reduced supply of dollars and will contribute to the increased demand for dollars – general supply and demand concepts apply. In addition to this expected change in consumer pockets, there will be yet more constraints to the consumer’s available dollars as a result of the tax changes that took effect January 2013.

Unintended Consequences and Outcomes All of these factors collectively create a severe squeeze on consumer buying power, and over time that translates to reduced demand for goods and services. If reduced demand remains, for a prolonged period of time, businesses that supply goods and services will be forced to evaluate their pricing models to preserve or improve profits. Those firms that are publicly traded will be forced to do this evaluation sooner than private firms. As firms evaluate product and service pricing, they will also evaluate cost structure – as many have already started. As firms make short term decisions to preserve profitability we will see an increase in unemployment, which of course contributes to reduced consumer spending. All of these factors support that GDP will continue to decline over the next several years. We also see the migration out of equities and debt markets and into cash as a very significant shift. This will create an interesting cultural paradigm in America. The general consumer, low to middle income, will experience a reduced cash supply for the reasons provided in the analysis above. The wealthy class will simply observe a change in asset class – from equities and debt to cash. This increased separation in social class will further support a deflationary period in the US, where consumer behavior prefers cash as opposed to investing for future return.

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2013 Macro Forecast| Copyright by Reuben Vandeventer February 1, 2013


2013 John Galt Research Macro Forecast