I. The Economy & Financial Markets

For many years I have predicted that the “slow burn” would continue. As we begin 2017, the heat has been turned up dramatically. The financial coup d’état drained trillions of assets from sovereign governments, pension funds, municipal and community institutions, and households. Falling interest rates have compounded these losses.

Now, the debt growth model is over and the cost of capital for these existing institutions is rising. It has become more difficult for some to “kick the can.” It is impossible for others. What remains in the existing institutions are liabilities.

We are currently witnessing an acceleration of “controlled demolitions” of existing liabilities as pension funds, insurance companies, and businesses must renegotiate or abrogate their contracts. Sovereign governments – who have the capacity to print currency and to issue more debt – must engage in a deeper re-engineering of government assets and operations.

The most important question before the United States is whether or not we will re-engineer the return on investment to taxpayers of government investment, credit, contracts, appropriations and regulations from a negative to a positive return. If we do, we will create explosive wealth. If we do not, we are in for a long, harsh financial squeeze at best…or civil war at worst; perhaps even a repeat of the “rape of Russia.”

In our 2015 Annual Wrap Up (and in numerous recent quarterly and annual wrap ups), the Solari Report focused on the growth of a new, networked economy which we call Global 3.0 and the reinvestment of funds shifted through the “financial coup d’état.”

In this year’s report, we have chosen to focus on the traditional industrial economy of Global 2.0 and to ponder how the demolition of liabilities will be managed in 2017 and beyond. But much is happening — including continued growth — in Global 3.0, so we’ll mention some of the highlights.

Given Brexit, the change in the US administration and the upcoming European elections, 2017 will be a year of transition. Looking down the road over the next 5-10 years, we face a wide variation in what is possible. If we succeed in coming into balance with the environment and make a successful transition to a multipolar world — including the implementation of new technology in productive ways — investors will enjoy significant opportunities. If we do not, the risks will continue to rise.

Will the Dow rise to 30,000 or fall to 10,000? Either scenario is a possibility.