It won't surprise any longtime reader of this daily e-mail (or my newsletter) that I don't trust governments. I would never willingly be a creditor to any government. But even I was surprised by the hijinks now being revealed in the Greek government's budgets. Get this... Greece didn't count most of its defense spending in its annual budgets because such amounts were state secrets. So almost 30% of its spending didn't officially "count."
Why on Earth would anyone loan to any entity (much less a government) that can't produce accurate financial statements? (By the way, the U.S. can't either. The government's own auditor won't certify the government's budgets.) And why does anyone believe a currency backed by a handful of insolvent governments will survive? Imagine if you're a German. How much of your savings are you willing to spend on such Greek nonsense each year before you finally dump the euro and start hoarding gold? The euro is pure madness. It's the ultimate expression of a world gone crazy for government debt. In 20 years people will ask, did you ever see a euro?
We wrote it, did you trade it?
If Greece gets bailed out, then the rest of the so-called PIGS (Portugal, Italy, Greece, Spain) will ask to be saved as well. The situation will look like the U.S. last year... with the authorities saving everything in sight. In short, it'll be a replay of what happened here, with the authorities sacrificing the value of the euro to save Europe's financial system. In 2010, the choices for the euro are 1) extreme weakness in the currency, as you sacrifice the value of the currency by printing money to save the PIGS, or 2) extreme uncertainty. – Steve Sjuggerud, January 2010, True Wealth
Since Steve's issue, the European Union agreed to bail out Greece. And Steve's predictions are coming true. The PIGS are under fire, and the EU will likely print more money to save the foundering countries, too.
In a recent op-ed for the Financial Times, George Soros agreed with Steve. He said the EU's lack of a treasury for solvency issues (it only has a central bank) will eventually doom the euro. He thinks Greece will be fine, but the ensuing bailouts will bring chaos...
[M]akeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large a portion of euroland to be helped in this way. The survival of Greece would still leave the future of the euro in question. Even if it handles the current crisis, what about the next one?
What's the only bullish sign for the euro? It's hard for this many traders to be right, at the same time. According to Bloomberg, traders' bearish bets against the euro are at an all-time high. The spread between short-term rates in the euro and dollar is at its highest since September. And large speculators had 59,422 more bets the euro would fall than bets on a gain – the same group was bullish as early as December. When that many traders are lined up on the same side of the "boat," a countertrend whipsaw is virtually certain.
But as soon as the euro bears get whipsawed... look out. Once the currency cracks, Steve's readers will make a fortune. He's discovered a trade that will return higher multiples than any other way of shorting the euro. In his most recent issue, he said you still have time to buy before the crash. Also in his latest issue, Steve said his favorite gold indicator is flashing buy, and he's constructed a trade that has returned more than 100% the past four times this signal flashed. To sign up for True Wealth and access these two, super-safe trades, click here...
New highs: Berkshire Hathaway "A" Shares (BRK-A) and "B" Shares (BRK-B), Keyera Facilities (KEY-UN.TO), Procter & Gamble (PG), Tejon Ranch (TRC), IMS Health (RX), Shaw Group (SHAW), Northern Dynasty (NAK), Rex Energy (REXX).
In the mailbag... a good question about "The End of America" – my catch phrase for the coming devaluation of the U.S. dollar. Plus, lots of great feedback on our Report Card. Please send us a comment about our work. Good or bad, we read them all: feedback@stansberryresearch.com.
"I have spent a lot of time evaluating your research on the 'End of America' situation. At this point, I just hope you are wrong. (Although, I am afraid you may be on target.) How do you expect the 'End of America' to affect the following 'every day life' areas?
"A) House values now and in the future?
"I struggle with a few scenarios:
1) Buying a house with today's dollars only to see the debt inflated away in the future (5% for 30 years in today's dollars)
2) Higher future rates putting pressure on future house values because people cannot afford the higher valuations.
3) The replacement costs of future housing should skyrocket at the material required to build a house will cost considerably more due to inflation.
"B) Tangible 'Stuff' like cars, appliances, etc. – It seems it would be advantageous for people to buy big ticket items before the 'End of America' scenario plays out? Would they be better off paying cash or borrowing?
"In closing, I truly appreciate your candid evaluation of the events of the world and how you see them playing out. I would like to see you expand this to show how it could affect your readers in a day-to-day scenario. I think it would really illustrate just how dire the situation can or will be." – Paid-up subscriber K.C.
Porter comment: The most important thing to realize about a currency crisis is the U.S. dollar will lose a tremendous amount of its purchasing power. You might think that's great if you've got lots of U.S. dollar obligations – like a mortgage. But the reality is, the consequences of this kind of massive debt repudiation can't be predicted... and will be extremely bad. Extremely bad.
For example, the economy will slow tremendously because of the disruption to the currency. Common services you take for granted today will become unavailable. Your credit cards will not work. There won't be gas at the gas station. The grocery store will be empty. State and local employees won't be paid on time – and may stop working. So while you might think there's a silver lining to a currency crisis, there's really not. The consequences of such a crisis will far outweigh any of the short-term profits you might think you've accrued.
Yes, technically, the smart thing to do now would be to borrow as much money as you can (at fixed interest rates) and then use the money to buy hard commodities – like gold, silver, oil, and farm land. Someone with a large income or a lot of wealth might be able to pull off this trade. My friend Doug Casey, for example, is essentially making this trade via large land holdings in Argentina and big investments in cattle. But Doug isn't borrowing any money. And here's why you probably shouldn't either: You can't know how the rules will change – but you can be sure they will.
For example, in the last big currency collapse I witnessed first hand (in Argentina in 2001/2002), the government simply closed all of the banks and forced a conversion of U.S. dollar savings into pesos. The government literally stole billions of U.S. dollars from its citizens. But that could never happen here, right?
Wrong. It already happened once in 1933. FDR stole about $250 billion worth of gold during the Great Depression. And discussions are underway right now in D.C. about taking all 401(k) savings and "exchanging" them for new government securities to "insure" the retirements of the American people. If the banks are all going bust because they can't afford the fixed-rate loans they made before the crisis, what's to say the government won't simply allow the banks to unilaterally change interest rates on all of their existing loans? It could surely happen.
The point is, we're facing a major, major crisis. I can't tell you when the walls will come crashing down, but I can tell you it will happen at some point soon. Our government is bankrupt. Eventually that's going to be very, very bad for anyone who isn't prepared to get out of harm's way. The best advice I can offer you to survive is:
1. Hold gold bullion in a safe and secure place. Don't tell anyone else you own it or where you've hidden it. (Personally, I'm fond of self-storage units outside the U.S.)
2. Do your best to get out of debt. If you can't, make sure all of your obligations are in fixed-rate, nonrecourse loans. If possible, borrow from a foreign bank.
3. Don't keep a penny saved in paper currency.
4. Own real estate – particularly productive real estate, like a farm. If possible, buy the same outside the U.S.
5. Get a second passport. It's not as hard as you might think. If you've got $250,000 to spend and know the right people, you can even get a diplomatic assignment from another sovereign government, making you nearly invulnerable to the risk of currency/travel restrictions common during a currency crisis.
6. Stockpile anything you can't live without – food, water, ammunition, medicines.
I'm sure this sounds crazy to most of you. But think about this. In Argentina, the banks were closed for six weeks. There was no way to get cash. There was no way to use credit cards. People were selling their real estate for 10 cents on the dollar – but only if you had U.S. dollars. That's how desperate they were for money. And when the banks re-opened, 75% of everyone's cash savings had been stolen by the government. Plus, prices on every kind of basic commodity had tripled. The middle class was completely wiped out – and may never recover.
That will happen here at some point. I promise. And the way things are going, it will happen sooner than anyone expects.
"Reading in the annual review about your Put Strategy Report moves me to write you. I was never a subscriber, but your announcement of the publication was part of the inspiration for my own put strategy. In October of 2008, I was looking at huge losses. I had carried a lot of leverage on companies that I followed and had generally held for years. This proved very profitable in the two years leading up to 2008. In the vicious downturn of that year, I had lost my gains, my capital, and a considerable amount of borrowed money.
"My recovery since then has relied on two things. (1) I held on to my core positions and (2) I started selling put options. I sold puts on companies I'd followed and knew well and which had already crashed by 50, 60 or 70%. I kept puts open for all the available months as the year 2009 unfolded. And I generally covered these puts when I had realized 80% of the maximum possible gain on a position and rolled into new positions. When the market dipped I took profits on my open put positions and occasionally I also closed positions at a loss. My gains exceeded my losses in a ratio of 10:1 in 2009. Along with the recovery of my core positions, selling puts has brought me back from the financial graveyard. While I didn't follow your specific advice, your promotion alerted me to the great opportunity that existed for selling puts at that time. So thanks very much..." – Paid-up subscriber David Roytenberg
"The best investment I ever made is not a stock or bond. It is my membership in Alliance. In early 2008, I ran for cover. Fearing the world was coming to an end, I went into hibernation (mainly to money market funds). I would periodically dip a toe in the equity water and usually got burned.
"With the advice of Doc Eifrig, I bought the BUD arbitrage and made some money. In hindsight, this recommendation by the Doc gave me faith that the sky wasn't falling. The outcome of this trade gave me the confidence to start investing in equities again. It was such a slam-dunk.
"In early 2008, I started getting an education about bonds from Mike Williams. I had never before invested in bonds. It was a revelation for me. It felt like I was back in night school. From Feb. 2008 to Dec. 2008, I invested a significant percent of my total cash in Mike's recommendations. It was during this period that the whole bond market (as well as stocks) imploded. I was showing losses in my bond purchases, but I hung in there with Mike's encouragement. As bond prices plummeted, I bought more. I believed in Mike's bond-picking judgment. Even though two of my bonds are in Chapter 11, I have faith that these situations will end well. Even considering these defaults, I am showing a profit of 67% to date in the bond price (plus significant interest payments).
"And the best is yet to come as maturities for my bonds occur. This is the real pot of gold. In the meantime, I am collecting interest ranging from 24% to 35% annually. I will be getting 54% annually from one bond when (not if) it emerges from Chapter 11. Some of these bonds will be paying me interest until mid-2016. Most importantly, I have learned investing patience from Mike. It has paid off handsomely.
"I have done extremely well with Dan Ferris's picks. His royalty recommendations have made me 67% since Mar. 2009 and climbing. I am learning a lot from Dan about the importance of value investing. Two of Matt Badiali's picks I still own are going gangbusters. One is up 98% since Mar 2009 and one is up 43% since Dec 2009. I now own a portfolio of stocks and bonds that is paying me substantial dividend and interest income regularly.
"I also own some speculative 'kicker' stocks. I am retired and now own a portfolio that I can be comfortable with for all of my needs (simple though they may be) in addition to capital gains potential. I am sitting pretty thanks to you guys. Thanks, and keep it coming." – Paid-up subscriber James DiCaprio
"I have been an Alliance member for a little over a year and am 68 years old. Through the years, about 40, I have spent a lot of money on newsletters. Most are not worth the paper they are printed on. Looking back I cannot remember losing money on any of your recommendations that I invested in. The hands down winner is Tom Dysons pipeline reco. I admit it was hard to buy in what appeared to be a crashing market but his compelling arguments gave me the courage to buy. He got me in near the bottom at some fantastic interest rates. Also the rec. to reinvest the dividends was super. Most of the pipelines I bought have gains of 100% or more, the others are not far behind. I plan to keep reinvesting the dividend until inflation kicks in then maybe I can weather the storm better buy cashing the dividend.
"This part of the e-mail is directed to Porter. I am amazed at the vicious e-mails that you receive. I think that is because some of the people that subscribe to your service expect to become millionaires over night. They probably lost some money on a trade and are outraged. These people don't understand that the stock market has risk and loses are part of trading. They probably should not be in the market at all. Please ignore these responses and continue the excellent reporting. You have no equal!" – Paid-up subscriber Carl Wolff
Porter comment: Thanks very much for sending these notes. It gives us a great sense of accomplishment to know our hard work is paying off for you and making a real difference in your financial affairs.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
February 22, 2010