Another record day for corporate debt

It has been an interesting morning around here... I got a phone call from a very senior Wall Street executive I've known for a few years. He's a former managing director at a big investment bank, and he still knows lots of senior traders. He was having dinner last night with one of the biggest traders in the world of so-called "agency debt" – those are the obligations of Fannie and Freddie. The trader asked him to pick up his briefcase. He could barely lift it. It was full of bullion. The trader said, "I've installed a safe in my apartment, and I'm slowly converting most of my assets into bullion..."

Ordinarily, I'd say that's a sign of the top in gold. But this guy simply knows more than anyone else about how much government debt is out there and how badly mispriced it is relative to other, safer investments. Besides, all of the other traders in his firm think he's nuts. We'll know it's time to sell gold when we host a gold conference and it sells out – more than 10,000 people.

Or as Doug Casey likes to say, when "Newsweak puts a golden bear on its cover tearing apart the New York Stock Exchange." Remember, these cycles last a long time. BusinessWeek's famous "Death of Equities" issue was published in 1979. It took 20 years before the Financial Times wrote about "The Death of Gold" in 1999. My bet is we still have five or 10 years left before there's another new low in the Dow/gold ratio. It normally bottoms at 1 – where one unit of the Dow is worth the same as one ounce of gold. And it peaked in 2000 at more than 40.

On Monday, we pointed out triple-A-rated government bonds now trade at higher prices (and lower yields) than U.S. Treasuries. While we don't really expect this anomaly to last, it certainly is evidence the marketplace believes government debt is more likely to be downgraded than certain sound companies.

Today, there is an even stranger anomaly: 10-year swaps are now "trading through" Treasuries, meaning at a higher price and a lower yield. These swaps have the same creditworthiness of double-A-rated corporate bonds. Thus today, the market seems to think that, in the next 10 years, U.S. Treasuries will be more of a credit risk than double-A-rated paper. And that's why at least some of the world's most knowledgeable traders have begun to carry gold bars in their briefcases...

These currency problems aren't unique to America – not at all. In fact, we think the euro will fall apart first. In January, Steve Sjuggerud told his True Wealth readers to short the European currency, saying it was obviously doomed:

If you don't save Greece, if you kick Greece out of the euro instead, then you're faced with more hard choices. Which of the other PIGS do you boot? This would create extraordinary uncertainty. When the possible outcomes are 1) extreme weakness to finance bailouts or 2) extreme uncertainty, where you don't know what countries are in or who's in charge – it's time to bet against the euro. – Steve Sjuggerud, January 2010, True Wealth

The euro hit a 10-month low today on more bad news surrounding the PIGS (Portugal, Italy, Greece, Spain)... Credit ratings agency Fitch cut Portugal's credit rating for the first time, down one notch to AA- with a negative outlook. Portugal's deficit is 9.3% of GDP, more than triple the 3% European Union mandate and much higher than a typical AA- credit risk. Concerns also mounted that the EU must enlist the International Monetary Fund to aid in a Greece bailout. UBS deputy head of global economics, Paul Donovan, put it best... Greece "is going to default at some point. If Europe can't solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn't work?" Steve's trade is up nearly 15%.

In his latest issue, Steve tells readers about "quite possibly the best investment [he's] ever seen." This investment has never lost money in a calendar year going back 30 years. It has beaten stocks with much less volatility over the same period. And it has zero correlation with the stock market. Steve has actually worked with a creative financial firm to create this investment. And due to certain guarantees (we can't give away the details in the Digest), this investment has no downside risk. It's the ultimate market insurance. As Steve wrote, "When the whole world falls (like in 2008), this still makes money." To sign up for True Wealth and access Steve's latest recommendation, click here...

The new housing numbers came out today... Purchases are down 2.2% to an annual pace of 308,000. There were fewer home sales last month than at any time since recordkeeping began in 1963. That's despite an extension of the government's tax credits. Thus, demand for housing would seem to be at nearly an all-time low.

Meanwhile, the inventory of unsold homes increased to 9.2 months' worth, the highest since last May. One reason for the fall in demand and growth in inventory: The average mortgage rate increased to more than 5%. So purchases are down, inventory is up, distressed inventory is soaring (more than every third house for sale is in foreclosure), and it's more expensive to finance a house. You'd expect prices to fall, a lot, right?

Wrong. That's not the case. The median home price of a new home in the U.S. actually rose 5.2% to $220,500 – the biggest gain in two years. Interestingly, in spite of all of the problems around the world with banks, real estate, and government finances, hardly a market in the entire world – even U.S. residential homes and mortgages – is lower now than it was a year ago. And the price of just about everything else in the world is up substantially, especially all of the commodities related to economic growth and expansion, like oil and copper. How can this be?

It's the miracle of paper money, my friends. No matter how bad things get, as long as the U.S. government wants to bail out every large bank and as long as it's willing to paper over the big holes in our economy, the prices of things will continue to go up. That's the miracle (or the curse) of inflation, depending on your point of view.

What happens when the system is massively reflated? First and foremost, the losses on the banks' books disappear. Richard Bove, who is probably the best banking analyst in the world, says the big bank stocks will rise another four times because of falling loss reserves. Those folks counting on deflation while ignoring the huge inflation right in front of their eyes are waiting for Godot.

New highs: Fairholme Fund (FAIRX), Washington REIT (WRE), PowerShares Dynamic Biotech Fund (PBE), Johnson & Johnson (JNJ), McDonald's (MCD), Altria (MO), Intel (INTC), Procter & Gamble (PG), Banco Latinoamericano (BLX), Longleaf Partners (LLPFX), Sequoia Fund (SEQUX), Philip Morris (PM), Automatic Data Processing (ADP), Portfolio Recovery Associates (PRAA), Dana Holding (DAN), Carpenter Technology (CRS), A. Schulman (SHLM), American Axle (AXL), MAG Silver (MAG).

In the mailbag... a reader who thinks government-led health care will increase our standard of living and solve our fiscal problems. Hooray for OBAMA! Send us your opinion on taxes, the government's fiscal deficits, or our fearless leader: feedback@stansberryresearch.com.

"I read many newsletters. This issue of the Investment Advisory has to rank as one of the best I have ever read. I am going to e-mail customer service and inquire if it is possible (1) to buy single copies of this issue or (2) if I can copy it attaching information on how to subscribe. In any case: I plan to reread 'The Greatest Danger' to make the historical information easy to recall from my 75-year-old mind." – Non-subscriber Elaine Ward

Porter comment: Thank you, Elaine... I've spent a lot of time recently trying to show my subscribers what I see in global economics. I believe these macro forces are becoming vastly more important – unfortunately.

"I would like to add my voice to those commenting on how much they've learned from S&A. PSIA stands out in this regard. The most helpful issues taught me to be skeptical about good stories. Porter, I disagree with you often, but you force me to think. That's why I read you..." – Paid-up subscriber JJ

"So Google kicked you out. I had a preview of it in the recent days. My opening page is set up on Google; several times when I wanted to go first to your site and clicked on the link in my browser I would get the message: Google cannot find the link, check the address. It seems that for Google it is easier to maintain independence and fight censorship in China than in it is own country (Amerika). What a bitter paradox. Sergey Brin's parents left the Soviet Union to raise their son as a free man here, and now, in the worst Soviet traditions, he is acting as a pawn of our government in its effort to silence people who tell things this government does not like." – Paid-up subscriber Michael Brailovsky

Porter comment: I'm not willing to go that far yet, not until I know more about why they have begun to refuse our advertising. But... it certainly seems like a strange coincidence.

"One part of your Digest was of particular interest to me. You said, 'Nearly every single major nation – the so-called G7 – will have debt-to-GDP ratios that exceed 100% by 2014. The exceptions are Canada and Germany – at least if Germany decides not to bail out Greece, Spain, Portugal, and Italy.' Canada and Germany. What makes them unique in managing their economies? Only 2 nations ahead of the game. Am I mistaken, or do both of these countries have national health programs? Yet, they still, at least according to you, seem to be managing things quite well." – Paid-up subscriber George F. Fordham

Porter comment: Our current health care system is a debacle. We spend more than any other nation on health care, yet we have only middle-of-the-road results in objective measures like child mortality and average lifespan. Your question seems to indicate you believe allowing the government to have more control over the industry is likely to make it more efficient.

I have no reason to believe that's true and lots of reasons to believe it's not. If you truly desired better health care for more people in this country, you could do four simple things:

1. Vastly increase the number of doctors by allowing cheaper and less comprehensive educational programs. When I have a sinus infection, I don't need a medical degree and a six-year internship to diagnosis the problem and write a prescription. Likewise, when I have a broken arm or hundreds of other obvious and uncomplicated issues. While there is certainly a need for expert doctors who have been thoroughly trained and are capable of handling the most complicated sorts of problems (like cancer or rare infectious diseases), our current system is set up to make every doctor the best in the world. This obvious reform of our medical system will never happen because the doctor's union – the AMA – will never allow it. It's the AMA's job to make becoming a doctor next to impossible to ensure high wages for existing doctors.

2. Demand all hospitals and doctors post information regarding pricing and outcomes on their websites. Force hospitals and doctors to charge the same rate to each patient regardless of insurance coverage. Today, it is far easier to find accurate reviews and pricing on hotels than hospitals. That's insane. By making prices public, the consumer will be able to choose the best and most affordable solution, putting pressure on hospitals to deliver both quality and value. And making hospitals and doctors charge each patient the same price will finally make a true market for health care instead of a socialist regime based on collectivism.

3. Allow a truly national market for health insurance to exist and make sure there are good alternatives to going without any coverage. By allowing people to pay cash for health care at the same price as insured patients, you will put market pressure on the insurance providers to deliver both quality and value.

4. Finally... while I don't personally use any prescription drugs, I think it's economic suicide to limit their patent life to less than 20 years. We've extended copyright protections for Mickey Mouse to 100 years because we understand the economic importance of property rights. Why would we sacrifice these rights for drug compounds that take decades to discover and billions to make? Drugs would be vastly more affordable – for everyone – if drug companies were allowed to earn their profits over several decades instead of just one or two.

These are the kinds of changes you'd expect the government to make if it were truly interested in building a better health care system. I don't believe the government has any interest in actually achieving any of these things. The government simply wants what we all want individually: more power, a larger income, and more assets to oversee.

"Thank you for all you do and for sincerely speaking the truth. I have been trying hard to learn all the lessons you teach regarding investment and so far I've beat the market handily, which is more than many can say, I reckon. I am 46% owner, along with a partner, in a small business started in 1999, which grew to 25 people by 2007. We have kept our cash flow positive, in spite of a huge downturn in our business. We had to let five of our people go in late 2008, but we been able to hold steady since then.

"Last night's 'health care' vote convinced me that there is no reason for me to continue trying to run a business when the cards are so heavily stacked against me. When Pelosi spoke of 'Life, Liberty, and the pursuit of Happiness' – when what she meant was that it was I who was supposed to provide that happiness for her through my labor – I finally broke. Something snapped. I am walking away. My shares are now for sale – best bid by April 15, which will be my last day of any productive work that benefits the government in any way.

"As I see it, the rest of my life should be focused on my family and the things that truly matter. I look forward to meeting you, as you will be one of my neighbors in the Rancho Santana community once your house gets finished. I've already got a condo down there." – Paid-up subscriber CB

Porter comment: I'm right behind you, CB. Give me one rational reason I'd continue to work 60-plus hours per week after 11 years of building this business when the government promises to take half my income now and the other half when I die? Why on Earth wouldn't I simply move to a no-tax jurisdiction, enjoy my $100,000 annual tax-free allowance as a nonresident U.S. citizen, and wait for the country to regain its senses? I promise you, we're not the only folks thinking the same thing.

And let me tell you, when U.S. bondholders realize the 50 million Americans who make up the real tax base aren't going to pay the debts, there will be hell to pay around the world. That's why, if you're going to leave, you'd better get your assets out now, while you still can.

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
March 24, 2010