Iguanas are falling – dead – out of my palm trees. And it's starting to be a real problem...
It has been 35 degrees in Miami over the last two nights. Most homes here – including the one I live in – don't have heat. My front yard consists of a beautiful, 50-year-old, walled garden, featuring giant royal palms, some of which were alive before the house was built in 1949. Iguanas love my garden. There are at least a dozen of them around the house. Normally, these big lizards don't do much, except eat bugs and scare folks who aren't used to them. But they're cold-blooded. Cold weather kills them. And they've been literally dropping from the sky all week – frozen and dead. Dead lizard storage wasn't what I had in mind when I got this place...
Maybe I should box up all of the dead iguanas in my garden and send them to Al Gore. Contrary to Hollywood and Washington D.C. propaganda, the polar bears are thriving. It's the Miami iguanas that are in trouble....
We have been warning for more than a year that the U.S. government will soon face a liquidity crisis and be forced to devalue the U.S. dollar by 50% or more. We've been running our Treasury like a banana republic. And soon we'll have the debt and a currency crisis worthy of a banana republic.
To very briefly summarize the problem, the U.S. Treasury has moved its obligations "down the curve" – meaning most of its debts will come due in a very short amount of time. This reduces the carrying costs of our obligations, but leaves us vulnerable to disaster if our creditors decide not to "roll over" our obligations.
I estimate the Treasury will need to borrow at least $3 trillion in 2010 to cover our current deficit (which will likely be more than $1.5 trillion) and repay older debts coming due. In total, the Treasury must find a way to refinance more than half our total debt in the next four years – while at the same time fund record annual deficits that now exceed 10% of GDP.
I don't believe these debts will be repaid or refinanced. In fact, I don't believe it's even remotely possible. Our largest creditor, China, buys around $600 billion in Treasury obligations each year. The rest of our creditors buy another $250 billion or so. Americans, in total, save about 5% of GDP – or around $500 billion. So assuming demand remains robust for our debt obligations and every penny of our domestic savings are invested in Treasuries, we could borrow up to around $1.4 trillion each year – at the very most. Currently, our annual deficits exceed this amount. Meanwhile, we've got to find a way to repay or refinance more than $4 trillion in the next three years. It can't be done. And that's why the Fed has bought more than $300 billion of Treasury securities in the past year.
Now, if inflation heats up (and it will as more and more of our debt is "monetized" by the Fed) what are the chances our creditors will either demand much higher interest rates (which we can't afford) or simply abandon the Treasury market? Some people say there's no chance our creditors will abandon us. Really? What does America export that they can't live without? Hollywood movies? Ha, ha, ha...
To me, it's a dumb question. It's already been decided. Our creditors aren't going to abandon the dollar – they already have. Central banks were net buyers of gold last year for the first time since the end of Bretton Woods in 1971.
And here's another question to ponder... On Friday, the government announced it would offer the largest amount of so-called TIPS bonds ever – $10 billion worth. These bonds offer full protection from inflation. After this auction, the TIPS market will reach $600 billion in size, or a little less than 10% of the entire Treasury bond market. Maybe our foreign creditors are more worried about runaway inflation than they're letting on in the press... I can tell you this for certain: In the entire history of phony paper money, runaway government spending, progressive taxation, and inflation, you can't find a single honest minister of finance. You will know the government is lying to you about the fate of our currency because their lips will be moving.
In my latest PSIA, "The Only Trend that Matters in the Next Decade", I tell readers my two favorite ways to profit from lying politicians. I recommend one long and one short trade... I expect both to steadily outperform the market for many years. If you haven't already made these two trades the backbone of your portfolio, you're missing out on a huge profit opportunity. To sign up for PSIA, click here...
Meanwhile... today's headlines were all about China. China surpassed the U.S. as the world's largest auto market after vehicle sales jumped 46% in 2009. Sales of passenger vehicles, buses, and trucks jumped to 13.6 million in China, the fastest pace in at least 10 years. In the U.S., sales slumped 21% to 10.4 million – the fewest since 1982.
Strangely though... even though automobile sales are reportedly soaring, Chinese gasoline sales are declining. Mmnnn... How could that be? Legendary speculator Jim Chanos says China's government is buying automobiles and hiding them in massive fields in the countryside. (If anyone can find evidence of this on Google Earth... please pass it along to us. You will be rewarded.)
Here's another potential problem... The Chinese government has urged banks to build high-end residential and office properties in Beijing and Shanghai – many more than can be rented profitably. According to the CEO of one of China's most successful property developers, "We can see more and more empty buildings across the whole country."
Andy Xie, one of the world's most-respected China economists, said the nation is doomed to face bubble after bubble due to its "get rich quick" mentality.
The overwhelming desire for getting rich quick dominates every nook, fissure and strata of Chinese society. Such desires cannot be fulfilled; the terrible logic of economics is that money must circulate. Creating bubbles can temporarily blind people to this logic, as overvalued assets substitute for money to fill psychological needs. This is why, whenever conditions permit, China seems to have asset bubbles.
How's that any different than America, Andy? Oh, I know. China builds bubbles with profits and savings. We build bubbles with other people's money. Which economy do you think will survive?
Rather than betting on China... How about a safe way to earn a 50%-100% dividend? Editor George Huang has discovered a tiny, New Jersey-based company that could pay the largest dividend in stock market history. George thinks the dividend will be as high as 100% of the company's market cap (60% on the low end). And because this company is so small, few research outfits have any idea this market anomaly is occurring. To learn more about the FDA Report, and this amazing dividend opportunity, click here... (Today is your last day to pick up a subscription at a deep, once-a-year discount.)
Chesapeake Energy recently drilled a monster well in the Barnett Shale gas field in Fort Worth, Texas. It's the largest of the 14,000 wells drilled in the region. The well produced 13 million cubic feet of natural gas per day... 36% more than the next-largest Barnett well.
Dave Leopold, Chesapeake's operations manager, laid out the economics for the Fort Worth Star-Telegram:
If the well eventually produces 10 billion cubic feet of gas and fetches an average price of, say, $6 per 1,000 cubic feet (a level close to today's prices on the gas futures market), it would generate $60 million in revenue. It cost about $2.6 million for drilling and completion (which includes fracturing) of the well.
That's a 2,200% return on investment. Chesapeake's well is 71 times larger than a typical Texas gas well. However, Matt Badiali, our resident geologist, found one even better...
The well he visited was 4,000 times larger than the typical Texas gas well. It flowed about 54 times the volume of Chesapeake's well. Granted, he had to travel halfway across the world to see it, but the trip was worth it.
The best part is, nobody but S&A Resource Report readers understand how big it is and how many of these wells are out there. This stock, which Matt expects to "add a zero to its current market cap," is currently trading underneath his buy-up-to price. But it will probably exit that range soon. To get in ahead of the crowd and invest in what will likely be the largest energy discovery of our lifetimes, click here...
New highs: Fairholme Fund (FAIRX), iShares Hong Kong (EWH), Central Europe & Russia Fund (CEE), iShares High Yield Bond Fund (HYG), Burlington Northern Santa Fe (BNI), Freeport-McMoRan (FCX), Kinder Morgan Energy Partners (KMP), Altria (MO), Sequoia Fund (SEQUX), United Parcel Service (UPS), Portfolio Recovery Associates (PRAA), Prospect Capital (PSEC), Dana Holding (DAN), Northern Dynasty (NAK), Encore Acquisition (EAC).
In the mailbag... a good suggestion about how to short U.S. government debt. Remember this year's resolution: Send us a note. We read them all. Don't let your subscription expire (ever)... or at least not until you've been published in The Digest. All notes here: feedback@stansberryresearch.com.
"You can do a 1X short of TLT thru TBF.... no need to go to the double-short TBT. This is very important to many of your readers, like myself, who invest thru ERISA plans, where you can't 'short' directly." – Paid-up subscriber Steve Paine
Porter comment: That sounds like a good idea. Thanks for pointing it out.
"I cannot believe that you are charging that outrageous amount for an Alliance membership. I paid $5000 and that was so over priced my only justification to pay that cow choking amount was that I could use it as a tax deduction. So, it's safe for me to say that since I've made the price of my membership 30 times over in the last 1 1/2 years that anybody that doesn't get in now at double the price will look back in a year and ask themselves why didn't they take the chance and by now would have recouped the outrageous amount many times over. Like they say 'Hind sight is 20/20'. Well, I'll give you the hindsight in advance, if you buy now you'll look back and say 'it was the best investment I ever made.'" – Paid-up subscriber Jeff Eason
Porter comment: It's funny to me... Most people, it seems, are more willing to pay thousands of dollars for luxury goods like cars, bags, and hotel rooms than they are to pay for investment research that will help them make more money. So you can think about it in two ways: You can either see $10,000 to join the Alliance as expensive... or you can see it as an absolute bargain. It's certainly vastly cheaper than trying to get your own CFA designation or hiring a hedge-fund manager.
"I'd love for you to comment on very high quality corporate bonds. I assume much of what you said applies to them as well (high inflation would be bad for them). Perhaps low quality bonds would be better as they will more easily be able to repay with inflated currency, so buying bonds selling at 50 due to fear of default. Treasuries and corporate are obviously different, so your thoughts would be appreciated as people probably have portfolios with corporates as well." – Paid-up subscriber David G.
Porter comment: High-quality corporate bonds are similar in price and yield to government bonds – which means they're no bargain. I'd tread cautiously. To me, the best way to buy corporate bonds is to wait until you can get them for 50 cents on the dollar – or less. These opportunities arise across the entire market once every 10 years or so. And you can usually find special situations if you look carefully – though right now you'll find precious few such opportunities, thanks to the number of guarantees Uncle Sam has passed around.
The most recent opportunity to buy corporate bonds at a huge discount was the fall of 2008, when our own Mike Williams loaded up with several issues that earned us more than 100% in a few months. If you're not reading his newsletter, True Income, you're missing out on the smart way to play the bond market.
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida and Baltimore, Maryland
January 11, 2010
Dead iguana storage... A gift for Al Gore... Danger ahead for the U.S. Treasury market... Big new TIPS issue... Lying liars... A bubble in China?... Safe 50%-100% dividend?...