I don't think I can recall ever being more disgusted in public... and certainly not at an investment conference. On Wednesday, I attended the famed Ira Sohn Investment Research Conference in New York City, which benefits pediatric cancer. The conference was good and I'm glad I went... but one presentation made me want to vomit.
It was Steve Rattner – the New York financier turned OBAMA! "car czar." Listening to him tell one lie after another about the bankruptcy of General Motors was bad enough. (And believe me... I know a little bit about GM's balance sheet, having been the first analyst anywhere to predict the carmaker's bankruptcy as early as 2005.) But having to listen to this scumbag lecture me about the evils of "income inequality" was truly more than I could bear.
This man was personally implicated in bribing New York state pension officials (but hasn't been indicted yet). He made close to $500 million via his private-equity fund (Quadrangle), while his investors underperformed municipal bonds. This guy lives in a $15 million home on Martha's Vineyard and in the same Fifth Avenue apartment building as George Soros. This is a guy who flies his own plane... whose wife is the leading fundraiser for the Democratic Party. This is Arthur Sulzberger Jr. and Michael Bloomberg's best friend. And Barry Diller's. This guy spent his entire life in the rarified world of Ivy League colleges, investment banks, and New York City's most elite social circles.
And yet... even with all of these advantages, he ended up accused of bribing New York State pension officials to get them to invest with his private-equity firm. (By the way... I have to hand it to OBAMA! on appointing Rattner as the "car czar." OBAMA! knew about the corruption charges, and he appointed Rattner to restructure General Motors anyways. After all, who better to steal from bondholders than a crook? And now, Rattner was going to lecture us, the great unwashed, about "income inequality." It was simply unbearable...
After spending about 20 minutes congratulating himself on the bailout of GM (which cost taxpayers roughly $80 billion and bondholders roughly $27 billion), Rattner put up a chart he seemed to believe indicated rich people in America were making far too much money. I let out a loud "Boooo...."
Really, it was more of a moan of agony. I just couldn't take anymore. How could such a person ever have been allowed to reach such levels of power and influence? How could an idea as obviously repelling as government-directed income redistribution ever be discussed at an investment conference filled with thousands of capitalists?
Rattner's response to my loud boo was remarkable. In his most condescending, the-government-knows-best tone he said: "I hope you're joking." As if to even question the role of government in redistributing the wealth of our society made me some kind of a mental invalid or moral outrage. I replied, in a much, much louder and more hostile tone: "YOU'RE THE JOKE."
When I write about not recognizing my fellow Americans... and feeling like I live in a country called Amerika, I'm talking about the Rattnerization of our country. This guy is the very embodiment of the term "limousine liberal." He wants to raise your taxes because his income is now all sheltered. And he thinks he knows how to use your money far better than you do. In his mind, he's doing you a big favor when he raises your taxes.
As the whole global warming thing falls apart (hard to believe it has lasted this long), guys like Rattner need a new slogan. They need a new calling – a new, better, and simpler reason to motivate voters. Their cry will be "income inequality." The free market has failed, they say, because some people are getting very, very rich. And Rattner knows well the 50% or so of the people who no longer pay federal income taxes will believe income inequality is a problem (instead of the result of a wonderful technological revolution). And they will support every possible measure to correct "the problem." This will keep people like Rattner in power for a long, long time. Look for Al Gore's next movie to be about income inequality. You think I'm kidding. But I'm not. Rattner even has a hockey stick chart, just like Gore did, showing that income inequity is soaring... and threatening to destroy us all.
The rest of the conference was great, by the way. All of the other speakers were successful investors, most of whom manage billions. Said David Einhorn of Greenlight Capital:
How long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts – that is, by the printing of money?
You might recognize these two core questions. I've been asking them since December 2008 in my newsletter. They are the two most important questions in finance and global politics. I am afraid – more afraid than I have ever been – that not only do our politicians not know the answers to these questions, they don't even care to think about them.
What scares me the most isn't that we have a huge fiscal problem, it's that our politicians have come to believe we don't need to balance our budgets, insist on banking discipline, allow companies to go bankrupt, or even require people to pay their debts because we can always print more money. This is how paper money systems have always collapsed. And how great empires have always ended.
By the way... not many investors know this (and David Einhorn didn't mention it either), but Alan Greenspan himself attempted to quantify the answers to those key questions regarding sovereign debt. He published the answers in a little-read financial journal in 1999. I've read it. Several times. The answer is, sovereigns can borrow as much money as they want, safely, as long as they keep at least one year's worth of foreign debt service (principal and interest) in hard currency reserves. The U.S. has about $800 billion in reserves: oil, gold, and euros. We owe foreign creditors roughly $2 trillion in the next 12 months. That's very, very dangerous.
Normally on Fridays, I do my best to introduce you to an investment strategy – something you probably haven't tried before, but could really improve your results. Today, I'd like to encourage you to try short selling. Yes, really.
I know you're unlikely to ever try shorting a stock. But in February, I told my subscribers it was time to hedge our portfolio. We sold off a few long positions and started adding short positions each month. Currently, I have buy recommendations on eight stocks and short-sale recommendations on six stocks. But almost all of our long positions are "hedges" – designed to do well in the event of a crisis. I believe our short positions will vastly outperform our long positions over the next 12-18 months.
I told my subscribers back then if they weren't willing to sell stocks short to protect themselves from the possibility of a big correction in the stock market, they should simply put half of their portfolio in short-term Treasury bills, through the exchange-traded fund SHY, and the other half in gold bullion. This way, they'd be hedged against a monetary crisis and have plenty of liquidity to buy stocks after a crash. And frankly, I think the crash is coming even faster than I expected. Now, I know, every writer you read probably claims to have predicted the European currency crisis. But here's exactly what I wrote in the February issue of my newsletter:
What will happen next? You should already know. Sooner or later the poor quality of the credit will be exposed. Italy's lenders will take huge loses. Asset prices in Italy will collapse. Interest rates will soar. The same will happen across the euro zone. And the euro will be exposed for what it really is – just another paper money scheme. No different than John Law's bank or Bear Stearns' subprime CDOs.
But what about the U.S.? When will the real quality of U.S. credit become apparent to our creditors? How long will our paper currency scheme last?
The consequences of a currency crisis are so horrible I often sit and think to myself... I must have this all wrong. Things can't possibly be this bad. But then I look at all of the numbers again. I've spent my entire career following the numbers and reaching my conclusions based on the numbers alone. They've never led me astray. They've given me the confidence to reach correct conclusions unthinkable to other analysts. Given the hard choice between a reality that's hard to accept and a delusion that's impossible to trust, I'll pick the reality. I hope you do the same.
Sure, I know Greece lit the fire, not Italy. But Italy's time is coming, trust me. And these problems are so big it hardly matters which sovereign borrower is at risk of default next. They are all going bankrupt. Still, I fear 90% of our readers haven't yet either moved to a cash/gold position or taken any significant short positions. I think they're making a horrible mistake. The global credit crisis isn't over. And it won't be until the world's sovereign borrowers prove they're capable of servicing and repaying their debts. The largest sovereign borrower is the United States, and our debt level is completely unsustainable. More and more investors are going to realize this – as was apparently to me at the Ira Sohn conference.
In our flagship advisory – Stansberry Investment Advisory – we're recommending short-selling five major U.S. corporations and an ETF that holds 20-year U.S. sovereign debt. We will soon add more positions to our short book. Each of these short positions are companies we believe are either: 1. Frauds, 2. Incapable of servicing their debts, or 3. Completely obsolete. I have more confidence in our short portfolio today than I have ever had at any time in my career. These are all "sure things," just like General Motors was when I first recommended shorting it in early 2006.
Here's what I hope you'll do... Subscribe to our flagship advisory. Read the January, February, and March issues carefully. If you don't agree nearly every warning we've given has been timely and on the money, just ask for a refund. On the other hand, if you agree with our facts and logic, take a long look at our current short recommendations. Try shorting one of these stocks (or all of them).
Even if you only short one share, just try it. You might discover that shorting allows you to hedge the risk of your long-held equity positions and stay in the market when you might otherwise be forced (by fear) to sell high-quality investments. Assuming you own high-quality, blue-chip businesses, positioning even just 10% of your assets on the short side can give you a substantial amount of insurance against another big fall in stock prices. You'll never understand how valuable shorting can be until you try it. To find out about the Investment Advisory and how access to my list of short positions, click here.
New high: Altius Minerals (ALS.TO).
In the mailbag... a letter from a subscriber you'll have to read to believe. He's all in favor of "income redistribution." When did we all move to Russia? Send your best shots here: feedback@stansberryresearch.com.
"I often find your analysis of the markets to be perceptive. I have made some money by buying and selling at your recommendation. This is good. However, your political commentary is distressing and offensive... I know that you think that the 10% of the wealthy deserve to have 50% and more of the assets and income in this country, but that is not the country I grew up in... Obama does understand that a redistribution of wealth is imperative if this country is to have a future, and I am sorry that you think this is just socialism or communism, but it is just good, common sense... By the way, I am a graduate of the University of Chicago Graduate School of Business, and I have learned through experience and education that the denizens of that school are just a bunch of 'free market' adherents and were full of baloney, and were just apologists and legitimizers for the greedy and the crooked. I am not an idiot. I have just smartened up, and I wish that you would grow up also." – Paid-up subscriber David Preefer
Porter comment: You'd love Steve Rattner. I can introduce you. You guys can decide how much money we all "deserve." And how many assets we should be allowed to keep. You, Rattner, and Wesley Mouch. You can save us from the evils of other people being richer than us...
Just to be clear, I don't think any citizen of the United States "deserves" any amount of wealth or income. I don't think people "deserve" health care, either. Or school lunches. Or college tuition. Or subsidized mortgages. Why not? Well, for starters, you can't "deserve" a good or a service. All of these things – from mortgages to health care – have to be provided by someone. And the only way to motivate folks to provide you with your wants is through trade or force. I prefer trade. Guys like you and Rattner and Mouch are happy to use force. I find that despicable. It's tyranny dressed up like charity. And the self-righteousness that always seems to go along with these horrible ideas – like you telling me to "grow up" – nauseates.
Let me tell you about growing up. The first lessons I can remember my father teaching me was that nothing in life is free and life isn't fair. I knew from the age of about seven if I wanted something I was going to have to work to get it. I also knew someone else would always have it easier or better than me. That's life. Frankly, I've never considered (or cared) how much money or income my neighbors have. It's none of my business. Likewise, I don't think it is any of your business (or the government's) to know those things about me. That's how a civilized society should operate – your affairs should be yours alone. For the vast majority of our history, that's how America operated, too. But not any more. Today, we're stuck here in Amerika with people like you and Steve Rattner.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
May 28, 2010