Greek 'deal' breaks down... Bernanke's confused... Buffett's 'most dangerous of assets'... Gross on zero-bound interest rates... Sjuggerud: 'This is your moment'...
One day after the supposed Greek austerity deal, whereby the country would receive a 130 billion-euro bailout, things fell apart... European finance ministers deemed the proposed 3.3 billion euro in budget cuts insufficient. They're calling for an additional 325 million euro in cuts for this year's budget. We'll see a revised deal before the March 20 deadline, when Greece owes 14 billion euro in debt repayments.
The euro, which rose on yesterday's flimsy announcement, is back down to less than $1.32.
The flood of money on its way to save Europe (just yesterday, the Bank of England added 50 billion pounds to its bailout efforts) is the latest iteration of why you want to avoid most bonds today.
Global central banks have printed trillions of dollars to boost their economies. These bailouts usually solve the immediate crisis, i.e. keeping a bank from collapsing. But they've failed to resolve the larger issues, like high unemployment and falling home values... And worse, this cheapening of global currencies is punishing savers and forcing money into longer-dated and riskier assets.
Interest rates are already near zero. And they'll stay there through at least 2014, according to Federal Reserve Chairman Ben Bernanke. He also said the Fed would consider more quantitative easing should the economy not improve from here.
Even Bernanke admits the folly of his ways, though he's in denial of the current situation... "[O]n current, reasonable expectations about policy... the U.S. federal deficit will be unsustainable within 15 or 20 years at the most," Bernanke told the Senate Budget Committee. He urged Congress to clarify the U.S. fiscal plan as soon as possible.
It's clear we have no hope of sustaining our current deficit spending. From Porter's October 2011 issue of Stansberry's Investment Advisory...
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The European crisis is far from over. And as I've said many times, the endgame will be a bailout of the entire European banking system organized and financed by the Federal Reserve. Such an action would be hugely inflationary and could have severe political consequences in the U.S. |
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Likewise, I don't believe we have even begun to scratch the surface of the real financial problems we face in the United States. Think about the big picture... As of today, Americans owe $55 trillion in combined federal, state, local, corporate, and personal debt. The interest on these debts comes to more than $3.6 trillion each year – more than the entire federal budget. I don't believe debts of this magnitude (almost 400% of GDP) can ever be repaid – or even financed – with sound money on legitimate terms. |
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The resolution of these debts will be painful – whether it's through inflation (which seems to be the path today) or default. I believe it's a fatal mistake for investors to forget that these challenges remain unmet. Rather than beginning to reduce our debts, we continue to add to them at the federal level at the fastest pace in peacetime history. We are a nation that has become completely addicted to debt. And those kinds of addictions do not end happily. |
You've heard our thoughts on inflation and bonds over the years. In short, we think inflation is coming... And we're long-term bearish on the dollar. Recently, many of the world's greatest financial minds also commented on the situation. Now, legendary investor Warren Buffett and Bill Gross (manager of the world's largest bond fund for money-management firm PIMCO) have weighed in on current fiscal policy and its effect on investors...
In his most recent annual letter to Berkshire Hathaway shareholders, Buffett called bonds "among the most dangerous of assets." He wrote...
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Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. |
His point: If the payments of interest and principal are created out of thin air, they're not as valuable. "High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments. And indeed, rates in the early 1980s did that job nicely," Buffett wrote. "Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label."
To echo Buffett's point, why would you lend someone money at current rates? (Buying a bond is simply lending an entity money.) One incentive for lending money at low rates is potential capital gains (meaning interest rates fall and bond prices rise). But yields are already near zero. They can only fall a small amount, if any. If you have no chance of capital gains, your principal and interest will be repaid in devalued currency. This leads us to Bill Gross' comments...
In an op-ed for the Financial Times, Gross discussed the danger of "zero-bound" interest rates...
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What incentive does a U.S. bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is 2 per cent of par and the downside substantially more? |
Low rates are supposed to coax money into longer-dated and riskier assets. But Gross argues they may actually be doing the opposite – keeping funds in savings rather than bonds. Interest rates are near zero in both long- and short-term debt, and bonds offer little chance for capital appreciation. That creates a "liquidity trap," Gross says, because the bond market represents "too much risk and too little return."
With so much risk in today's market, what should you buy? Our colleague Steve Sjuggerud says you should get into U.S. housing. As opposed to Gross' duality of "too much risk and too little return," Steve says buying a house today is "the greatest opportunity you will have in the next 10 years in investing – as far as risk versus reward." In today's DailyWealth, he writes...
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My friend, the time has come. It is time for you to buy a house, preferably a primary residence. |
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No excuses. No delays. Just figure out how to make it work. |
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Already have a house? Go get another, and rent out the one you're in. |
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The point is, banks are finally willing to get rid of stuff. And investors (like my friend) are willing to step up. Buyers and sellers are finally seeing eye-to-eye. This is it. This is your moment. The opportunity for the really great deal is just about to end. |
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You see, your downside risk is extremely low, as houses are selling way below their replacement cost and you're essentially getting the earth itself "for free." |
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With homes dramatically below replacement cost AND with mortgage rates at record lows (below 4% for a 30-year mortgage), houses in the U.S. are more affordable than they've ever been. |
Throughout Steve's career, he's shown subscribers how to make big returns without taking big risks. Now... Steve has compiled a set of reports on investments that can give you incredible gains... but come with virtually no risk of going down. Click here for the details.
New 52-week highs (as of 2/9/12): iShares Dow Jones U.S. Home Construction Fund (ITB), Invesco High Yield Investment Fund (MSY), ProShares Ultra Technology Fund (ROM), Virginia Gold Mines (VGQ.TO), V.F. Corp (VFC), Anheuser-Busch InBev (BUD), Microsoft (MSFT), and Philip Morris International (PM).
It's a light mailbag today... Just someone thanking us for huge returns. How have we righted or wronged you? Let us know here... feedback@stansberryresearch.com.
"Yep I bought 1500 shares of [Hershey] Dec. 07 and as of yesterday am up 69.8%. Thanks Porter." – Paid-up subscriber Art Aitken
Regards,
Sean Goldsmith
New York, New York
February 10, 2012