Editor's note: Most of our team is in Santa Barbara today for our annual Alliance conference. We're hosting more than 300 of our lifetime members at the beautiful Bacara Resort. As such, today's Digest will be brief.
You know our thoughts on the U.S. Treasury and the debt instruments it issues. Perhaps you've seen a short video we made on the topic called "The End of America." In short, we're bearish. The U.S. is broke. We have a $1.3 trillion budget deficit. The current 2.2% yield on 10-year Treasurys is unsustainable. The government's irresponsible money printing will eventually lead to higher yields. We call this "the only trend that matters for the next decade." In the January 2010 issue of Stansberry's Investment Advisory, Porter wrote...
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This trend – toward higher interest rates in the United States – is the single most important trend in finance. The great bull market in paper money, central banking, and the faith and credit of the United States is over. After all, our leaders have no faith. And we have no credit. |
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We commemorate the death of the great bond bull in this issue. |
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The good news is, after a 30-year bull market in bonds (lower interest rates every year), most people don't believe higher rates are possible. Incredibly, despite the actions of our Federal Reserve, many investors still actually believe deflation is a real possibility. This gives us plenty of time to position our portfolio properly. |
Due to our beliefs that interest rates will rise and the government is broke, we recommend avoiding U.S. Treasurys... in any form. Fourteen years ago, the Treasury issued Treasury Inflation Protected Securities (a security whose principal increases and decreases with inflation). But these are a farce. The government controls the official inflation numbers, and therefore controls the price of your "TIPS." On the topic, we pose the following question...
Would you loan money to a friend at a floating interest rate and give him full power to set that interest rate? Your answer, we hope, is no. The government hopes otherwise... For the first time since it offered TIPS, the Treasury is considering offering a new security – floating-rate notes. Officials are scheduled to meet with the 22 primary dealers – including banks like Goldman Sachs and JPMorgan – to discuss the new issue on October 28. In theory, a floating-rate Treasury is wonderful. It would offer the safety of a Treasury bond and protection against inflation. But this is only in theory... Just like with TIPS, the government sets short-term interest rates. Our bet... these new issues won't pace the real inflation.
One month into his presidency, Obama created the Home Affordable Refinance Program (HARP), which lets borrowers with less than 20% equity in their homes refinance if Fannie and Freddie back their loans. It was a failure. So far, only 894,000 borrowers have used it. But now, Obama's bringing it back with some important changes…
Soon, everyone will be able to refinance and pull more cash out of his home. The main "enhancement" to HARP removes the current 125% loan-to-value ceiling for fixed-rate mortgages backed by Fannie and Freddie.
It failed once, and we bet it will fail again. HARP doesn't address the issue that nearly half of all borrowers are underwater. While their payments will be lower, they still owe more than the house is worth. And they won't pay.
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New 52-week highs (as of 10/21/11): SPDR Utilities Select Sector (XLU), Dominion Resources (D), McDonald's (MCD), Activision Blizzard (ATVI).
Porter squares off against more subscribers on Social Security in today's mailbag. Send your thoughts here... feedback@stansberryresearch.com.
"Your reply to my recent letter was yet another example of why I said 'arrogance of youth.' The implication was that I, and most other Seniors in my position [I turn 65 next month] have no real understanding of the 'Ponzi scheme' we UNWILLINGLY participated in for all our working years. I wholeheartedly agree with EVERYTHING you stated, except the fact that we are now participating in a 'crime' for extracting whatever pittance we can scrounge from the current system.
"You state that a retiree today has contributed [as a family] around $352,000 to the system but will withdraw $798,000, a huge 126% 'windfall' in benefits over his/her lifetime. Rubbish! The dollars I contributed in 1965, 1975, 1985, etc., are worth far MORE than the pathetic caricature of a dollar today, and the 'dollars' I will receive over the course of my remaining years.
"But one HUGE statistic you conveniently fail to mention is the very one you continually pound into investors today. That is, the statistic concerning the power of compounding one's wealth through time. Give me back what I contributed to this pathetic system and I will be more than thrilled. But... ..Also give me back the 40-plus yrs. of miracle compounding that wealth I would have achieved.
"This current system is rotten to the core, I fully grant that. Your reply though implies that I, and the millions in my age group, should now willingly forego any recompense because we are 'criminals' for now fully expecting to EXTRACT from, rather than CONTRIBUTE to, this same rotten system. So as I understand your reasoning, my generation, having supported America's aged and infirm for more than 40 yrs with our own 'contribution,' should now feel remorse for having the current workforce attempt to repay us, in worthless dollars today, for our support of the previous generation in much more sound money. Forgive me Porter, I'm just not that altruistic!
"Here's the challenge I present to you. Give us an ALTERNATIVE to the current boondoggle bankrupting our country. Don't characterize us as 'criminals' on the 'dole' because WE HAD NO OTHER CHOICE! There was NO OPT OUT available to us! And please, give me credit for having enough intelligence to understand how thoroughly, morally, bankrupt the current system is. I'm no idiot, and I don't believe for a second that William Sutherland is either." – Paid-up subscriber George Earhart
Porter comment: The analysis I cited was from the Social Security Administration. It was done using "constant dollars" – i.e. adjusting for inflation. Your point about the dollars you contributed being worth more is simply false.
I agree, as I wrote, that the promises made to you by the government should be delivered. In fact, what I wrote is that you deserve more than a promise from a Ponzi scheme. What I hope to accomplish is the alternative you're asking me to provide.
What I know is... if more Americans understood the real nature of Social Security, they would be far more eager to change it. Currently, it's impossible to even discuss changes to the system without putting yourself out of business.
"George is absolutely 100% correct, but being the arrogant jerk that you are you won't admit it. How are those wood chips in Canada doing for you?" – Paid-up subscriber Ed Chapman
"Can I get a refund on my subscriptions? I refuse to sit here and listen to some ass insult me. If I can't get the refund that is fine. Porter may need some of my hard earned (and yes it was EARNED) Social Security money to take his fancy trips. You can continue to go on TV and brag about what a great success you are but it won't be on my dime. I will not renew any of them. I will spread the word to all of the other old criminals out there like me on your view of us. Kiss my ass." – Paid-up Jerry Lowry
Porter comment: Jerry, proving me right is a funny way to argue.
Regards,
Sean Goldsmith
Santa Barbara, California
October 24, 2011
Live from Santa Barbara... This trend still matters... The new Treasury bond... Obama's plan to save real estate... Default near in California... More Social Security debate...