The local gun shops and sporting-goods stores can't keep ammunition in stock. They get daily deliveries, and the stuff flies off the shelves. One local sporting-goods storeowner went on TV the other night and said, "It's not just our little town. It's the entire country. There's an ammo shortage everywhere." With all the gold, guns, and ammo people are buying, it's as though they're gearing up for some type of social breakdown.
I've been warning you about possible runs on life insurance companies... Today, a Bloomberg story says life insurance policyholders are selling like crazy. According to Brian Pardo of Life Partners Holdings, "Senior citizens 'are really seriously in financial trouble' with no real way to raise cash besides selling assets that they may not want to part with 'at garage-sale prices.'"
Pardo is in the life settlement business. He buys life insurance policies at a discount, pays the premiums until the seller's death, then collects the proceeds. Last year, a $5 million policy went for $1 million. This year, it's more like $600,000. Prices are falling because demand from life settlement companies fell last year as the credit crisis came crashing down...
Which leads us to another problem with life insurance companies: direct commercial real estate investments. According to a recent report by investment company Bridgewater Associates, commercial real estate investments make up about 10% of all life insurance company investments. A new report by Deutsche Bank says the delinquency rate on paper backed by commercial real estate assets has more than doubled since September. The delinquency rate in commercial real estate is set to surpass the peak rate of the last recession. This is even worse than it sounds...
The commercial real estate debt market is almost three times as large as it was in the early 1990s, when "close to 1,000 U.S. banks and savings institutions failed," and "lenders took about $48.5 billion in charges on commercial real-estate debt... representing 7.9% of such debt outstanding," according to the Wall Street Journal. Deutsche Bank expects a 5%-6% delinquency rate by the end of next year.
Life insurance companies, like all other commercial real estate lenders, will suffer. Sooner or later, this will hit the headlines, which could cause a run on whole-life insurance policies, which have a savings component attached to them and can be cashed in early...
That is unless Barton Biggs, Morgan Stanley veteran turned hedge-fund manager, turns out to be right. Biggs thinks the S&P 500 could surge 30%-50% this year. He thinks the bailouts and stimulus packages are "an important first step in the right direction." If Biggs is right about stocks, life insurance companies – and anyone who owns stocks – could get a reprieve.
I don't know about 30%-50% on the S&P 500, but I can't deny the incredible deals on great stocks right now. Procter & Gamble is selling for 11 times earnings, a dirt-cheap price for a fantastic business. Even TJX Companies, which I recommended to Extreme Value readers in December, is up more than 30% and still selling for less than 12 times the company's estimate of 2009 free cash flow. Berkshire Hathaway, Automatic Data Processing, UPS, Altria Group, Philip Morris International... all the best businesses are on sale.
I think it's naïve to believe bailouts and stimulus packages will work magic on the economy. Then again, maybe I'm naïve. Maybe I'm just giving in to the pervasive gloom and doom. I keep talking about how our banking system is inherently insolvent... and yet here it is, hit by a meteor and still clunking along. Yesterday, Dick Bove, a well-known bank analyst, said 97% of U.S. loans are paying interest and principal, and 98% are at least paying some interest. I had to agree with him when he said the banks don't need any government help. That's exactly right. Just leave them alone, and they'll work it out by themselves.
I keep saying our currency's intrinsic value is zero. And yet, the more of it I get, the better off I am. And they still don't take South African Krugerrands at the grocery store. Now I'm talking about life insurance companies going bust, yet all the life insurance stocks are up since I said to short them and New York Insurance Superintendent Eric Dinallo says solvency is not a problem in the life insurance industry.
Oh well. Nothing happens overnight. I'm sticking to my guns. I think the banks, the currency, and the life insurance companies have even worse times ahead than what they've already endured.
At the other end of the spectrum from Barton Biggs, and more dire in his warnings than me, is Ron Paul, the only honest man in Congress. Of the current crisis, Paul told the Financial Times, "This is the big one." He says the U.S. dollar will implode in one to four years, and we're looking at a 15-year depression. Because the government refuses to let the economy correct on its own, he says, "We are likely to see an inflation depression. In the 1970s, we had stagflation, but not depression. Inflation depression is what you see in Zimbabwe."
New highs: none.
If you don't start sending us more feedback, I'm going to do something drastic... like write about George Soros. Don't make me do it... You don't know what I'm capable of! E-mail us your comments, questions, and other feedback to feedback@stansberryresearch.com.
"If we start giving the government the power to 'control those companies that could cripple our economy since they are too big to fail,' where do we draw the line? Imagine Microsoft has a meltdown. For the last 6 years a disgruntled employee has buried a virus in every copy of Windows and tomorrow morning, every computer on the planet refuses to start. Can you picture the outrage in Washington. 'How could we let a company run practically every personal computer in the world!!' 'How can one company control almost every software business application in the world!!' Where was a our government to protect us? Couldn't we see this coming? Or imagine if Warren Buffett is wrong? How could we let one powerful investor control billions of derivatives! How is he any different that some of these 'too big to fail institutions. If Berkshire Hathaway were to fail, the ripple through the financial world would be catastrophic! We need to break up Microsoft, and severely limit Warren Buffett, in the interest of protecting the American people. And the world. Right now! We need to move quickly on this regardless of track record. It's for your own good, America, trust me, I am here to help. Where do we draw the line? Of course, I am being sarcastic. I believe government should mind their own damn business. The problem is, they believe protecting me is their business... and I have zero chance of their business failing!" – Paid-up subscriber Mark Tobino
Ferris comment: Atlas Shrugged is coming true, right here, right now.
"Hey Dan, I fully agree about you're remarks about the Sopranos and a job for Remington Sturm Ruger and S&W. But with the Gestapo like Feds worrying about Ron Paul bumper stickers, maybe we should'nt be so vocal!! After all, unfortunately they have the power, and the jack boots!" – Paid-up subscriber Mike McNamara
Regards,
Dan Ferris
Medford, Oregon
March 26, 2009