How would you like to earn 17% a year for the next two years on an investment that's 100% guaranteed by the federal government of the United States? To pull off this trade, all you have to do is understand one simple concept. And it's something you should understand anyway, because it's the foundation of paper-money economics.
How many of your friends and neighbors are struggling to find a safe place for their money right now? All of them. How many people need a very safe way to earn 17% a year – enough money to pay for most (if not all) of their living expenses? All of them. So how can you get in on this deal?
All you have to know is one little secret about how the banking system works. That's it. The situation is open to everyone who understands how to play it. You can literally earn more in dividend yields alone over the next two years – in an investment that's 100% backed by the federal government – than most other people will make with all of their investment returns combined.
What's the secret? I can sum it up for you right here: The government needs banks to lend more money and it can make them do it. If you know the right way to play the system, you can have the government's printing presses running right into your pocket.
How is this possible? The whole trade is a play on central banking. I don't want to waste your time with more economics than you need to know... but you need to understand the main difference between paper-money systems (like the one we have) and gold-reserve systems, like the kind we had prior to 1913.
Here's the bottom line: In paper-money systems, the value of bank reserves is set by central bankers. So when the central bank wants to make lending more profitable, it can simply lower the cost of borrowing reserves. This allows banks to lend more money and to make more money doing so. In a gold system, the cost of reserves (bullion) is set by the free market. That makes it much more difficult for governments to manipulate the economy. What does this have to do with earning 17% safely? Let me explain...
Right now, America's central bankers have set the cost of bank reserves at an all-time low. They want to make it easy for banks to create more money through lending. And they want to make lending as profitable as possible, so the banks can recoup their housing-bubble losses. As a result, the profit margin on lending money is at its widest point since 2003. Banks' lending margins have rarely (if ever) been wider, thanks to the central bank's manipulation of short-term interest rates. Now is the time to buy banks. But which banks should you buy?
How about a bank that doesn't take any principal risk (it only makes loans that are 100% guaranteed by the federal government), that doesn't pay any corporate taxes (it's a REIT), and that pays out essentially all of its earnings in dividends. The current yield is more than 17% annually.
The bank I'm talking about is called Annaly (NLY). Annaly is a specialized kind of bank – a "virtual bank." It doesn't have branches or take deposits. Instead, it simply pays other banks to borrow money over relatively short periods of time. On average, Annaly is funding its capital base using loans that expire in two years' time. Annaly then takes this money and buys mortgage notes (which offer 100% principal protection from Fannie Mae or Freddie Mac).
In this way, Annaly is borrowing over the short term (two-years) to lend for the longer term (mortgage notes). Thus, Annaly is a pure play on the yield curve – the difference between the price of money borrowed for the short term versus money borrowed for the long term. And the yield curve has rarely been steeper than it is right now, meaning Annaly is making record-setting amounts of money. Thanks to its corporate structure (it is a tax-advantaged REIT), Annaly is required to distribute 90% of its profits directly to its shareholders.
As long as the Fed continues to manipulate the economy by holding interest rates at absurdly low levels, Annaly is going to produce enormous dividends for its shareholders. You can see the company's current results for yourself, here.
One word of caution... The trick to keeping the profits you'll earn in Annaly over the next two years is knowing when to sell the stock. There's a simple formula we've used successfully over previous banking cycles that will get you out of the stock in plenty of time. We will definitely be selling at some point in the next 24 to 36 months – after we've collected another 50% or so in dividend income. If you want to learn more, please click these links to follow our work on Annaly in either Porter Stansberry's Investment Advisory or The 12% Letter.
Obama's new tax plan, effective in 2011, is projected to raise $1 trillion over the next 10 years.
Under the budget plan, the top two individual income-tax brackets will increase from 33% to 36% and 35% to 39.6%, respectively. And the long-term capital-gains tax rate will increase from 15% to 20% (except for those making under $200,000). Also, any profit paid to portfolio managers will now be taxed as income, not capital gains as it is now. Obama's plan also caps itemized tax deductions at a 28% tax rate (as opposed to one's highest income tax rate as is currently law). Finally, Obama's plan reenacts the estate tax, with a $3.5 million exemption and a 45% top tax rate.
The folks making these tax projections don't understand basic economics or human nature. You cannot force the top 10% of your population to pay for nearly all of the expenses of government – especially not a government of this size.
Why shouldn't the rich pay for government? Simple: There aren't enough of them. And the higher the marginal rate, the more incentive for them to stop working, cheat on their taxes, or simply move out of the country. The richest, most ambitious, and most mobile members of our society will not willingly pay more than 50% of their earnings in taxes for very long – especially not to a highly indebted, highly corrupt government that's dominated by special-interest groups.
Every country that has tried this approach has failed (and gone bankrupt). That's exactly what is happening in the U.S., too. The tax rates on the rich keep going up. The amount the rich pay in terms of total tax receipts keeps going up. But the total amount collected in income taxes is plummeting (last year was the worst year for tax receipts since the early 1950s). Sooner or later, our creditors are going to see our tax structure isn't working and is inherently unstable. You won't want to own dollars on that day.
Rather than lowering the total cost of government and spreading these costs more fairly across all taxpayers, the IRS seems to be stocking up for a more confrontational solution... According to a post on the Federal Business Opportunities website, the IRS is looking to buy shotguns:
The Internal Revenue Service (IRS) intends to purchase sixty Remington Model 870 Police RAMAC #24587 12 gauge pump-action shotguns for the Criminal Investigation Division. The Remington parkerized shotguns, with fourteen inch barrel, modified choke, Wilson Combat Ghost Ring rear sight and XS4 Contour Bead front sight, Knoxx Reduced Recoil Adjustable Stock, and Speedfeed ribbed black forend, are designated as the only shotguns authorized for IRS duty based on compatibility with IRS existing shotgun inventory, certified armorer and combat training and protocol, maintenance, and parts.
Our friend Whitney Tilson passed along this ad for Smith & Wollensky, in today's Wall Street Journal, offering to exchange food for stock certificates:
In what could be the biggest sign of a China bubble yet, Burton Malkiel, author of A Random Walk Down Wall Street, is starting a long-only China fund. If you're not familiar with Malkiel, he is a Princeton economics professor who preaches the efficient-market hypothesis. His best-selling book is a longer-than-necessary explanation of why you supposedly can't beat the market over an extended period of time. (Never mind the fact that many value-oriented investors have trounced the market's average return for their entire careers...)
In an interview last year, Malkiel said, "The only thing that is really important for economic growth is culture." He thinks the Chinese are fierce believers in free markets and expects the country will be larger than the U.S. in 20 years. When one of the most adamant critics of active portfolio management starts a long-only fund dedicated to the world's sexiest market, watch out below.
New highs: Sprott Resources (SCP.TO), Steak 'n Shake (SNS).
In the mailbag... lots of good questions about my warnings of the U.S. government's impending insolvency. Send your rotten tomatoes, err... umph... legitimate questions here: feedback@stansberryresearch.com.
"As usual your piece on the impending bankruptcy of the U.S. is interesting and well written. Maybe you are highlighting each taxpayer's burden for illustrative purposes, but it seems you are using it as an argument to show that the total debt can't be repaid (to which I agree). The problem is that you are excluding the taxes from corporations." – Paid-up subscriber Matt Calabro
Porter comment: I base my analysis on personal income tax because that's the government's largest source of revenue. Corporate taxes are easily avoided and are normally passed along to the final customer in any case. I believe studying what the individual taxpayer can bear in terms of income taxes is the best measure of a government's ability to repay its debts. And there's no way American taxpayers can afford an additional $200,000 to $400,000 in debt. That, of course, is only a rough estimate of today's actual debts owed.
Meanwhile, we don't have the political will to merely cease running trillion-dollar annual deficits. It is inconceivable that we will ever possess the political will to begin actually repaying our debts. And that means, at some point in the next 10 years or so, our country will suffer a horrendous run on its currency and a complete financial meltdown.
"Porter – EXCELLENT analysis as always. I'm amazed though that you didn't add one other calculation to your case regarding the debt of the U.S. – you mention the unfunded liabilities for Medicare, Medicaid, Social Security, etc but you didn't add the total into the debt number. You try to get a handle on what we currently owe with just the current 'mandates', but our unfunded liabilities alone which total another $52 TRILLION (that per the USA Today), far outweigh even our current out-of-control spending. Just wanted to point that out. Awesome job as always – keep up the great work." – Alliance member M.L.
Porter comment: Well... I don't include those estimates because I think it's too easy for people to pretend they don't exist. After all, we're not paying any interest on those potential liabilities yet and all of those promises can still be legislated away. The point I think is important to understand is, based solely on the money we have already actually borrowed, there is no possible way for us to avoid a default.
"I have been warning my friends about the dangers of the annual U.S. deficits since Ronald Reagan set the standard for fiscal irresponsibility in the '80s (While the Gipper did a lot of great things in office, he should also be held accountable for ushering in the era of big deficits). So I am in agreement with Porter on his latest bankruptcy rant. However, it's not quite as bad as he says (although it could easily become that bad). There are several things that could be done to get the situation under control. We could get out of Iraq and Afghanistan and then cut the defense budget down to levels that make sense in a world where we are the only military superpower. We could put a freeze on all government salaries for the next five years.
"We could cut future Social Security payments by a few percent and we could, with the right plan, rein in the ridiculously escalating cost of medical care. Combine all that with a growth in tax revenues that should come with an economic recovery and there might be hope. It's tempting to say we'll never have the political will to do any of those things, but if the average citizen actually begins to grasp just how terrible this escalating debt really is, things could change quickly." – Paid-up subscriber Jim
Porter comment: I think you're ignoring all the evidence that's right in front of you... Our government doesn't really even know how much money it has borrowed or it will need to borrow over the next few years. We have no plan to repay any of our debt. And we are incapable of even controlling the size of our annual deficits. More than 50% of our population pays nothing in taxes and expects cradle-to-grave care – including health care. There is no doubt in my mind we have already bankrupted our country. We just don't know it yet.
"I am hesitant to sing your praises lest I be labeled a drunk. Seriously though, I have been a subscriber for about 19 months now, and I find the S&A Digest to be far and away more informative of the real world than the Wall Street Journal ever dreamed of being. I am an American ex-pat, (been out of the US for 12 years), and am scared to death to put any of my money back into the US via Ameritrade or E-Trade or the like... this makes most of your research kind of, well, help me out here.
"I read the Digest every day, & I recall that you mentioned a new advisory that you were working on for folks who want to have an overseas brokerage account late last year, and trade/invest in international equities. By your own admission in your recent Digest article, this would be a good move. Best wishes & hope you are able to get that new International newsletter up ASAP. I promise to be the first subscriber." – Paid-up subscriber Ken Stone
Porter comment: We are working on it. We are very close to landing a good partner in Hong Kong who has 40 years of experience at the highest levels of international finance. Stay tuned. (And if you're interested in helping us set up our new office in Hong Kong, please get in touch. We need direct marketers, we need copywriters, and we need analysts – all with Asian language skills. These people aren't easy to find.)
"Mr. Stansberry: I really appreciated the short comment about losing the grandmother. I am sorry for the loss. Please indulge me regarding this story:
"Back in 2003 I was miserably working in a consulting office trying to figure out what to do next. I found a consulting position that would allow me to travel near my home town in Indiana. I still had three grandparents left and looked forward to spending time with them in my travels. Nearly every time I was in the area, I would stop in and visit my father's parents, who always welcomed me with a pot of hot soup or stew, plenty of homemade biscuits, and hot tea with honey.
"I would sit with my grandparents as they told me their story of growing up in Arkansas, their migration to Indiana, about the eleven children they bore, politics, religion, finance, etc. These people lived through the great depression, a world war, and other difficulties that would cripple many of today's complaining generations. They were glad to have the slightly out of plumb house that they had, the food on the table, and the family to enjoy.
"I would also visit my mother's mother in the nursing home in a nearby town as often as possible. Not much conversation there but plenty of hugs.
"I lost my father's father in 2005 and my mother's mother in 2009. My father's mother is almost 84 years old and I still am able to visit her on occasion in my travels. I am completely aware of the limited time left with her and cherish every moment. It's almost as if Providence allowed that time knowing that it would be too soon gone. As you indicated, for anyone who has their forbearers still walking around on this earth, take time to say hello.
"The Stansberry Research is some of the best financial research available. But I will always cherish the financial and other advice I received from my grandparents over the past six years. Again thanks for the short note." – Paid-up subscriber Quentin S. Ragan
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland and Miami, Florida
February 3, 2010