We thought the Fed could wait at least a quarter to fire up the printing press for "quantitative easing," round two. Alas, we were wrong. So much for austerity...
Today, the Federal Reserve announced it would use over $150 billion in annual proceeds from maturing mortgage and agency debt to buy Treasurys. The Fed says the economy's growth is slowing: "Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months."
While the Fed isn't growing its balance sheet – a slight positive – it is monetizing U.S. debt (in essence, supplying credit to the U.S. government), which is the No. 1 action to take if you want to guarantee hyperinflation. This is Zimbabwe finance... straight out of the Mugabe playbook.
When the Fed buys Treasurys, it's not just manipulating rates in the U.S. Over 60% of the world's reserves are in U.S. Treasurys. So the Fed is manipulating borrowing costs for the entire world. The Fed's actions are a crime. It's paying back old debt with new money. That's the inevitable endgame for every paper currency.
This is a sure sign that inflation is back. Stocks had their biggest drop since June. Gold is up. And scared investors are fleeing for the "safety" of the dollar. The euro, on the other hand, is getting crushed. It's now trading at $1.288 (down from a recent peak of $1.33).
The Volatility Index (VIX), the market's fear gauge, jumped 15% today. But it's still at nearly half its May highs. Our guess... the VIX is heading higher. Price-to-earnings ratios will shrink.
We've been urging you to add to your short positions all year. No one knows how long this rally can continue... Trillions of fresh dollars pumped into the economy can take years to work through the system. But selective short sales are a great way to hedge your exposure. The risks to the dollar and to the world's monetary system are too large right now. When the market can drop almost 3% in a day, it's good to have some insurance.
To recap, we look for three main situations when selling stocks short: 1) Frauds like Enron or Lehman. 2) Overly indebted entities like GE (or the European Union). 3) Obsolete businesses like newspaper publishers or hard-drive manufacturers.
Two of our favorite short sales today are General Electric and the European Union. Both entities are suffering from an unserviceable level of debt. But the similarities don't end there. Look at this five-year chart comparing GE to a proxy for the EU...
You don't have to be an expert chartist to notice the high correlation. Why so similar? GE Capital, GE's finance arm, has huge exposure to UK mortgages and Eastern European debt. When the euro collapses, so does GE Capital's loan book.
I can't go into too much detail on the situation, because Porter is covering it in the upcoming Stansberry's Investment Advisory (out on Friday). He will also discuss it further in Friday's Digest.
If you look at the 12 largest corporate losses in history, you'll see names like AIG, Time Warner, GM, and Fannie Mae. But you won't see GE (one of the 10 largest companies in the U.S.). Why? Because the company has yet to take a major writedown on its assets... It's only taken about $10 billion in writedowns throughout the crisis. It's all accounting magic. Eventually the losses will come to light – they always do – and GE will collapse. To access Stansberry's Investment Advisory, and be the first to read his upcoming issue, click here...
New highs: Realty Income (O-PE), Seagate (STX), Western Digital (WDC), Altria (MO), Philip Morris (PM).
The True Income "love fest" continues in the mailbag... a truly unprecedented amount of positive feedback. No more vitriol? feedback@stansberryresearch.com.
"I had never bought a corporate bond before becoming a subscriber to True Income. I have since bought 7 of Mike's bond picks using Vanguard. The Vanguard Bond people had no problems with any of the orders and I paid fair prices. I always look at the prices on www.investinginbonds.com before and after I buy. After the trade executes, you can see it and compare it with others." – Paid-up subscriber Don Guinn
"Fortunately for me, I started reading Porter's newsletter in early 2007. Porter convinced me that I could manage my money as well as the company that was currently managing it. So I moved my IRA to Scottrade and started liquidating the mutual funds they had me in. Porter seemed to be in favor of corporate bonds, is subscribed to True Income. Overall, I have purchased nine bond issues. Two have gone bankrupt, one had a business change and Mike advised us to sell it. If I sold today, I would have doubled my capital. I have no intention of selling these bonds however, as they have a cash yield of 17%, and my capital gain will be even larger than the mature.
"I bought Mike's first recommendation, the Tribune Company bonds. The price of the bonds went down, so I bought more. Mike suggested Rite Aid, and then Free Scale and I bought some of those. Then I bought Aleris and Realogy. Overall, I have purchased nine different bond issues. The one that has so far turned out to be the worst was Aleris, which I sold when it was approximately worthless after it went bankrupt. By watching carefully, I was able to sell the Tribune Company bonds for a very small profit. I wound up losing about half the money I put into Realogy. I also bought some of the Rite Aid convertibles at about 340. What a sad learning experience. Although I had read in the Digest and other books that greed does not pay, and that nobody times the market perfectly, I had not learned yet. At 340, did I back up the truck, and even buy my typical position? No. I was greedy.
"At 340 I bought 20% of my full size position, thinking that I would wait and maybe it would go down. Over the next week it went up a little, so I did not buy more thinking that it would go back down to 340. Over the next few weeks I sat and watched it go up to 950. Yes, I did well on what little I invested. But, I could have done five times as well had I simply made my standard investment. True Income paid for my Alliance membership." – Paid-up subscriber RS
Goldsmith comment: If you haven't signed up for True Income after reading a week's worth of gushing feedback, you probably never will. And that would be one of the largest investment mistakes you'll ever make. If you're still on the fence, I encourage you to reread last Friday's Digest, where Porter discusses the benefits of high-yield bond investing. To watch a video presentation discussing True Income, click here.
Regards,
Sean Goldsmith
Baltimore, Maryland
August 11, 2010
Quantitative easing, round two... Ben "Mugabe" Bernanke... Inflation is back... Another plea to short stocks... And two of our current favorite shorts... More True Income love...