In a September 20 interview with The Daily Crux, I suggested a collapse in the U.S. dollar is inevitable and the most serious threat to the wealth of the average American.
Here is exactly what I said:
All of my asset protection planning and my inflation planning is based around this idea, which is if I woke up tomorrow morning, and the Chinese would no longer accept the dollar, and neither would OPEC, what would happen? Because that's exactly what's going to happen... I 100% guarantee it. I think it's very likely it's gonna happen in the next 10 years, certainly in the next 20 years. Someday, I will wake up and our trading partners will no longer accept our currency.
The moment that happens, there is going to be enormous problems. You know, people think that $4 gasoline is a big problem. Well, try $40 or $80 gasoline. And you want to talk about the class warfare that we have? Well, you're going to see some real class warfare when suddenly there's not a state government in the United States that can afford to run buses anymore.
Yesterday, a major U.K. newspaper (the Independent) published a report that serious discussions are now underway involving Russia, China, Japan, and France to replace the dollar with a basket of currencies in the global oil market. Is the report credible? I believe so. Of course, the countries involved are denying it. But sooner or later, this kind of a change will (and must) take place. The U.S. cannot go on repaying its debts in money that it simply prints.
Our foreign creditors aren't the only folks who are worried. At Jim Grant's Fall Investment Conference two weeks ago in New York, John Paulson – the richest and most successful speculator since George Soros – explained his personal concerns about the fate of the dollar.
Once the Fed began directly buying Treasuries and mortgages, I lost faith in the dollar as a reserve currency for my assets... What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-a-vis the dollar one year from now, three years from now, five years from now.
And I think with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go, and the magnitude of that difference also increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point.
Dear subscribers... That's not Porter Stansberry talking. That's not Doug Casey talking. That's not Bill Bonner talking. That's the richest and most respected man on Wall Street... perhaps in the whole world of finance. Right now, the dollar is the world's financial medium. Demand for the dollar comes wholly from trade and finance. Nobody needs the dollar to buy goods from the U.S. – we have a massive trade deficit.
So what do you think will happen to the demand for dollars around the world if the world's financiers follow Paulson's lead? What do you think will happen to the dollar if the world's oil traders abandon it? And what do you think will happen to our country when the average American finally recognizes these things – which are happening right now? Lord, help us. I can only hope most of you have followed our hundreds of pleas to buy gold – and to put it someplace safe.
By the way... I received a bucket-load of criticism because of my September 20 warnings. In my experience, people get the most upset about things they know in their hearts are true, but that they're not willing to accept because of the massive amount of pain those truths will cause them. The anger is a result of their fear.
I received the same kind of criticism when I wrote Fannie and Freddie were finished and GM would go bankrupt. Well, I'm sure to get a lot more criticism tomorrow. Because this stuff is absolutely happening. And it's scary as hell.
One more shot across the bow of the U.S. dollar: Australia is raising interest rates, sending a message to the other G20 nations that they can't go on running their printing presses forever. And the U.S. Treasury is now admitting it lied to the American people last fall – deliberately – about the solvency of Fannie and Freddie. So let me ask you this question: Who in his right mind would want to hold dollars from a bankrupt nation, a nation whose own Treasury admits it can't be trusted?
Oh... one more nugget: The FDIC has begun to make interest-free loans to private-equity groups in an attempt to save the commercial real estate market. What's the dollar worth if the FDIC isn't even going to demand interest on its debts? Your guess is as good as mine, as long as your guess is "a lot less than it's worth now."
No, we don't get everything right here at Stansberry Research. But we sure did get the big turn in the REIT market right. Back in May, we went from being bearish to full bullish on the sector. As I wrote in my newsletter, PSIA:
Why do I think the bear market in REITs is over? Because the floodgates of new capital have opened... The fact that REITs have this kind of access to capital tells me the yield spread has peaked and it's time to buy REITs. I know this is a 180-degree change from what I was telling you six months ago. But when the facts change, I change my mind. I made money trading several highly leveraged firms on the way down. I plan to make money trading the highest-quality leveraged firms on the way back up.
During the third quarter, REITs returned 33%, according to the Dow Jones Equity All REIT Index. That's the biggest gain since the index's inception in 1989, beating out the previous record, which was set three months ago. Only six stocks in the 114-company index posted a negative return. Many REITs are up around 90% from their March lows. We moved our pick in the REIT space – a mutual fund of preferred REIT shares – to a hold months ago. Now, with the fund up more than 60% in five months, it's probably time to sell.
Yield on REITs vs. 10-Year Treasuries
Yesterday, we pointed out apartment vacancies stand at 7.8% – the highest since 1986 – and will likely worsen by year's end. And apartment rents are down nearly 3% from a year ago. The same thing is happening in office space. Office rents fell 8.5% in the third quarter from a year ago – the biggest year-over-year fall since 1995. Companies returned a net 19.6 million square feet of office space to landlords in the quarter, bringing the net decline this year to a record 64.2 million square feet. Meanwhile, office vacancies hit 16.5%, a five-year high.
Lower rents and higher vacancy spell disaster for commercial REITs, which own the properties, and banks, which hold half of the $3.4 trillion in commercial real estate (CRE) loans.
For months, Dan Ferris has been covering the coming disaster for regional banks with large concentrations of CRE loans. These banks are far undercapitalized, and they're sitting on a huge pool of declining assets, which are undoubtedly carried at too high a price on the balance sheet. It seems the Federal Reserve is finally catching up with us...
In a recent Fed presentation to banking regulators, Atlanta real estate expert K.C. Conway noted, "Banks will be slow to recognize the severity of the loss – just as they were in residential." New York Fed President Bill Dudley added, "More pain likely lies ahead for [the commercial real estate] sector and for those banks with heavy commercial real estate exposures."
A study of 800 banks – which all have more than half of their loans in CRE – shows how fragile the situation is... Banks with heavy CRE exposure had only 38 cents in reserves during the second quarter for every $1 in bad loans – that's down from $1.58 in reserves for every $1 in bad loans from the beginning of 2007. And the same banks are writing down their assets at a much slower pace than the CRE market has actually fallen.
Many banks are simply extending CRE loans that come due – even if they wouldn't make that same loan today – hoping the market will recover in time for the next deadline. This allows them to avoid foreclosure and maintain those loans at inflated prices. In some of these "extend and pretend" cases, the value of the underlying property has fallen below the amount of the loan.
To access Dan's favorite way to play the unraveling in the commercial real estate market, sign up for Extreme Value here...
S&A Short Report Editor Jeff Clark thinks the entire market is ready for a massive downfall. In his latest update, Jeff told readers the "perfect storm" he's been waiting for has finally struck. All of his most trusted indicators are flashing "sell." He's recommended a simple trade that will make readers 175% when the market slips. To learn more, click here...
New highs: Morgan Stanley Emerging Markets (EDD), Central Europe & Russia Fund (CEE), Keyera Facilities (KEY-UN.TO), Coca-Cola (KO), Philip Morris (PM), Portfolio Recovery Associates (PRAA), European Goldfields (EGFDF.PK), Silvercorp Metals (SVM), Silver Wheaton (SLW).
In the 'bag... a return to form. The insults came fast and hard on the back of my criticism of "Homeland Security." In fact, one subscriber wasn't content to only throw a barb my way... She insisted on insulting all of you as well. Send yours here: feedback@stansberryresearch.com.
"If you wonder why you were intercepted by Homeland Security 'thugs' maybe you should be more careful what you write. As you know, these 'thugs' read our e-mails, too. As one who rants against the government as much as you do, if you were not stopped would be the bigger suprise." – Paid-up subscriber Stewart Miller
Porter comment: It's way too late for that... and don't forget... the pen is mightier than the sword.
"You are right on in what you said. I think what might happen is that a bunch of heavily armed citizens, tired of their rights being violated just might take things into their own hands and say, 'Enough of this crap.' Our government thinks they are better than we are. That is the root and sum of the problem and that anything a citizen is doing that is beyond the ken of the favored few must be doing something illegal. There are some very good things out there on the internet that give very good pointers for survival in the upcoming upheaval. I could see it coming from a mile away (back during Bush's administration and even earlier)... Make sure you have some .30 caliber (or better) rifles and lots of ammo and be prepared to defend yourself, because your government isn't going to do so. In fact, they will be the ones you will be fighting." – Paid-up subscriber Glenn
Porter comment: You can't fight them. You can only manage your affairs in a way that makes it impossible for them to control you.
"Your little 'pirates on the water' piece was really 'nice' and has questioned why I subscribe. The fact that you instantly thought Homeland Security would 'plant' drugs, or because they check your 'papers,' they are 'thugs.' FYI, if they didn't do any of the checks and just rode by, you would probably say something negative as well... All this for a 'couple of uncomfortable minute,' just stick to financial work. And next time you interact with a police officer or 'Homeland Security,' you should probably thank them for putting their life on the line to keep YOU safe. What have you done for your country lately? This newsletter doesn't qualify." – Paid-up subscriber Michael Dawson
Porter comment: What these guys were doing had nothing to do with safety and everything to do with power. The only way they were putting their life on the line is the risk of melanoma from being in the sun all day, every day. In regards to saying "thank you," I may be a whipped dog, but I'm not going to roll over and wet myself.
"Once again you amuse us with your Libertarian balderdash. Had the country been run by Libertarians since the Declaration of Independence was signed you'd probably be bitching about Gordon Brown, our PM instead of griping because of the minor indignities forced on you by our misbegotten War on Drugs. I do feel sorry for your having to undergo a rather gentlemanly version of the stop and search that nearly every black man in this country has had to go through simply because he is black. Judging from your attitude toward Acorn, you'd probably be amongst those who'd view the aggressive stop and search activities of your local police as simply good policing...
"Similarly, you seem to be bright enough to understand that Libertarianism is a road to nowhere and one that no advanced country will ever travel and remain advanced. What impels you to be so wrongheaded in these areas? You don't engage in magical thinking in your business life, why so elsewhere? It is rather amusing that your musings attract a fair share of people who seem incapable of understanding which services you provide for free and which ones you sell. Why do you suppose that these people are attracted to your writing?" – Paid-up subscriber Frans
Porter comment: You've got your history so mixed up, I don't know where to start... but you did a nice job insulting most of your fellow subscribers. Reminds me of that letter we got from the jackass at Kiplinger's. It would be interesting to discover how you compare to the folks you're insulting.
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
October 7, 2009