"Who's gonna get screwed?" Rick Rule posed this question to the audience in St. Michaels... only his language wasn't so tame. He was discussing the sorry state of the U.S. economy. The U.S. has on-balance-sheet liabilities of roughly $12 trillion. We have off-balance-sheet liabilities of closer to $60 trillion. Our states are running huge budget deficits. Pensions are severely underfunded – Rick's example was San Diego, whose pension contribution shortfall is $1.2 billion.
Then, you've got the overstretched individual. And we're trying to solve this problem of debt with more debt. Between the entitled individuals, the U.S. bondholders, and the producers, someone will get screwed. Rick actually says all of them will. And the theme of the End of America will be "strong and enduring." Now, you need to know how to protect yourself.
Rick is an expert in natural resources. In particular, Rick's expertise is in small-cap natural resource firms. Rick says Pareto's Law is one of the most important rules in small-cap resource investing. According to Pareto's Law, or the "80/20" rule, 80% of the effects come from 20% of the causes. In the small-cap natural resource world, 80% of the success comes from 20% of the people. If you apply the 80/20 rule to the existing 20%, you get 4% or 5% of the population responsible for 65% of the utility. Rick urged everyone to identify that 4% or 5% – the most successful folks in the natural resource world – and follow them.
Guys like Lukas Lundin, Ross Beaty, Robert Friedland have made investors a fortune with their mining projects. Everything they touch gushes cash. You have a much higher probability of winning when you're betting on guys like this. The key is to back them only in ventures they have experience with (i.e. mining versus exploration).
From a macro perspective, Rick says the major theme with energy is emerging demand. A lot of people around the world want to live the way we do in the U.S... and we use a lot of energy. The average Chinese person only uses 4% of the energy we do per capita. South Koreans use 17% of the energy we use. According to Rick, if China's demand went to half that of South Korea, it would consume every drop of petroleum produced in the world. While energy demand is increasing per capita, reserves are decreasing. While Rick's presentation had a small light at the end of the tunnel, the next presenter extinguished it...
"Things are going to be so bad, they're going to be even worse than I think." These words came from none other than the great Doug Casey. Doug followed Rick's bearish presentation with an even more bearish one. Doug says everything is expensive. He doesn't want to buy real estate or stocks. He wants gold, and recently bought a bunch. But he's not happy about it because gold has increased by four or five times in the past 10 years. Other than gold, Doug doesn't want to hold commodities. He doesn't want to hold U.S. dollars.
Doug says the only "lock cinch" trade is shorting bonds. He says it's a triple threat on your capital. Bonds prices fall when interest rates rise, and interest rates are going "to the moon." Bonds are also a bet on the creditworthiness of the issuers. And from the government on down, their credit worthiness is in doubt. Finally, bonds are denominated in currencies. And every currency in the world will eventually reach its intrinsic value... zero. To see our favorite short bond trade, check out the January 2010 issue of PSIA.
On the long side, Doug says he's putting his money with Rick Rule and Marin Katusa, an energy analyst who works for Casey Research. Doug thinks a super bubble is coming in junior mining stocks. And when they soar, they don't double. They increase by 50 or 100 times.
Doug also said the most important investment advice he could ever give is to diversify politically. Get your money out of the country. Explore second citizenships and passports. Look at foreign real estate. Don't wait.
New high: Silver Wheaton (SLW).
Read on to learn how inflation wipes away debt in today's mailbag. Then, send us your own question here: feedback@stansberryresearch.com.
"The advice 'Porter said another way to play inflation is to buy highly leveraged companies. As inflation takes hold, the value of their debts will vanish' needs a little qualifying, it could be catastrophic otherwise:
"Those companies should have very long-term leverage, at fixed rates, with sufficient cash flow to pay out the debts and not have to necessarily roll them over. Otherwise, they could be toast.
"Personally, I take a zero-debt approach and only invest in real producing assets. Figure it out." – Paid-up subscriber Steve Rosberg
Goldsmith comment: You're exactly right, Steve. Thanks for the note. Look at REITs, leveraged natural resource companies, and banks. No, banks don't produce real assets. They are a pure yield play.
"Am I very ignorant? Please explain to all us ignoramuses how inflation wipes away debt? One still owes their debt whether more and more printed dollars are injected into the system, which is what I've been told is the only reason for inflation. As far as I can understand, regardless of inflation you still have to pay your debt. Yes as inflation rises you pay with more and more cheaper dollars but for the average Joe those cheaper dollars get harder and harder to come by and he has to pay more of them to the basic necessary items." – Paid-up subscriber Louis
Goldsmith comment: Inflation erodes the value of the dollar. In an inflationary environment, you are able to pay off your debt (which you incurred with strong dollars) with weaker dollars.
Regards,
Porter Stansberry and Sean Goldsmith
St. Michaels, Maryland
April 28, 2010