The crisis in context: one year later... The best long-term trade in the world... Why deflation is a myth... Arabs launch their own regional currency... Kudos to Badiali... Why don't we give our research away?...
At this time last year, I had just returned from a week in Hong Kong. It was the middle of the greatest financial crisis in 50 years. Hong Kong's economy had been crushed. The Four Seasons Hotel – where we hosted our annual S&A Alliance meeting – was almost empty. Everyone was worried about the future. I'd never encountered a more bearish and frightened group of investors. It wasn't just our audience, either. A few of my analysts were "running for the hills" too:
Then, after talking about touring a safe Hong Kong REIT that's yielding nearly 20% annually, [one analyst] told our audience they shouldn't be buying securities at all. Only cash and gold. Next came an analyst who is convinced a global deflation is underway and prices for commodities, real estate, and stocks will continue to decline... – The S&A Digest, December 8, 2009
While most of the clients (and some of our analysts) had never been more bearish, the more experienced members of the group were extremely bullish. S&A's fixed-income analyst Mike Williams, who has been analyzing the bond market professionally for as long as I've been alive, told attendees he'd never seen a better opportunity in high-yield bonds in his entire career.
Eduardo Elsztain, who runs the largest land-holding company in Argentina, was looking for investors to buy hotels in the United States. (By the way, Eduardo delivered this year. He did his first big U.S. deal, buying 20% of Hersha – a large U.S. hotel owner – for about 10 cents on the dollar.) Peter Churchouse, the former head of Morgan Stanley Asia, explained Asian property stocks had never been cheaper and they were a once-in-a-lifetime opportunity.
What did I tell our readers about the market one year ago, in the middle of the biggest panic of the last 50 years? That I'd never been more bullish. I literally pounded my fist on the podium and told the audience this was the moment they should have been waiting for... that investors get rich at times like these, when everyone else panics. I explained why deflation was a myth and 2009 would see stocks, commodities, corporate bonds, and real estate rally. In The Digest, I summarized the speech I gave:
Bank collapses and declining mortgage credit is certainly deflationary. However, such analysis looks backward and ignores the elephant in the room: the central bank's printing press. U.S. Federal Reserve bank credit has increased from $868 billion to more than $2.1 trillion in the last year (141% growth). In the last quarter, it grew at a 2,596% annualized rate.
The narrowest measure of money supply (M-1) is increasing at a 17.7% annualized rate. Next year's federal deficit will likely surpass $1 trillion – more than 10% of GDP. Various government programs will see federal purchases of more than $1 trillion worth of financial instruments, including $600 billion worth of mortgages.
Upcoming government programs promise to spend $1 trillion on new roads, bridges, and railways... Given this massive increase in money and credit, is it possible for us to continue to see falling prices and weaker aggregate demand? I doubt it. If I'm right, economic activity should pick up in the first half of next year, and we should see stocks and commodity prices rally. We should also see the U.S. Treasury market reverse course as the dollar weakens. – The S&A Digest, December 8, 2008
Where are we today? If you could go back in time to a year ago, should you have bought stocks, commodities, bonds, and real estate? Or should you have simply held cash, in anticipation of a big deflation?
You tell me: Junk bonds are up about 50% on average, not including coupon payments. Many of Mike Williams' recommended bonds are up more than 100% since last year. Meanwhile, Starwood Hotels stock is up about 125% – to use one blue-chip example of a U.S. hotel company. And Hong Kong property? It's up about 100%, too. What about commodities? Just about everything is way, way up. Gold, silver, platinum, copper, etc.
What fell sharply in 2009? Government long-dated bonds. They are down nearly 20% over the last year. This is the first major decline in the government bond market since the big bond rally began in 1982. If we were truly in danger of a lasting deflation, these bonds would have rallied, enormously. Instead, they fell for the first time in 30 years.
The era of ultra-low interest rates is over. And it will not return in my lifetime – not as long as paper money continues to exist. Shorting the U.S. government bond market is the best long-term trade in the world. (The chart below shows Lehman Brother's Government Long Bond iShare security, which is a proxy for the value of government bonds.)
As if to put a ribbon on our predictions for 2009, yesterday the Department of Commerce put the final dagger in the myth of deflation. According to the Commerce Department's PPI index (a measure of raw materials), prices are up nearly 7% over the last three months. Get used to rising prices, a weaker dollar, and more and more international monetary instability. The death of the dollar isn't going to be a pleasant ride...
Speaking of the death of the dollar... You might recall I predicted commodities will wind up being priced in the currency of the dominant producer – not in U.S. dollars. If you think oil is expensive today, just wait until you can only buy it in a hard money currency controlled by religious fanatics. Today the U.K.'s Telegraph reports:
The Arab states of the Gulf region have agreed to launch a single currency modeled on the euro, hoping to blaze a trail towards a pan-Arab monetary union... The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts.
By the way... even after all of this... some people in my office still claim deflation is around the corner. They still don't understand. To have a sustained period of deflation requires sound money. How they could mistake the U.S. dollar – paper money – for the real thing, I'll never understand. Here's a hint, gentlemen: Real money isn't anyone else's liability (much less the obligation of the world's largest debtor). Real money can't be printed. Real money lasts forever. Real money is gold, not paper.
We wrote it, did you buy it?
Sino Gold has a clear plan to ramp up gold production for the next several years. It has the unquestioned support of the Chinese government, as we saw from the rapid advancement of its projects to date.
The company should increase its production by more than 45% by the end of 2010. Its relationship with the Chinese government is great, which means that it will likely continue to find and develop new projects. This is a spectacular growth story that will continue for many years... unless someone (like Eldorado) acquires it. That acquisition is nearly certain, we just don't know the time frame. – Matt Badiali, July 2009 S&A Resource Report Special Report
Yesterday, just as Matt predicted, Eldorado Gold completed its acquisition of china-focused Sino Gold. Sino Gold was a fantastic gold miner. It had two producing mines and two more in development. S&A Resource Report readers made 56% in just five months.
Matt recently recommended three other mining stocks operating in China. And they all have deals with the Chinese government. He believes the government will choose these stocks to consolidate the mining industry in the country. If that happens, we'll see huge returns. To sign up for the S&A Resource Report and access Matt's special report, click here...
New highs: Visa (V), AmeriGas Partners (APU), Kinder Morgan Energy Partners (KMP), Enterprise Partners (EPD), Keyera Facilities (KEY-UN.TO), Altria (MO), United Parcel Service (UPS), Longleaf Partners (LLPFX), International Royalty (ROY), Steak 'n Shake (SNS), Dana Holding (DAN), Jinshan (JIN.TO), Encore Acquisition (EAC).
In the mailbag... A reader who still believes in deflation. Are there any more suckers out there? Let us know. We've got a bridge in New York we'd like you to take a look at: feedback@stansberryresearch.com.
"Trust me. It's still deflation. D comes before I. Inflation will come but not now. It's deflation first then inflation. If it were inflation first the market would be shooting up right now." – Paid up subscriber Allen Whitmore
Porter comment: Maybe you didn't notice, Allen, but U.S. stocks, as measured by the S&P 500, just completed their largest and broadest nine-month rally since 1933 – moving up more than 50%. With a record-setting expansion of the Federal Reserve's asset base and record-setting U.S. government deficits (exceeding 10% of GDP), it is about as likely that gravity won't work tomorrow as it is that the value of the dollar won't decline.
"You almost NEVER give anything away free. First comes the teaser line with promises of huge returns, and then, WOOPS, only way you can get info on that is to subscribe to yet another expensive publication. Do any of you have consciences? Do you have any idea of how many people you have turned against you? Even the mention of your name to other investors I know brings loud BOOS! You may not be hated quite as much as the financial institutions, but the race is tight. Have a great holiday and get in the spirit: GIVE!" – Anonymous
"I know you always like good wines. I particularly like good wines at a good price. Recently Wine Spectator came out with their top 100, there are some real steals this year. Several under $20/bottle. This morning I picked up some 2006 Monte Antico out of Italy for $10.99, I had to open one this afternoon to see if I should buy more. I'm getting ready to head to the liquor store soon!" – Paid-up subscriber Bob Greene
Porter comment: I've had lots of Monte Antico over the years. It's OK. Far from great, in my view. If you'd like a much better chianti (for just a bit more), try Fontodi. Its 2006 chianti regularly beats 2001 brunellos out of my cellar in blind tastings. Fontodi also makes an exceptional pinot nero (pinot noir) that I love.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
December 16, 2009
What did I tell our readers about the market one year ago, in the middle of the biggest panic of the last 50 years? That I'd never been more bullish. I literally pounded my fist on the podium and told the audience this was the moment they should have been waiting for... that investors get rich at times like these, when everyone else panics. I explained why deflation was a myth and 2009 would see stocks, commodities, corporate bonds, and real estate rally. In The Digest, I summarized the speech I gave:
Bank collapses and declining mortgage credit is certainly deflationary. However, such analysis looks backward and ignores the elephant in the room: the central bank's printing press. U.S. Federal Reserve bank credit has increased from $868 billion to more than $2.1 trillion in the last year (141% growth). In the last quarter, it grew at a 2,596% annualized rate.
The narrowest measure of money supply (M-1) is increasing at a 17.7% annualized rate. Next year's federal deficit will likely surpass $1 trillion – more than 10% of GDP. Various government programs will see federal purchases of more than $1 trillion worth of financial instruments, including $600 billion worth of mortgages.
Upcoming government programs promise to spend $1 trillion on new roads, bridges, and railways... Given this massive increase in money and credit, is it possible for us to continue to see falling prices and weaker aggregate demand? I doubt it. If I'm right, economic activity should pick up in the first half of next year, and we should see stocks and commodity prices rally. We should also see the U.S. Treasury market reverse course as the dollar weakens. – The S&A Digest, December 8, 2008
What fell sharply in 2009? Government long-dated bonds. They are down nearly 20% over the last year. This is the first major decline in the government bond market since the big bond rally began in 1982. If we were truly in danger of a lasting deflation, these bonds would have rallied, enormously. Instead, they fell for the first time in 30 years.
Matt recently recommended three other mining stocks operating in China. And they all have deals with the Chinese government. He believes the government will choose these stocks to consolidate the mining industry in the country. If that happens, we'll see huge returns. To sign up for the S&A Resource Report and access Matt's special report, click here...
In the mailbag... A reader who still believes in deflation. Are there any more suckers out there? Let us know. We've got a bridge in New York we'd like you to take a look at: feedback@stansberryresearch.com.
"You almost NEVER give anything away free. First comes the teaser line with promises of huge returns, and then, WOOPS, only way you can get info on that is to subscribe to yet another expensive publication. Do any of you have consciences? Do you have any idea of how many people you have turned against you? Even the mention of your name to other investors I know brings loud BOOS! You may not be hated quite as much as the financial institutions, but the race is tight. Have a great holiday and get in the spirit: GIVE!" – Anonymous
"I know you always like good wines. I particularly like good wines at a good price. Recently Wine Spectator came out with their top 100, there are some real steals this year. Several under $20/bottle. This morning I picked up some 2006 Monte Antico out of Italy for $10.99, I had to open one this afternoon to see if I should buy more. I'm getting ready to head to the liquor store soon!" – Paid-up subscriber Bob Greene
Porter comment: I've had lots of Monte Antico over the years. It's OK. Far from great, in my view. If you'd like a much better chianti (for just a bit more), try Fontodi. Its 2006 chianti regularly beats 2001 brunellos out of my cellar in blind tastings. Fontodi also makes an exceptional pinot nero (pinot noir) that I love.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
December 16, 2009