The End of Western Civilization
A dire 'Brexit' warning... The end of Western civilization... 'Brexit' odds are soaring... One of the largest tech deals in history... Yields plunge to record lows (again)... The best deal on gold research you'll ever see... P.J. O'Rourke: Are you ready for Hillary?...
Yesterday, we mentioned that European Union ("EU") bureaucrats were certain to step up their threats and fear mongering as this month's "Brexit" vote approaches. Apparently, they already have...
In an interview with Germany's Bild newspaper yesterday, EU President Donald Tusk issued the starkest warning we've seen yet.
Tusk told the paper that a Brexit could have terrible consequences for the U.K., and could cause a breakup of the entire EU. He also warned – with a straight face, we can only assume – that it could lead to the end of all of "Western political civilization." From the interview (translated)...
Every family knows that divorce is traumatic for all concerned. Economically, it would be a disadvantage for all in the EU, but primarily for the U.K. Politically, it would encourage all the radical anti-Europeans in many member states. In addition, the day when the British leave the EU, our external enemies [will drink] champagne. We should make every effort to spoil the party...
The campaign [in favor of a Brexit sends] a very clear message: "Let's go out, nothing will change, everything will be as before." Well, it will not. There will be for the United Kingdom negative consequences not only economically, but also, and foremost, geopolitically.
Do you know why the result is so dangerous? Because [it is] totally unpredictable in the long term. As a historian, I am afraid this is actually the beginning of not only the destruction of the EU, but also of Western political civilization.
This rhetoric is clearly meant to frighten folks. But it's important to keep a couple of things in mind...
First, we're talking about a regulatory union of 28 European nations that has existed in its current form only since 1992. (The more exclusive eurozone – whose 19 members use the shared euro currency – was created only in 1999.)
Second, prior to this union, many of these countries argued and fought amongst each other for most of recorded history.
Sure, there are benefits from the arrangement, at least in theory... The EU's official aim is to ensure the free movement of people, capital, and trade between member states.
But there are also significant costs... particularly for the relatively more productive members. The U.K. pays more than 10 billion euros per year for membership. All members must also follow the EU's laws and regulations on trade, employment, agriculture, energy, industry, immigration, and virtually every other area of their economies.
So while the EU was widely celebrated during the good times, it's not surprising to see members starting to revolt now that the European economy is struggling.
A Brexit could create some uncertainty and turmoil in the short term, but we're willing to bet it won't usher in the end of Western civilization.
More important, whether or not the U.K. votes to leave this month, the EU (and particularly the eurozone) is unlikely to survive the next major downturn.
This would be bad news for EU bureaucrats and their cushy salaries. But even this wouldn't be the end of the world. What those folks will never admit is that burdensome regulations aren't actually a requirement for free trade and commerce.
In the meantime, you can expect the fear mongering to continue...
A survey on Monday showed the "leave" vote at 46% compared with just 39% for "remain."
Betting markets – where folks are wagering real money on the outcome of the Brexit vote – still show "remain" in the lead. But odds have plunged from as high as 85% in May to less than 60% today. Graham Sharpe, media relations director for U.K. bookmaker William Hill, says at this rate, "leave" could gain the lead by this weekend...
We were forced to shorten our Brexit odds yet again overnight, and having once been long-odds outsiders the odds have now come all the way down. The momentum is such that it seems inevitable a Brexit will be the favorite by the weekend if this trend continues.
About 72% of all the bets we have taken since we first opened our book have been for a Brexit, and if that were to be translated to voting patterns it would be all over.
Yesterday, software giant Microsoft (MSFT) announced plans to buy professional social-networking firm LinkedIn (LNKD). If approved by regulators, it will be one of the largest tech-industry deals in history.
Microsoft will pay $26.2 billion – or $196 per share – in the all-cash deal, a 49.5% premium to LinkedIn's previous closing price.
The offer values LinkedIn at more than 80 times earnings before interest, taxes, depreciation, and amortization ("EBITDA"). That makes it the most expensive of any major acquisition this year, according to Bloomberg data.
It's also the biggest deal for Microsoft under CEO Satya Nadella, who has refocused the company on its cloud-based software and services for business. As he explained in an interview on Monday...
This is about the coming together of the leading professional cloud and the leading professional network. This is the logical next step to take. We believe we can accelerate that by making LinkedIn the social fabric for all of Office.
Microsoft holds more than $100 billion in cash, but it will be borrowing to finance the deal. This is because most of that cash is held overseas.
Thanks to the foolish U.S. corporate tax code – one of the few in the world that taxes companies on profits earned overseas – Microsoft would have to pay 35% or more to repatriate that money to the U.S. Instead, it makes more sense for the company to borrow billions more than to pay in cash.
This unusual situation – plenty of cash to service debt, but relatively little in the U.S. where the debt must be serviced – led Moody's Investors Service to place Microsoft's "AAA" rating under review for downgrade. The other major ratings firm – S&P Global Ratings – reaffirmed Microsoft's "AAA" rating on Monday.
Microsoft shares are a favorite recommendation of Retirement Millionaire editor Dr. David "Doc" Eifrig. Doc shared his thoughts on the deal in a private e-mail with us this morning...
Generally, we're not excited about social-networking stocks. But Microsoft looks to have made a good move here. First, LinkedIn does actually earn some real money. It made $299 million in free cash flow over the last 12 months. So it is a real business... even if the valuation was on the high end.
But more important, Microsoft is the technology company for real business. While Apple and Google sell consumers phones and games, Microsoft earns billions from corporate server software and workhorse applications like Word, Excel, and Access.
Teaming up with the social network of business makes sense. It can integrate the products in ways that actually work. Imagine turning on your computer and working in Microsoft's cloud-based Office suite, which stores all your work files, and it's plugged into all your work communications through LinkedIn. Microsoft will also have access to unequaled data on how people work, communicate, and switch jobs.
As Doc explained, $26 billion isn't cheap from a value-investing perspective. But under Nadella, the company has been deliberate with its growth strategy and acquisitions.
I think Microsoft made this move carefully. And as far the Moody's rating is concerned, I couldn't care in the slightest. If you have an "AAA" rating, you're probably too safe. Microsoft has $100 billion in cash and is only borrowing to save money on taxes. That won't be a problem.
Finally, we note sovereign yields plunged to new record lows again today...
The yield on 10-year U.K. government bonds hit a record low of 1.11%. Japan's 10-year government bond hit a record negative-yield low of -0.155%. Swiss 10-year government bond yields also hit a new negative record.
And as we feared last week, the yield on 10-year German "bunds" – the benchmark debt for virtually all of Europe – has now dropped below 0% for the first time in history. Bund yields touched as low as -0.033% this morning.
No, what is happening today is not normal...
Foolish central-bank policies are creating distortions unlike anything we've ever seen before. And they are guaranteed to end in disaster.
No one can be certain when these problems will come to a head. But the recent acceleration in plunging yields suggests it could be sooner than even we expect.
We're beginning to feel like a broken record, but if you still haven't taken our advice to put a portion of your savings in physical gold (and silver), we urge you to do so soon.
Regular readers know we've also recommended putting a small percentage of your portfolio in select gold- and silver-mining stocks.
Why? Because during a bull market, certain precious metals stocks will move 10, 20, or 50 times the price of gold and silver.
To be clear, these stocks are incredibly volatile... So you wouldn't want to put a huge part of your portfolio in them. But when bought at the right time and the right way, they are one of the few legitimate ways to make a fortune in stocks.
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New 52-week highs (as of 6/13/16): Central Fund of Canada (CEF), Nuveen Municipal Value Fund (NUV), Silver Standard Resources (SSRI), and PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ).
In today's mailbag, a longtime subscriber shares his experience with Stansberry Research. Send your questions and comments to feedback@stansberryresearch.com. As always, we're prohibited from providing individual investment advice, but we read every e-mail.
"Good afternoon, I'm writing in general to commend Porter and his entire team of analysts across all publications. Anyone that writes in complaining about the publications, the Digest, or anything else has not and will not learn anything from any Stansberry writers. When I initially signed up in late 2011, it was because I felt there was just something wrong going on with the finance system, even after the run up.
"Since then, I've become an Alliance Member, which was a major financial commitment for me and my wife, but I would make the same decision again in a heartbeat. I have learned an immense amount about investing, the economy, cycles, valuation, technical analysis, fixed income, and more.
"Since joining Stansberry, some of the investment techniques I've added to my skill set are bond purchases, selling puts, trailing stops, placing 'alpha' option trades, selling covered calls, and selling stocks short. But the biggest thing I've learned from the Stansberry team: patience. I always understood compounding money, but just never knew how to properly apply it to investing. Do I still make mistakes? Yes, but I'm learning from them now instead of repeating them, while still beating the market. Luckily, I still have a long horizon of investing ahead of me.
"If people don't learn from everything Stansberry publishes, then they either cannot learn or they cannot comprehend what they are reading. Porter, thank you and your team for giving me the market education that I could get nowhere else. See you and your team at the Alliance Meeting!" – Paid-up subscriber Anthony S.
Regards,
Justin Brill
Baltimore, Maryland
June 14, 2016
Are You Ready for Hillary?
Hillary Clinton is now the Democratic presidential nominee... and then some.
Not only has she pinned the nomination to the mat in the convention's delegate professional wrestling tournament, but she has also snatched her main opponent by the scruff of his neck and heaved him over the ropes with a resounding 13% victory in the California primary.
There won't be any "Feel the Bern" floor fracas at the Democratic convention. Sanders supporters will go back where they came from – "Occupy Your Parents' Basement."
Furthermore, as of this writing, Hillary holds a double-digit polling lead over Republican nominee-to-be Donald Trump.
I wouldn't say she's unstoppable, but I wouldn't place a large bet on stopping her. This means that as investors – and as citizens – we need to be prepared. We had better go into the "Clinton Crouch" and get "Ready for Rodham."
To be prepared, we have to understand Hillary and her politics. In one way, this is simple. With Hillary, there's nothing to understand except politics.
Yes, she was a lawyer. But a lawyer with political connections – partner in the Rose Law Firm and First Lady of Arkansas.
Yes, she has endured a difficult marriage. But she clearly stayed in it for political reasons.
Take away politics, and Hillary is the bossy girl we all went to high school with, full of lots of whatever opinions were in fashion at the time. She's the head of the Prom Decorations Committee, shrilly insisting, "This year's prom theme is Susan B. Anthony!"
For that matter, becoming head of the Prom Decorations Committee was political, too.
Every politician is political – by definition. But some politicians are "all politics, all the time." Having a politician like that as our national leader means politics will intrude – even more than it does already – on the parts of our lives that aren't political. Politics will continue its invasion of the private aspects of our lives, especially private enterprise.
You're probably wondering how much worse it could get. Political intrusion on private life has already gone so far that, with the transgender toilet issue, the federal government is telling people how to go to the bathroom.
But one thing we should never say about politics is that it can't get worse.
We have someone running for president who is wholly, completely, and entirely political. And her opponent, though he still maintains that he's a "political outsider," is making broad, sweeping political promises.
This is a good time to review what makes politics so dangerous.
Politics is the enemy of prosperity.
The secret to prosperity is that wealth isn't zero-sum. Wealth is not a pizza where if I have too many slices, you have to eat the Domino's box. We can make more pizza. Everybody wins.
But political power is zero-sum. There's only one winner in politics. We can't wedge the fat butts of two congressmen into one seat in the House of Representatives. And we can't – and wouldn't want to – build another Oval Office so that Hillary and Donald can both be president.
Politicians don't hate prosperity. It makes them popular. But politicians are prisoners of zero-sum thinking. This is why Hillary thinks she can achieve prosperity by soaking the rich, and why Trump thinks he can achieve it by clawing back dollars from the Chinese.
Politics is the enemy of merit.
Anybody can go into politics. There's no exam to pass, no board certification required. And you don't have to prove yourself by meeting a payroll, making a profit, or selling anything but a bunch of baloney to voters who aren't paying much attention anyway.
If you can put up with endless rubber-chicken dinners and spout the same babble of nonsense a dozen times a day in every Podunk where they'll let you stand on a stump, you'll do fine in politics. We often hear that "the best people don't go into politics." Of course they don't. They have jobs.
Politics is the enemy of freedom.
Government has a legal monopoly on force. All political power is based upon the fact that, with certain rare exceptions, the government – and only the government – is allowed to kill you. Even over a parking ticket. If you don't pay the parking ticket, you'll get fined. If you don't pay the fine, you'll get jailed. If you try to escape from jail, you'll get shot.
We don't want to go without a government. Places like Libya have tried that. But having a monopoly on force does not lead politicians to a mindset that celebrates individual liberty.
Fighting back against politics is hard. And perhaps it can't be defeated. But keeping those three precepts in mind can help us predict where politics is going.
For example, when facing a decision about an economic issue – such as deficits, debt, or entitlement spending – will politicians make a choice that benefits the economy? No. At least not on purpose. Politicians will always opt for whatever increases their power, no matter what the economic cost.
The good news: Gold prices should soar.
When politics impose or expand control over any business or enterprise, will that control be exercised by wise and intelligent people? No. Politicians and political appointees will exercise control. If any of them are wise and intelligent, it will be by accident.
The good news: Loopholes of stupidity will abound.
Will government regulatory agencies promulgate transparency, making sure we have all the information necessary to make individual choices? Like hell they will. Regulatory agencies will promulgate ever-growing lists of arcane rules and regulations. Rules and regulations are the Monopoly money of the monopoly of force.
The good news: The more rules the game has, the easier it is to game the rules.
More good news: Any reliable prediction means an opportunity for profit. Even a reliable prediction of doom. And Hillary is one.
Regards,
P.J. O'Rourke
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