The S&A Digest: The price of socialism

The price of socialism... The FDIC bankrupt?... A great chart from Casey Research... Buy the kroner... A use for foreclosed homes... Pzena's letter... How I met Sjug... Deadline on the Private Wealth Alliance is tonight...

The government's measure of consumer prices, the CPI, jumped 4.1% in June (over last year), the highest official rate of inflation since 1991. As the government steals your savings and lowers your standard of living via its massive, unfunded bailouts of banks and mortgage lenders, just remember that since the resulting inflation – the real price of socialism – doesn't appear on any ledger, it doesn't really count...

How big will the bailout get? Nouriel Roubini, an economic advisor to Bill Clinton and a professor at NYU's Stern School of Business, tells Barron's:

Many public institutions are themselves going bankrupt. The FDIC has only $53 billion of funds and has already committed 15% of it to bail out depositors of IndyMac. The FDIC's deposit-insurance premiums weren't high enough... Studies done by experts in banking suggest that at least 8% of all U.S. banks are in big trouble. Eight percent of the roughly 8,500 that the FDIC essentially is insuring equals about 700 banks. Another 8% to 16% also are shaky, so some 700 potentially are going bust and another 700 eventual could join them...

It's a joke. The taxpayer's bill is going to be huge. I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion... The banks have written down only about $300 billion of subprime debt [so far].

What's that mean for you, dear subscriber? Well, this is America. Our politicians are fabulous at spending money. They're not nearly as proficient at raising the revenues they require. What happens when politicians promise a whole lot more than they can possibly deliver? More inflation is on the way, you can bet on it.

Our friends at Casey Research built a chart that shows America's incredible growth of outstanding debts over the last 80 years. This chart is smart: It's linked to gross domestic product (GDP), meaning the growth of debt is shown in proportion to the size of our economy. It's a more honest way of looking at the real growth of our obligations. See it for yourself, here.

David Winters isn't the only super-investor buying Norway. Jim Rogers told the crowd in Vancouver last week he's holding the Norwegian kroner. And, of course, he's still selling the U.S. dollar.

More closures... Citigroup is closing a $400 million convertible arbitrage hedge fund, the final step in shuttering its $2 billion Tribeca Global Investments group. Citigroup set up Tribeca with the goal of attracting up to $20 billion. Private-equity giant Carlyle Group is also closing its hedge fund, Blue Wave Partners Management. Despite the fund's 2%-plus return this year, Carlyle said it wasn't able to gain "critical mass." Also, First Priority Bank, a regional Florida bank, shut its doors today – the eighth U.S. bank to fail. SunTrust is taking over the deposits.

At least the government is finding some good use for the thousands of foreclosed homes... Sacramento-area police are using foreclosed homes for prostitution stings. The police say the homes are perfect for the stings. They arrested four prostitutes in one night. Your tax dollars at work, Sacramento...

Value investor Richard Pzena, who lost big on Citigroup and Fannie Mae, is still buying financials. In his second-quarter letter to investors, Pzena said mark-to-market accounting accelerates the recognition of potential losses and potentially overstates them. He also found financial firms' returns over the past 36 years have been higher with smaller leverage (important because banks are rushing to deleverage). He compares the phenomenon to oil production: "It seems a simple paradigm. If you'd heard that all the oil producers had cut their output by 10%, it would be logical to assume that oil prices would rise and oil stocks would follow suit. Effectively, the banks have done the same thing: With the new capital discipline and reduction in leverage, they have less money to lend and spreads have risen sharply." He's buying "world-class franchises" like Citigroup, Royal Bank of Scotland, and HSBC. Read the full letter here...

The "chairman" was squiring his wife around New York City over the weekend on a previously planned mini-vacation. Expect the letter tomorrow.

New highs: Idenix (IDIX).

In the mailbag... Where I met Sjug. Questions? Comments? Concerns? We value your opinions and input. Believe it or not. Send your best shot here: feedback@stansberryresearch.com.

"Porter, You've known Steve for 'over 20 years.' Consider you are in your mid-30s, where/when did you first meet? just curious..." – Paid-up subscriber CH

Porter comment: I met Steve Sjuggerud at New Smyrna Beach, Florida, in 1985. We've been close friends ever since. It was about the same time I got my first job. My employer, Arnie Sager, ran a liquidation warehouse on the rough side of town in Orlando, Florida. Arnie gave me the best piece of advice I ever got in my life: "Porter, pick your friends very carefully. You will become them."

Arnie was exactly right. The people you share your life with, the people you spend time with, the people you trust – they influence you in profound ways over time. I had no idea when I met Steve Sjuggerud at the beach (when I was only 13 years old) what an Atlas-like role he would play in my life. I didn't know he would hire me out of college, introduce me to finance, and set me on the primary path of my life. But... I knew even then, Steve would lead me somewhere good. Sjug was the smartest, most athletically gifted, and most charismatic person I'd ever met. I knew hanging around him couldn't hurt me. I'm still inspired by him, even after all these years. He is a truly exceptional person. He still pushes me to improve – to be a better surfer, a better analyst, a better husband, a better friend. I'm deeply flattered we've been friends and business partners for such a long time.

"An interesting Question in the 08/02 S&A Digest: 'It would be an interesting research project to figure out how many Harvard MBAs have directed billion-dollar-plus companies into bankruptcy...' In response, don't forget that Bush is a Harvard MBA and look what he's done for the Country. Perhaps, in addition to your letters from GM's Chairman, you ought to write letters from Bush to the rest of us." – Paid-up subscriber Stephen

"As a subscriber to your PSIA and True Wealth I have read your positive comments about Nicaragua. I was born in Managua and left in 1979 just before Somoza's overthrow. I have lived in California since then and have not been back to Nicaragua in nearly thirty years. My wife, my older sister and her husband, and I (we were all born in Nicaragua and have not been back in nearly three decades) are going back in mid August for a vacation. I am excited and scared about my trip and wanted to ask for any suggestions based on your experiences there. I know you especially like Rancho Santana. Our plan is to stay at the beaches as much as possible. I enjoy reading you and Steve and respect your opinions. I am hoping that you may be able to write me a few words of wisdom and encouragement regarding beautiful Nicaragua." – Paid-up subscriber Giovanni

Porter comment: Your best bet is to hook up with a good local travel agency. I've used Oro Travel, in Granada, in the past. They have English-speaking guides, know all of the best hotels and restaurants, and can make sure you pay local prices instead of the "gringo" rate. My personal favorite spots are Rancho Santana, Pelican Eyes hotel in San Juan Del Sur, and Gran Pacifica – but my opinions are shaped by where I can find the least crowded, highest-quality surfing. Wherever you go in the country, you will be amazed by how kind and beautiful the Nicaraguan people are.

"Your political comments often, not always, sound like an arrogant 5th grader spouting to his classmates what he thought he heard at home; dogmatic, over simplified, and not making much meaningful sense. But he is only in 5th grade. You have been instrumental in the success of your company, and I am sure you are a talented person in matters financial and economic. You obviously are self-confident. However, it is embarrassing for me to read many of your political comments. They are dogmatic, simplistic, and frankly ignore the nuances of history's problems. It is hard to risk my money on the recommendations of someone who does not seem to appreciate the difficulties that serious decision makers face when they do not have the benefit of hindsight. But I do not have to agree with my doctor when he goes on about 'politics' as long as he is a good doctor. I am relatively new to Stansberry Research, so I will follow along and see whether you are a 'good doctor,' and forgive the comments that say too much about you and your sophomoric understanding of how difficult things can be when you do not know the outcome." – Paid-up subscriber Peter Bogdan

"Gentleman, I note that you're marketing your $500 5-for-life services vigorously. I assume you know that your caveat (so long as they are published) raises doubt as to the offer's value. Comments?" – Paid-up subscriber Klaus Schonfeld

Porter comment: We simply reserve the right to change the mix of what we publish as the market demands. Our offer is genuine, and you can rely on us to fulfill our obligations. We've been in business since 1999. Our parent company, Agora Inc., has been in business since 1979. Also, the price you're paying for these publications is less than buying all of them on a one-year basis. We're not actually asking you to risk anything. The deadline is tonight at midnight. Click here to learn more.

Regards,

Porter Stansberry

Baltimore, Maryland

August 4, 2008

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