About right now, I imagine 90% of our subscribers and most of the analysts in my building think I'm nuts. Truthfully... I feel a little bit like Chicken Little. I've been saying the risk of hyperinflation is a more serious threat to our wealth (and way of life) than a massive deflation. Meanwhile, just about every month it looks more and more like Europe's banking crisis will cause another round of serious deflation in the world's asset prices. I'm starting to look pretty foolish...
I thought economic growth would be stronger than expected, not weaker. I thought job growth would be stronger than expected, not weaker. I thought yields on long-term Treasury bonds would move higher, not collapse to less than 3%. And I thought silver and gold would soar, instead of stall out. What do I have to say for myself?
Well, I'd much rather be making money by being "wrong" than losing money while being "right." And my short portfolio has been racking up stupendous gains. We were up 20% in one day on our short of Barnes & Noble this week, for example.
Now, you might say, "That's fine, Porter, but I'm no speculator and I got crushed this week." I know that's what probably happened to the majority of individual investors, who for some reason will not allow themselves to short stocks. But that's why in February of this year, on the front page of my newsletter, Stansberry's Investment Advisory, I told subscribers:
U.S. stocks are woefully overpriced, and runaway inflation will drive stock valuations down. If you're not willing to hedge your exposure to the stock market with short positions, then you need to go completely to a cash position hedged with gold.
What's the country song about not wanting to be right? If being wrong is this profitable, then I don't want to be right. But I will be.
Why do I still believe inflation is the problem that ought to keep you up at night? It's very simple: The collapse of the developed world's sovereign borrowers, the demise of most of the triple-A-rated corporations in America, and the destruction of the U.S. consumer's balance sheet are all signposts to the end of the world's current monetary system. Today, more than 60% of the world's banking reserves are U.S. dollars. When governments have to bail out their banks (and they will), they're going to need U.S. dollars to do it. And they're going to need massive quantities. These dollars won't come in the form of legitimate credits for the simple reason that the U.S. government is broke and so is the U.S. consumer.
Where will the new money come from? The printing press. Mark my words: Over the next few months, maybe six, maybe 12, the Federal Reserve will open huge new "swap" lines with its European counterpart, the ECB. And the Fed will begin buying massive quantities of questionable European assets. The Fed will bail out Europe. And just like when they bailed out Bear Stearns, the Fed will swear it is only lending against high-quality collateral... But it won't let anyone else inspect its books.
This is how paper money systems fail. They don't fail because people hoard dollars. They don't fail because there's too much confidence in the paper money. They fail because, inevitably, far too much credit is created under the paper system. There's no fundamental limit to credit. Sooner or later, people realize the debts can't be carried, much less repaid. At that point, the system collapses – and not because the money becomes more valuable (i.e. deflation).
It collapses because people suddenly decide any other asset is better to hold than the money the banks keep printing. I can't tell you when, exactly, that moment will arrive. But I can tell you with 100% certainty it is coming. I know because of the size of the debts that must be monetized. What we've seen so far won't hold a candle to the problems we will face when that moment arrives.
What should you do about it? It's pretty simple. Do your best to stay out of debt. You can't know what's going to happen to interest rates. You can't assume you'll be able to carry a debt load, even though inflation will depreciate the burden of carrying it. Make sure to keep your savings in gold. Gold will become the new standard of international exchange (again) at some point in the next 10 years. Buy high-quality stocks – companies with plenty of pricing power (like Hershey's). They are the best hedges against hyperinflation. But... make sure you buy only when they're trading at attractive prices. Less than 10 times cash earnings is a good rule of thumb. And finally... most of all... be patient and prudent. Few people will get rich during this difficult period. Just holding on to what you have will be a triumph.
If you're looking for a new way to buy gold, watch our latest video about the most exciting gold investment we've encountered in a long time. We've found a tiny company sitting on at least $1 billion in gold (four times the company's current market cap)... And most experts expect the company's gold deposits to be worth several billion dollars. Plus, the gold deposits are super-rich. An average mine contains one to three grams of gold per ton of ore. The richest South African mines normally have seven grams per ton. This company's preliminary samples contain 15 grams per ton (more than five times the average). The highest-grade sample contained an astounding 39.7 grams of gold per ton.
Why are this company's deposits so much richer than average? It's the location... This company's deposits sit a mile underwater. That's right... This tiny company's massive gold deposits are in the ocean. Before you dismiss these claims as ludicrous, which was our initial reaction as well, know that four of the world's largest resource giants have been quietly building positions in this firm (one of the investors is the world's largest gold producer)... If word got out these industry titans were buying, the stock price would soar.
Another major investor in the underwater gold mine is a super-influential investor and one of the richest men in the world. He's made billions investing in early-stage companies like Facebook and other micro-cap resource companies. In fact, his last resource investment soared 910%. The most difficult task for micro-cap resource companies, like our underwater gold miner, is obtaining funding. Because this company already has four resource giants and one mega-billionaire backing it, funding is not a problem. It's just a matter of extracting the several billion dollars' worth of gold from the ground. To learn the full details, you can watch our video presentation here...
Brief personal note... I'm down in Miami with my family this holiday weekend. My three-year-old boy, Traveler, has fallen in love with our boat. He might catch his first fish tomorrow. I hope you're able to enjoy your family this weekend, too. Put your financial worries on hold. There are many things in life more important than gold.
In the mailbag... another GE short-sell skeptic. We're used to them. Send us your thoughts here: feedback@stansberryresearch.com.
"Some thoughts on GE, for Porter... Your analysis of GE's balance sheet, and your assumption that the company's demise is inevitable, is logical. However, having worked in financial services (and with GE as one of our vendors), I can tell you that there are complexities that will probably postpone GE's bankruptcy indefinitely. Not to say that the stock price won't decline, but the following may insulate GE somewhat, at least in the short term:
– A large portion of GE's credit card and loan receivables fall into one or both of the following categories: 1. Variable APR; 2. Private Label (in effect, client companies pay any shortfall in yield spread).
– As you mentioned, GE spends a tremendous amount lobbying the government (both here and abroad). Among other tactics, they use the 'if we go down, everyone goes down' argument (not quite that bluntly), which may be true. From where I sit, this would make it less likely that GE would be subject to completely 'free market' interest costs in the near future.
– The GE capital entities hedge interest costs with fixed term swaps, based on loan terms and estimated life/paydown. Even if interest costs suddenly increased, this would not affect the costs on their existing receivables – other than those with very near term maturities (with floating or short term interest pricing). And, any increased costs would be largely passed on to clients (commercial and retail).
"On that last point, what may eventually happen is that GE's increasing costs will make their pricing uncompetitive. As long as there are reasonable alternatives for customers (again, commercial and retail), GE could begin a long and painful death rattle – at least in the financial services segment. But the key is competitiveness. If overall market rates increase, costs for GE's competitors will increase as well. I can't see GE's cost of funds suddenly jumping from 2.5% to 7% without compensating increases in yield and client pricing on the financial services side.
"To your overall point, if GE's credit rating plunges several notches and only their costs skyrocket (as opposed to all competitors' costs increasing as well), for all business segments, their demise could be hastened. Right now, that's not enough for me to short GE, unless I'm shorting the market (or market segment) overall. But you could very well be right, in which case I will owe you a bottle of Blue Label. (Uhhh... once GE files for Chapter 11.) Thanks for the entertaining and thought provoking Digests." – Paid up subscriber Dean Northrop
Porter comment: You might be right about some of these issues. I wouldn't argue about the complexities of the repayment curves in private-label credit cards, for example. But what I like about the kind of analysis I've done on GE (and GM before it) is the equity value of GM is completely untethered from the risks to its balance sheet.
I can show you conclusively that, if it were marked to market, GE's balance sheet would be significantly underwater – perhaps by as much as $25 billion-$50 billion. And yet, the stock market continues to assign the company's equity a $150 billion market capitalization. I might be wrong, by degrees, about my balance sheet analysis. But there's no way I'm wrong by $200 billion. No way. And every penny that I'm right from $200 billion to zero means that GM's stock price is overvalued.
My prediction remains the same: GE will go bankrupt (or be reorganized in a way that wipes out shareholders) by the middle of 2012.
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida and Baltimore, Maryland
July 2, 2010