One of the most important things to remember about socialism – or coercion of any kind – is it fails eventually because human beings have an innate desire for liberty and a strong need for personal property rights. In fact, the origins of government lie in the need of agricultural communities to protect themselves from violence and theft. So it is particularly ironic that in more recent times, it is government itself that has more frequently played the role of bandit. When you start taxing people at extreme rates to pay for socialist "benefits," when you start telling them which schools their children must attend, when you start giving jobs away to people based on race instead of ability... you quash human freedom, which bogs down productivity... and if continued for long enough, leads to social collapse.
I find it perplexing that only 20 years after the collapse of the Berlin Wall, the West continues to implement laws that mimic all of the failed policies of our former "communist" foes. In fact, our current president won the election by promising to "spread the wealth around." But... truth be told... we don't have to look to Eastern Europe or the Soviet Union to find a society destroyed by coercion, socialism, and the overreaching power of the State. We could just look at Detroit...
In 1961, the last Republican mayor of Detroit lost his re-election bid to a young, intelligent Democrat, with the overwhelming support of newly organized black voters. His name was Jerome Cavanagh. The incumbent was widely considered to be corrupt (and later served 10 years in prison for tax evasion). Cavanagh, a white man, pandered to poor underclass black voters. He marched with Martin Luther King down the streets of Detroit in 1963. (Of course, marching with King was the right thing to do... It's just Cavanagh's motives were political not moral.) He instated aggressive affirmative action policies at City Hall. And most critically, he greatly expanded the role of the government in Detroit, taking advantage of President Lyndon Johnson's "Model Cities Program" – the first great experiment in centralized urban planning.
Mayor Cavanagh was the only elected official to serve on Johnson's task force. And Detroit received widespread acclaim for its leadership in the program, which attempted to turn a nine-square-mile section of the city (with 134,000 inhabitants) into a "model city." More than $400 million was spent trying to turn inner cities into shining new monuments to government planning. In short, the feds and Democratic city mayors were soon telling people where to live, what to build, and what businesses to open or close. In return, the people received cash, training, education, and health care.
The Model Cities program was a disaster for Detroit. But it did accomplish its real goal: The creation of a state-supported, Democratic political power base. The program also resulted in much higher taxes – which were easy to pitch to poor voters who didn't have to pay them. Cavanagh pushed a new income tax through the state legislature and a "commuter tax" on city workers.
Unfortunately, as with all socialist programs, lots of folks simply don't like being told what to do. Lots of folks don't like being plundered by the government. They don't like losing their jobs because of their race.
In Detroit, they didn't like paying new, large taxes to fund a largely black and Democratic political hegemony. And so, in 1966, more than 22,000 middle- and upper-class residents moved out of the city.
But what about the poor? As my friend Doug Casey likes to say, in the War on Poverty, the poor lost the most. In July 1967, police attempted to break up a late-night party in the middle of the new "Model City." The scene turned into the worst race riot of the 1960s. The violence killed more than 40 people and left more than 5,000 people homeless. One of the first stores to be looted was the black-owned pharmacy. The largest black-owned clothing store in the city was also burned to the ground. Cavanagh did nothing to stop the riots, fearing a large police presence would make matters worse. Five days later, Johnson sent in two divisions of paratroopers to put down the insurrection. Over the next 18 months, an additional 140,000 upper- and middle-class residents – almost all of them white – left the city.
And so, you might rightfully ask... after five years of centralized planning, higher taxes, and a fleeing population, what did the government decide to do with its grand experiment, its "Model City"? You'll never guess....
Seeing it had accomplished nothing but failure, the government endeavored to do still more. The Model City program was expanded and enlarged by 1974's Community Development Block Grant Program. Here again, politicians would decide which groups (and even individuals) would receive state funds for various "renewal" schemes. Later, Big Business was brought into the fold. In exchange for various concessions, the Big Three automakers "gave" $488 million to the city for use in still more redevelopment schemes in the mid-1990s.
What happened? Even with all of their power and all of the money, centralized planners couldn't succeed with any of their plans. Nearly all of the upper and middle class left Detroit. The poor fled, too. The Model City area lost 63% of its population and 45% of its housing units from the inception of the program through 1990.
Even today, the crisis continues. At a recent auction of nearly 9,000 seized homes and lots, less than one-fifth of the available properties sold, even with bidding starting at $500. You literally can't give away most of the "Model City" areas today. The properties put up for sale last week represented an area the size of New York's Central Park. Total vacant land in Detroit now occupies an area the size of Boston – Detroit properties in foreclosure have more than tripled since 2007.
Every single mayor of Detroit since 1961 has been a Democrat. Every single mayor of Detroit since 1974 has been black. Detroit has been a major recipient of every major social program since the early 1960s and has received hundreds of billions of dollars in government grants, loans, and programs. We now have a black, Democrat president, who is promising to do to America as a whole what his political mentors have done to Detroit.
Those of you with a Democratic political affiliation may think what I've written above is biased or false. You may think what you like. But there is no way to argue that what the government has done to Detroit is anything but a horrendous crime. You may think what I've written above is merely a political analysis. Perhaps so, but politicians drive macroeconomic policy. And macroeconomic policy determines key financial metrics, like the trade-weighted value of a currency and key interest rates.
The likelihood America will become a giant Detroit is growing – rapidly. Politicians now control the banking sector, most of the manufacturing sector (including autos), a large amount of media, and are threatening to take over health care and the production of electricity (via cap and trade rules). These are the biggest threats to wealth in the history of our country. And these threats are causing the world's most accomplished and wealthy investors to actively short sell the United States – something that is unprecedented in my experience.
Paolo Pellegrini – John Paulson's former right-hand man – is focusing on building his own large U.S. government short position... Pellegrini, who left Paulson's hedge fund to start his own in December 2008, says shorting long-term U.S. debt is the "only attractive bet" in the market today. He told Bloomberg in a telephone interview:
I always like to think about assets that are likely to experience a breakdown; the only thing I'm pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage-backed securities. I think that those are overpriced so they are attractive shorts.
Pellegrini is worried about the government's quantitative easing, which is punishing savers to pay for the financial crisis. Though he's wary of the U.S. dollar in the long-term, he believes it "has depreciated more than it should for the short term." For now, his $100 million fund is sitting on the sidelines.
Another great speculator, Jim Rogers, agrees with Pellegrini's stance on the dollar, saying the doomed currency is "overdue for a rally." Rogers says everyone in the world is pessimistic on the dollar, including himself, and he knows from experience, when everyone is on one side of the bet, it usually pays to be the contrarian. However, his long-term stance remains the same... Rogers believes the U.S. bond market is "the next bubble in the making."
The other way wealthy investors are seeking to profit is by positioning themselves as the government's new partners – taking positions guaranteed to return a profit thanks to the government's involvement. At a recent conference in Dallas, billionaire Michael Price recommended buying newspaper stocks – his $1.6 billion firm is long The Washington Post. Price believes newspapers, which currently operate on a failed and hopeless business model, will turn to the government for bailout cash. Today, the government already controls GE through loan guarantees. And so, it is the government that really controls all of GE's networks: NBC, CNBC, and MSNBC.
In the mailbag... more BSX bashing and another, even more creative scheme I supposedly engaged in... How have I ruined your life to enrich myself, dear subscribers? Let me know: feedback@stansberryresearch.com.
"Based on your writings to date you have had an excellent 'run' this past year or so. However, this wrong call on BSX after having been promoted (as opposed to 'pimped or pumped up') vigorously by yourself Porter as nothing less than 'MY best idea in three years' demands even more attention in my humble opinion... how on earth (if you were in fact doing your best for us as your readers?!), did you not at a minimum issue a 'warning alert' the week before the BSX news conference stating that there was now some un-anticipated political risk due to the behind-the-scenes Congressional discussion of the pending Baucus bill, etc?! Secondly, how could one of your other subscribers find out within 2 days of the all-important public disclosure by the CEO of BSX that one of its principal founders (Nicholas) had sold many of his shares during the same prior week?! What EXACTLY were you doing Porter that took so much of your attention away from this very important event (of course I am referring to the public third quarter news conference of BSX) during the prior week?!
"You have just responded in The Digest to a subscriber that your analysts are prohibited from owning any of the newsletters recommendations. But tell us all right here please how this most unusual (certainly unethical as well as disgusting!) but nonetheless plausible scenario is not possible from occurring): what prohibits you, Porter or any of the other analysts for that matter from getting an 'inside tip' and once, perhaps just once only in a career thus far... passing it on to some other trusted Friend confidentially and indirectly acting on it by for example... shorting BSX at the last moment before the CEO's telephone call was made public?!" – Paid-up subscriber Robert L. Schoenberg
Porter comment: I didn't know the political risk BSX faced until the conference call with the CEO, which I reported as soon as I could. Had I known, I would have told everyone to sell and would have recommended buying puts on BSX in my Put Strategy Report. I have reversed my position before in similar circumstances – like my commercial real estate position this spring.
Unfortunately, I didn't know. As I've explained, I did a bad job anticipating the political risk that BSX faced. But I've since learned the tax in question was inserted into the bill at the last moment because BSX and the other medical-device companies wouldn't go along with OBAMA!'s wishes at private White House meetings. It is unlikely I will ever be party to such "inside the White House" knowledge in real time. I don't have contacts in the OBAMA! administration. In fact, I'm sure they pretty much hate my guts.
Second, in regard to the insider selling... As I've covered extensively in my newsletter, there was inside selling going in BSX from one insider. This was forced selling by one of the founders, who had borrowed against the stock to invest in Lehman Brothers real estate deals, which in turn blew up. I did not believe it was significant, and I still don't. On the other hand, lots of insiders were buying, as was J.P. Paulson, who is a tremendously successful investor.
Finally... I understand you're hurt and disappointed by our BSX results. So am I. But I have a hard time understanding why you (or anyone else) would think I might have something to gain from this disaster. This situation has hurt my credibility, has resulted in an increase in refunds (which I must pay), and will undoubtedly result in lower renewal income for my newsletter, which again will cost me quite a bit of money. These costs dwarf any potential gain I might have possibly earned through the kind of scheme you imagine – or any other kind of similar scheme. And that's not to mention the risk of going to jail, losing my reputation, and seeing my business evaporate before my eyes.
Whether you think I'm a trustworthy person or not, only a total fool would put an entire global publishing company at risk to engage in the kind of petty fraud you imagine – fraud that is quickly discovered or reported. (See what happened to Tom Calandra, for example.)
"Thank you for the update on VZ. I recently purchased VZ shares (at a decent price) and was a little nervous when I read the mainstream media's account of VZ's report and saw the stock price decline. I then opened The Digest and read your commentary. What a breath of fresh air!! I have very little to invest (less than 15k) and with four young children to feed every dollar has to be stretched in this house. I appreciate the subscription to your writings. It has saved me a lot of money over the past two years." – Paid-up subscriber Quentin S. Ragan
"Just wondering if those that are criticizing you for the call on BSX sent you congrats or thanks for your great calls on FNMA or Visa or Bronco? what a bunch of babies – in this game you win and lose, so don't play if you can't handle the ups and downs." – Paid-up subscriber Jeff
"I need some help from your column, I have not sold my boston scientific shares. i bought them the first time recommended ,they went up ,i sold them ,,,and made money. But i bought them again based on earnings reports due hoping to catch another jump! Obviosly that did not happen... but the bad news seemed to have more to do with a stupid ceo that doesn't have a clue how to lead and was babbling in a news conference. since then the stock has regained some territory. i don't think mine lost 25% so do i have to sell? Don't they have some terrific new stent or product or something? what happened to that?i am not writing this cynically really don't get all the recent hubbaloo. all other med tech firms didn't go down due to healthcare so could i be right that if he shuts up and i wait i might see a return out of this yet? and is there a new product that was supposed to bring up share or did i get confused? please answer as i am sure other readers are wondering the same thing!!" – Paid-up subscriber joanne
Porter comment: I think it's important to follow your own trailing stop losses. I can't know what the future holds for BSX, mostly because I can't know if the new health care bill will pass and, when it does, if it will still include the special tax targeting BSX. All I know is our risk parameters were exceeded, and we followed our investment guidelines. Sometimes following stops will cost you money. But... they will always prevent you from making a catastrophic mistake.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
October 28, 2009