Vacation interrupted by raw stupidity

Yes, we certainly enjoyed our week's vacation from our vocation as money-grubbing scribblers. However, not even the peaceful sounds of the ocean lapping against Miami Beach could prevent our ears from assault by three of the stupidest comments ever made by sentient human beings. Unfortunately these statements were made by no less than the Secretary of State, the Speaker of the House, and the CEO of a major U.S. corporation. In today's Digest, I'll debunk your faith in humanity... but you might find yourself laughing. Sometimes it's all you can do when faced with the enormity of the problems facing our country and the ignominy of our leadership.

Let me begin with Hillary Clinton. God bless her. Has there ever been a more unfortunate woman in history? She wasn't qualified to pick a spouse, let alone run the foreign affairs of the United States. And now this... Let history record that economics has never entered her mind. Hillary was comparing the United States to Brazil recently when she said: "Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what – it's growing like crazy."

She was implying that if we raised tax rates on the rich, our economy would improve. And just to remind the audience of exactly what she meant, she began her talk by pointing out a theme that's growing in popularity in Washington these days: "The rich aren't paying their fair share," she said. Never mind the fact that the "rich" pay for the vast majority of government and roughly 50% of American citizens pay no federal income tax at all. What Hillary either didn't know or didn't care to mention was the highest income tax rate in Brazil is 27.5% – even lower than the Reagan-era rates her husband jacked up. Compared to the 43% rates "the rich" will be paying this January, Brazil seems like a tax haven for wealthy Americans.

It's hard to believe Hillary could be so woefully ignorant of the real lesson the Brazil economy demonstrates: Lower rates of tax generate far more revenue (as a % of GDP) than do steeply progressive rates like we have in the United States. The reason is utterly simple and intuitive to every person who has ever had a real job: Nobody likes to give half his paycheck to the government. As any economist (liberal or conservative) would tell you, steeply progressive taxes result in lower economic growth, higher unemployment, and vastly more tax avoidance. When will the Democratic party cease its attempts to capitalize on class demagoguery and adopt sensible economic policies?

Washington D.C. is the Daytona 500 of uselessness, ignorance, and vaingloriousness. You can imagine it as a giant toilet bowl, with all of the politicians racing into the sewer. There's Hillary, sitting right on the pole – far in the lead. I never imagined someone could overtake her on the race to the bottom. But I seriously underestimated the mind-blowing ignorance of Nancy Pelosi...

On July 1, Pelosi proclaimed in a weekly press briefing that the best way to stimulate the economy was to extend unemployment benefits – beyond the two-year limit. "It injects demand into the economy... It creates jobs faster than almost any other initiative you can name."

Silence. There's nothing but stunned silence. And the growing realization that these people (our leaders) have no idea what they're doing...

Pelosi is the daughter of a congressman. She went to college in Washington D.C., interning for senators. She married out of college and raised five children. Then, in 1987, she won a special election in California's Eighth District, where only 15% of the voters are registered Republicans. It is probably the "safest" Democratic seat in Congress.

In short, Pelosi has spent her entire life in government – sitting in a guaranteed seat. She has never run a business, held a regular job, or employed anyone in her entire life. I'm sure she believes what she said – that the government should simply support everyone and doing so is the quickest way to improve the economy. It is all she knows. As she said: "It's impossible to think of a situation where we would have a country that would say we're not going to have unemployment benefits."

Actually, Nancy... until 1935 there was no federal role whatsoever in unemployment benefits. Such arrangements were organized voluntarily by trade associations and unions – and were self-funded. It didn't occur to Americans that they ought to be responsible for someone else's unemployment insurance until Franklin Delano Roosevelt showed how the newly expanded electorate had changed politics in America forever. Campaigning with the explicit promise to rob your neighbors was good politics. And it has been ever since. The irony is, such policies have now become so mainstream that politicians like Pelosi don't even remember where they came from or their party's role in creating them. Nor do the politicians yet understand that believing in these ideas – that everyone can live at the expense of their neighbors – will lead to a catastrophic financial collapse, a situation that's well underway right now.

It's hard to make money based on the dumb things politicians say. But what about when the CEO of a large, publicly traded company says something that's so glaringly stupid you begin to question not only his competence, but his sanity? Ah... that's much easier.

On Barnes & Noble's recent quarterly conference call, the company's chairman, Leonard Riggio, said his firm's new digital ebook – the Nook – would actually lead to an increase in store traffic. That's insane. The ability to buy books instantly over wireless networks at vastly lower prices than hardback has been gutting Barnes and Noble's same-store sales figures. And with both Apple and Amazon competing in the digital book space, Barnes & Noble's ability to make a profit selling digital books is in serious doubt.

The stock fell 20% – in one day – following Riggio's comments. Readers of our flagship newsletter, Stansberry's Investment Advisory, have been short the stock since May... and are up roughly 30% on the trade.

New highs: Carbo Ceramics (CRR).

In the mailbag... more advice about carrying gold through airports. And one of your fellow subscribers thinks some of you are "unthinking drones." As for my perspective... FedEx seems to work just fine for gold coins. And none of my subscribers are "unthinking." If you're reading S&A, that's proof that you're brilliant, that your wife is beautiful, and your children are gifted. Send your observations to feedback@stansberryresearch.com.

"Thought I would weigh in on the whole 'taking gold through an airport and not being detected.' Just passed through Schipol airport in the Netherlands yesterday. They now have one of those body scanners in operation. They are no longer looking just for metal. If you have anything on you, they will see it. As to wether its okay to carry gold, that's a different issue. The scanner actually highligted a crisp £10 note I had in my shirt pocket. So Im pretty sure they will see the gold wafers." – Paid-up subscriber Manu M

"I too checked out carrying gold through airport security. I work at the top of Alaska and we have a small airport there with a TSA presence. I knew one of the guys pretty well so I told him what I was trying to do. I put 5 1 oz gold coins all in the same front pants pocket. Walked through with no beeping. I had him wand me and it beeped right away. He said that a paper clip would set off the wand. I then walked through the metal detector a few more times. The only time the metal detector went off was when the gold coins were almost touching the wall on the side of the metal detector as I passed through. On another note... I am always amazed at the frequency of uninformed/unthinking drones that read S&A (see Wayne Starr – Digest 7/6/10). FYI – you have to be VERY rich to short stocks through TDAmeritrade – $3,000 minimum balance...!" – Paid-up subscriber David K

Regards,

Porter Stansberry
Baltimore, MD
July 9, 2010