I told them what they didn't want to hear this morning: Our government is bankrupt, the dollar won't last another decade, and stocks have gotten far too expensive, given the risks to the currency. I'm hosting close to 250 people today at The Sanctuary, a beautiful, new five-star hotel on Kiawah Island, near Charleston, South Carolina. This is our seventh annual conference. And believe it or not, more than a few people here today have been to every Alliance conference – including last year's in Hong Kong.
We've invited a handful of our best contacts to join us here today and give a presentation to our best subscribers, including: Marin Katusa, Joel Nagel, Jack McCabe, and Rahul Saraogi. One of the big topics: Should we expect inflation or deflation going forward?
My answer: Inflation, but really, it doesn't matter. The real interest rates on U.S. Treasury securities are negative right now. So who in his right mind would lend to the U.S. government – at 3% or less – when the feds are taking over the economy, running $2 trillion annual deficits, and using accounting so bad it would embarrass the Chinese? Nobody. That's not even mentioning the fact that the government is printing up bank reserves, doubling the monetary base in the last year.
As a result, nobody will want to hold dollars, via U.S. bonds, stocks, or real estate. And that means higher prices are coming for imported, hard-money goods (like gold and oil) and lower stock prices (lower price-to-earnings and price-to-book ratios).
At last year's Alliance conference, I urged folks to buy stocks – vehemently... It was the most bullish I've been in my entire life. Now, I'm telling people I've never been more bearish. Have I lost my mind? Am I really this neurotic? Nope. When the facts change, I change my mind. I never thought we'd see the government running $2 trillion deficits, taking over health care, owning all the banks, etc. – and see stocks trading at more than 25 times earnings.
The stock market seems to believe the government can solve all of our problems with fiat currency and bureaucratic mandate. My bet is, it doesn't work... at least, not for long. And given the choice between T-bills yielding less than 1% and buying gold at $1,100 per ounce, I'm voting with the Indian central bank: I'm buying gold.
Last night, before the start of our conference meeting, I hosted an Atlas 400 Club meeting – just a small dinner for our founding members. Rahul, who invests solely in small-cap Indian stocks (and is based in Chennai), said he's buying excellent companies for four times earnings today... His fund is up around 80% this year. Another hedge-fund manager (based in New York) said he looks to profit from "asymmetries and paranoia," and he's currently looking for that one huge trade... a "Moby Dick" trade. Everyone at the table agreed today's Moby Dick trade is to short the U.S. government. And what's the ultimate way to short the U.S. government? Gold.
We also discussed the new book, The Greatest Trade Ever, about hedge-fund manager John Paulson's correct call of the mortgage meltdown... and the $15 billion he made trading it. Paulson was early in predicting the subprime crisis, and he started by shorting subprime mortgages. Then he shorted alt-A. Then prime mortgages. Once that trade played out, he shorted financial institutions. Then he bought financial institutions after they had been left for dead.
Paulson made money on every leg of the trade, but his largest gain – and the final leg of the trade – is still panning out. Paulson currently manages more than $30 billion... And he holds 15% of his fund in gold (through investments in the ETF and mining stocks). As we've said before, when the best and most respected investor on the Street is hoarding gold like a maniacal, antigovernment conspiracy theorist, it's time to take note. Paulson's gold position is so big (he's one of the biggest owners of the GLD exchange-traded fund) and so public, he'd have a hard time unloading... He's in this trade for the long haul. You should be, too.
But Steve Sjuggerud passed along the most original... and probably the best idea of the night. He presented an investment that can earn you 18% interest a year – with a minimum return of 5%. This is probably the single best way to generate safe income going forward. Atlas 400 members will receive more information on this investment shortly. We may try to put together a fund to buy these securities. If you are interested in learning more about the Atlas 400, send Goldsmith an e-mail at sean@theatlas400.com.
New highs: Vanguard Inflation Protected Securities (VIPSX), Visa (V), BNSF (BNI), Automatic Data Processing (ADP), IMS Health (RX), European Goldfields (EGFDF.PK), Royal Gold (RGLD), Barrick Gold (ABX).
In the mailbag... It's the usual fare. Here's a new question. If you had been at the Atlas 400 Club dinner last night, eating with a dozen very experienced financial pros, what question would you have put forward to the group? Send it here: feedback@stansberryresearch.com.
"[A]bout the continuous complaints on BSX... To me, it makes perfect sense after reading the article about the Babe Ruth Effect in the Daily Crux (www.thedailycrux.com) the other day... according to the Credit Suisse write-up, people feel approximately 2.5x more emotional about a loss than they do about a gain of the same magnitude.
This is why subscribers are over-looking the fat profits gained on Bronco, Fannie/Freddie, Calpine, etc. etc... I recommend that Babe Ruth article to everyone as it will definitely make a positive difference in my attitude about investing and best of it all it was free!" – Paid-up subscriber J. Young
Porter comment: Well, maybe that explains it... But I don't think the 2.5 multiple is close to right. We got something like 500 negative e-mails about the 12.5% loss on BSX – including folks who accused me of deliberately recommending a bad stock. Two weeks later, we got a huge gain on our recommendation to buy BNI (Buffett's new railroad) – something like 70%. I didn't get a single e-mail offering congratulations on the recommendation. And nobody accused me of defrauding Warren Buffett by getting you guys into the stock at $65 instead of the $100 he's paying.
"'Port-ah,' you and your crew are GREAT! I enjoy your writings... I must however, disagree with you and your compatriots vowing to flee the USA. Both sets of my grandparents came from Ireland seeking a better life, they found it for themselves, kids, & grandkids. While I agree that our country is REALLY screwed up (current & past Administrations being responsible), I intend to stay and try to fix it for my kids & grandkids. I WILL NOT QUIT this great country of ours, I will fight to right the ship! Keep up the good work, best to all, especially Steve & Matt!" – Paid-up subscriber John
Porter comment: That's your choice. I prefer to guarantee the safety of my family and my wealth. I think it's foolish for you to pretend America is the same country now that it was when your grandparents came here. It's not.
"Tom Dyson believes that we are in the middle of the great debt deflation where cash will be king and assets will decline in value. You and Dan and others believe we are in the middle of hyperinflation by virtue of unprecedented monetary and debt creation. Somebody is right and somebody is wrong (or maybe not)..." – Paid-up subscriber Michael
Porter comment: Oh, that's too easy. Tom is wrong. Dan and I are right. But as I explained above, it doesn't matter. Here's what matters. The U.S. issues paper money, backed only by the "full faith and credit" of the U.S. government. Mmmn... so we're relying on the "faithfulness" of the same government who brought us the Tonkin Gulf and weapons of mass destruction. That's probably not a good decision.
And credit? What credit? The U.S. is the world's largest debtor. Like I told the Alliance audience today, lending to the U.S. government is like lending to a crack addict. The only way he can repay you is if he breaks into your house.
Regards,
Porter Stansberry and Sean Goldsmith
Kiawah Island, South Carolina
November 9, 2009