Before we tackle the latest news on OBAMA!, I'd like to share this sobering thought with you. As you know, I believe we're on the verge of a long period of inflation, thanks to the Federal Reserve and the massive amounts of deficit spending. (Our annual deficits are now larger than our total debt when Reagan took office. By 2020, the annual interest on our debt will be larger than our total debt when Reagan took office.) Australia has moved to contain inflation by beginning to raise interest rates. Will the U.S. Federal Reserve do the same? No way. Here's why...
The big problem with the banking system is commercial real estate. Well more than $1 trillion in mortgages on commercial and multifamily mortgage properties will come due between 2010 and 2013. None of these properties can be refinanced without at least some asset inflation between now and then. There's no way the Fed will tighten its monetary policies. And there's no way the U.S. can run a balanced budget. Inflation, here we come.
For a reminder of how dishonest the government is regarding paper money, I refer you to an incredible video my friend David Galland (the managing director of Casey Research) sent me yesterday...
Here is President Nixon explaining in 1971 that Americans have nothing to fear from his decision to repudiate our promise to redeem dollars for gold. He's only taking this action to protect the dollar from "speculators." And there will be no devaluation. Watching this video is a great reminder: Paper money is nothing more than a big lie.
OBAMA! was awarded the Nobel Peace Prize this morning. I heartily applaud the action: It places him squarely in the camp he belongs. Remember: His fellow sitting presidential award winners include Woodrow Wilson and Theodore Roosevelt...
Wilson is probably responsible for more senseless U.S. deaths than any other president, by a wide margin. It was Wilson who first ignored Washington's specific advice not to become entangled in Europe's wars, setting the stage for the rest of the 20th century. He also taught the other presidents how to get America involved in other people's wars: Tell voters you'll keep them out of war before you're elected, and then do the exact opposite once you're in office.
More than 100,000 Americans were killed in action during World War I... which propagandist George Creel sold to the America people as "The war to end all wars." But as we now know, World War I was really only the "warm up" for World War II, where more than 400,000 Americans died. You could certainly make a case that Wilson is responsible for the greatest mass murder in U.S. history. Let's give him a peace prize...
As for Roosevelt, before he became president, he famously organized a group of volunteers to invade Cuba during America's colonial period – also known as the Spanish American War. Called the "Rough Riders," the brigade only had one horse... Roosevelt's. (His men ran alongside him... no kidding.)
Roosevelt described overrunning the Spanish forces in Cuba, who offered almost no resistance, as the greatest day of his life. The war, which was launched largely to sell newspapers and generate war profits, saw more U.S. troops die because of disease than in any actual fighting. It left the U.S. in possession of both the Philippines and Cuba... where we supported oppressive dictators for most of the next century, leading to a Marxist revolution in Cuba.
As president, Roosevelt arranged to steal Panama from Colombia so America could control the Panama Canal. He then went on to attack corporations as being the scourge of humanity. Thank God he died relatively young (60) before he could do any more harm.
Here's an important lesson... When you see a corporation making a big acquisition at or near the top of a booming market, watch out. On December 13, 2005, ConocoPhillips announced a deal to buy Burlington Resources for $35.6 billion. The price valued Burlington for about $17.50 per barrel – or about twice as much as Chevron paid for Unocal. It was one of the first major signs to me that a major top was forming in the price of oil and natural gas.
Now, it took a while for my fears to be realized, but earlier this week, Conoco essentially repudiated the strategy behind this (and a few other acquisitions). And last year, the firm wrote off $35 billion in assets, wiping out a decade's worth of profits. Meanwhile, the stock is still down considerably since this deal was first announced. Shareholders would have been far, far better off if Conoco's management had done nothing.
In the October 4, 2006 issue of The Digest, I warned that all of the factors were now in place for a huge oil and gas bust.
I've seen many investment manias and this one has all of the trimmings. For the last year, I've felt like a teenager watching a horror film. I knew all of the plot elements by heart, and I knew exactly how the movie would end – everyone was gonna get cut to pieces.
How did I know?
First, the futures markets were clearly in a mania phase, as I pointed out in my e-mail:
Hedge Fund Research counts 68 hedge funds dedicated to energy... up from 14 in 2000. Doug Leggate, of Citigroup, says speculative financial positions account for more than half of the energy future contracts traded on the NYMEX, up from 25% in 2000. In the last three years, the number of crude oil futures contracts and options contracts grew from 600,000 to 2 million.
Second, all of the investment banks were piling on, urging their clients to do a deal, no matter how inflated the price: "After the speculators lit the fire, Wall Street fanned the flames and cooked up their investment-banking fees: There have been $350 billion in energy-sector mergers and acquisitions announced this year – up 50% from last year."
Nothing sends a clearer signal to investors to beware than dozens of expensive mergers and acquisitions.
And finally... there was an idea driving all of these crazy deals: Peak oil – the idea that the world was in imminent danger of running out of oil. Anytime you see the market get swept up in a big idea like the Internet (1990s) or Peak oil (2000s) or global warming... you know it's going to end badly.
The flipside of every crisis, though, is opportunity. Because we knew Conoco would implode eventually, we simply waited until it wrote off all of its bad investments and changed its strategy. I recommended it in April... with natural gas trading for less than $4. We paid a little more than $40 a share, about 42% less than its price when the Burlington deal was announced. We are already up almost 25%. People really believe you can't time the markets. I wonder if they've ever tried...
Where in the U.S. Constitution does it say every citizen is entitled to a house he cannot afford? The U.S. government is providing a guarantee on roughly 90% of the mortgages made so far this year – many of which are going straight into default. I estimate Fannie, Freddie, and FHA defaults will end up costing taxpayers at least $1 trillion over the next five years, and it could certainly cost a lot more. That's roughly $10,000 per family in the United States.
If this kind of no-risk financing isn't a big enough incentive, the government is also going to extend its $8,000 first-time homebuyer tax credit to include all homebuyers. This tax credit already cost $30 billion per month. It costs a lot more now.
The health care "reform" just keeps getting better all the time. Promising everyone free health care wins a lot of votes. Finding a way to pay for it doesn't. So what do you think the politicians are going to do?
You know what they'll do: They're going to tell folks only the rich will pay. The Senate's plan is to enact a 40% private health care tax on plans that cost more than $21,000 – at least in some states. In heavily union states, like New York, where union employees are entitled to gold-plated health care plans, the tax won't kick in unless the plans cost more – say, $25,000.
It's all a lie, of course. There's no way these revenue strategies will work, because people will simply do whatever it takes to avoid the tax. Just like they move away from high income tax states to low ones. Or defer income above a certain level. The fact is, you can't "eat the rich" because most rich people aren't dumb enough to sit in the pot and get cooked.
What will happen when these revenue measures fail? Folks are going to get what they deserve, good and hard: a VAT tax, which will rip billions out of the middle class.
I have a humble suggestion... The U.S. Constitution has a little-remembered amendment – the 14th – which says, in part, citizens are entitled to equal protection under the law. Justice, as everyone knows, is supposed to be blind. Laws should treat citizens equally and not rob one group to pay another. If politicians weren't allowed to tax different people at different rates, they'd never get the votes to start these programs – programs that end up being supported by new taxes on the middle class.
You might think supporting truly fair taxes for all citizens will only help the rich – but you're wrong. It will make government more accountable to everyone and force us to limit the size of government to a level we can all afford. Nothing would do more to stimulate our economy. And besides, why should we have a Constitution and make the president swear to defend it, if everyone is actually going to ignore it?
New highs: Morgan Stanley Emerging Markets (EDD), Central Europe & Russia Fund (CEE), Market Vectors Gold Miners ETF (GDX), Kinder Morgan Energy Partners (KMP), Philip Morris (PM), Portfolio Recovery Associates (PRAA), Sprott Resources (SCP.TO), Yamana (AUY), Royal Gold (RGLD), 3Sbio (SSRX), Silvercorp Metals (SVM), MAG Silver (MVG), Jinshan (JIN.TO), Rex energy (REXX), Encore Acquisition (EAC), Int'l Tower Hill Mines (THM), Nevsun Resources (NSU).
In the mailbag... A reader complains my warnings about the ongoing collapse of the dollar are "shallow." What do you think, dear subscriber? Let us know here: feedback@stansberryresearch.com.
"Your warnings about the sky falling seem shallow. My portfolio is doing rather well. It's like a farmer not wanting to brag about his crops because it might tempt fate. Anyone can yell fire and blame everything on someone else. You are paid to help us put the fire out. Tell us what to sell and what to buy. Every crisis has a silver lining. How about investing in foreign debt with worthless dollars that are honored as though they have value?" – Paid-up subscriber Charles McDonald
Porter comment: I don't think any other newsletter writer (or any other equity analyst period) has given more specific and direct warnings about the fate of the dollar – or given people more safe ways to make a killing on the trend. I've made close to a dozen specific recommendations about how to profit from the falling dollar, starting last fall when I told all of my readers to buy as much bullion as they could reasonably afford. And that was when gold was trading for a little more than $700 per ounce.
At the beginning of this latest downtrend in the dollar last December, I also told folks to buy Annaly "right now" and load up on gold mining stocks, via the ETF GDX. Those two picks are now up 44% and 75%, respectively.
My most recent inflation-related recommendation – an oil driller – is up 70% in just one month. Overall, the average return from my 10 inflation-related open positions is more than 30%.
If you've been reading my letter for the last year, you knew what was going to happen to the dollar, you protected yourself, and you've made a killing. I'm not blaming anyone for anything. I'm doing my very best to warn people about what's happening and to encourage them to take the proper actions to protect themselves. I'd love to hear from the folks who took my warnings seriously. Did you think my advice was "shallow"?
"I would like to see a new service with a focus on stocks outside of the U.S. I think it is only a matter of time until those with half a brain move their brokerage accounts off shore and buy only foreign stocks." – Paid-up subscriber Tom Martin
Porter comment: We are in discussions with one of the best-known and most experienced global equity strategists in the world to set up a new, global equity research joint venture in Hong Kong. If you're interested in applying to work as an analyst in our new Hong Kong shop, please get in touch.
"I got the same treatment on SF Bay while fishing. Also was treated in much the same way last month by a County Park Ranger or Storm Trooper wanta be." – Paid-up subscriber Steve
"I just read the letter/article about Fred Frailey and Kiplingers. Could it be that the man is jealous of your clarity and success? I have found you to be ethical and wise in many ways. And you have a lot of courage to say some of the things you do!!!" – Paid-up subscriber RMS
Porter comment: Don't be too hard on poor Fred Frailey. Lots of people don't like what we do here at Stansberry Research. They've all got their reasons. But as long as we stay focused on serving our subscribers, we'll be fine. Everybody else, we can safely ignore.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
October 9, 2009