A flyspeck on the horizon

According to our "Anonymous" subscriber yesterday, we're always on vacation. Well, yesterday, I vacationed on a tour bus for about 10 hours with 15 executives and investors involved in a one-of-a-kind farming project.

We got off the bus in the middle of flat, wheat-covered plains, with 20 mph winds whipping prairie dust into our eyes, the snow-covered Rockies in the distance. We climbed aboard several enormous grain-seeding machines to see how they use technology like GPS to create efficiencies and increase crop yields. GPS is standard on maybe 70% of farm machinery in use today and probably 95% or more of all new sales. What's not standard is a single crop field so large you can't see the other end of it due solely to the curvature of the Earth...

These huge machines were dwarfed by the landscape. I saw a seeding machine on the horizon. It was a flyspeck, barely visible to the naked eye. This is a massive farming project, unlike anything that's being developed in the world today.

After taking the machine tour and a pound of prairie dust in the face, I couldn't keep my eyes open. I had to get back on the bus.

We were visiting the second-largest farm in the country, soon to become the largest... and perhaps one of the two or three largest in the world within five years. I don't normally get excited about a business less than two years old, and I don't normally get excited about things that haven't happened yet. But this situation is special. It's a farm that's ramped up from 0 to 70,000-plus acres in about 15 months. They expect to ramp up to 225,000 acres by the end of next year. I think the project will become a public company one day and make my Extreme Value readers a ton of money (more on this in a minute).

Agriculture is a great place for investment capital these days. It becomes more and more important as people become wealthier. Today, enormous new demand for commodities is coming from Asia. People in China and India, among other places, are a little bit wealthier today by our standards. But they're a lot wealthier today by their previous standards. First thing you do when you get a little more money coming in is eat better. That's one big reason why I'm really bullish on this farming project.

I'm being short on specifics. Those are reserved for subscribers to Extreme Value, who will learn all the details of my farming research trip in the issue due out Friday, June 4. To get access to this one-of-a-kind opportunity, you have to know the name of a certain publicly traded hedge fund the majority of investors don't even know exists. It's not like any other hedge fund. It's not buying financial stocks or publicly traded gold stocks. It's buying private stakes in precious metals, oil and gas, and agriculture businesses. You can't access these private investments any other way. You have to buy this publicly traded hedge fund to get in on the one-of-a-kind farming opportunity.

If you're scared of paper money, I totally agree with you. The next issue of Extreme Value is for you. If you're scared of stocks, I agree most of them are way overpriced (as I've been saying for months now), and this farming opportunity is for you, too. To get access to Extreme Value, click here now.

Between meetings and visits yesterday, I had enough time to notice Mr. Market falling out of bed. As I write this, the S&P 500 is down 2%. It's getting down around where it was last Thursday... only this time it ain't no trading mistake. I'm not predicting a market crash, but I'll remind you of what I told the audience at the Stansberry Alliance meeting in South Carolina last fall. Stocks don't go into lengthy bull markets until they hit rock-bottom valuations, usually with the Dow Jones Industrials or the S&P 500 trading below 10 times earnings. In fact, before a big bull market can happen, you'll see stocks bouncing along at low valuations for a year or more. Then one day, when nobody's looking, a new bull is born.

That's years in the future, though. Stocks will continue to go sideways for at least five years, ratcheting up and down in a painful, multiyear seesaw motion. That's why I only buy what is dirt-cheap. This is no time for marginal ideas. If you don't have a high sense of conviction and a substantial margin of safety, hold on to your cash.

Aside from noticing Mr. Market falling out of bed, I also noticed a Wall Street Journal headline this morning: "Inflation at 44-year low."

The WSJ article under that headline makes the usual novice error of equating upward movements in the price of goods with inflation. Whether or not the prices of goods reflect the existence of inflation is a separate issue from whether there's inflation. Stated as simply as possible, inflation is growth in the money supply. And we've seen massive growth in the monetary base in the U.S. It was less than $900 billion before the crisis really hit in September 2008. By December of that year, it was more than $2.2 trillion. According to the official Federal Reserve release, it's been more than $2.3 trillion since the week of April 21. It's backed off slightly since, but the Fed's monetary base is still near record highs. The only thing keeping massive runaway price inflation in check is the crappy condition of the banking system.

Don't get fooled. There is one and only one way for the government to "fix" the deteriorating banking system. That one way requires the wholesale printing of money. Don't get bogged down in the purposely complicated, secretive workings of the Fed. It prints money. That's its business. That's why we keep telling you to buy gold. After a quick conference call early tomorrow morning, I'm heading straight for my coin dealer and picking up some more Krugerrands.

I know what's happening to the banking system because I've seen what's been happening to the collateral behind the world's largest debt market, the U.S. home mortgage market. I've been watching things as we've progressed through the sale of our current home and the purchase of our new home (which is not quite done yet).

We set the asking price for our current home based on the comparable sales in our neighborhood. A sign went up in the yard, and we put out some flyers with the asking price and details about the house. The real estate agents came through a few days later and told me my asking price was $10,000 too high. I lowered the price $10,000 immediately because I wanted to sell a house, not sit around waiting.

Then, the appraisal came in more than 10% less than the reduced asking price. The low appraisal was due to the lack of recent sales and the distressed condition of more than 52% of the collateral in our area. The same thing happened at the house we're buying. The sellers watched in horror as 10% was hacked off their asking price, due to the moribund local housing market. We took a hit on our end, but made it up on the house we're buying.

I spoke with a mortgage broker who has a national mortgage appraisal consultant working for him. The consultant looks at appraisals all over the country. She says it's the same all over. Folks offer a house for, say, $399,000, which they paid more than $600,000 for three or four years ago. Then, the appraisal comes in at, say, $360,000 or so. Ouch. Don't bother appealing the appraisal, either...

Showing the appraisal to the banker is like showing a video of a homicide to a jury. Once they see you standing there pulling the trigger and the guy falling over dead, it's over. Bankers can't get that appraisal number out of their heads. And they won't lend more than what's necessary to support the appraisal. We were able to offer more than the appraisal only because we were coming in with a large enough down payment. Otherwise, we'd have been out of luck. And by the way, get ready to sign a million forms documenting your income, assets, arms, legs, and first-born child. Bankers have a new religion called underwriting. Still, it'll prove too little too late for many of them. The FDIC will likely seize more banks this year than the 140 or so it seized last year.

Sure, the housing sales numbers in the newspaper look good. But no one tells you housing sales always look good during the prime buying season in the warm months. It happens every year like clockwork. But housing prices will continue to crash as the weather turns colder and buyers disappear. Also, the appraisals really fell off a cliff after Komrade Obama's $8,000 first-time homebuyer tax credit expired. Like with the car-buying credit, his homebuyer program front-loaded the demand. Now, it's wasteland, when it would normally be busier.

All this and more is why Whitney Tilson and Glenn Tongue of hedge fund T2 Partners are short the Homebuilder ETF (ITB). Building new homes is a bad business when the supply of foreclosures continues to soar and you can't sell the existing stock of homes. The homebuilder short has been a great bet recently. I suspect it's got some legs under it and will continue to work for a while longer.

New highs: none.

A recommendation for "Anonymous" from yesterday's mailbag. And a question on buying gold bullion. Anything you'd like to let us know? Send it here: feedback@stansberryresearch.com.

"Thank you, I needed that today. I actually think printing a few emails from 'Anonymous' like you did, or others like him/her/it are entertaining at the least, potentially eye opening. These critters trade against us as pointed out, but they also breed, and vote. They tend to attack us for thinking or(gasp) making that evil substance they know nothing of, money, then demand we give more of ours to them via way of the political process. I have met many of them personally. They are growing in numbers. I think we need to be reminded from time to time, not to mention entertained.

"I suspect I would have gotten myself fired for my own answer to their request for a job as I might not been quite so family friendly.

"A word to 'Anonymous' though: lithium. Try it, it can be your friend." – Paid-up subscriber Kurt

"Please, please, please.... at least interview this 'anonymous' chap. I am wondering if he is high, funny, mad, or just lacks command of the spoken language. Thank you for posting his letter." – Paid-up subscriber Costas

Ferris comment: Anonymous has had his 15 minutes of fame. I won't be calling him for an interview. I sure hope the poor guy speaks and thinks better than he writes.

"The last few weeks you and others have been pushing the purchase of Gold. Are the Gold mining stock Matt is giving information on good stocks to buy or should a person buy Gold Bullions? If so, how do I go about purchasing Gold Bullions and where would I find the best deals?" – Paid-up subscriber Ron

Ferris comment: I buy Krugerrands. They're the most widely circulated gold bullion coin in the world. That usually means they'll have the lowest premiums. Sometimes my coin guy will redirect me into U.S. Gold Eagles if the premium is lower there. They're both the same, and I recommend you buy some now before gold takes off over the next few years.

Steve Sjuggerud just published a two-part series on how to buy gold in DailyWealth. You can read it here. Steve also managed to arrange a special offer for DailyWealth Premium subscribers: one-ounce gold bullion coins at a markup of only $1. Sign up for DailyWealth Premium here.

Regards,

Dan Ferris
Somewhere in Canada
May 20, 2010