A great strategy to use in this market...

A great strategy to use in this market... Why I still think we're heading into another crisis period... A big bet on 'Peak Oil'... Lawmaker freaks out over pension bill...

The market action over the last few weeks brings to mind one of my all-time favorite songs...

I'll meet you at the bottom if there really is one.

They always told me when you hit it you'll know it.

But I've been falling so long it's like gravity's gone and I'm just floating.

– Mike Cooley, "Gravity is Gone"

Yes... the stock market seems to be edging closer to another panic. This should not be a surprise to any of our readers. On May 11, I wrote: "This year's stock market swoon appears to be upon us."

Since then, the Dow and the Nasdaq turned in their worst monthly performances since May 2010.

I hope by now you know that I try to help subscribers learn something useful in these Friday messages. I recognize these efforts are mostly a fool's errand. Quite simply, I don't believe you can teach anyone anything. All I can do is give you the opportunity to learn something. Or as I say, there is no teaching, only learning.

What I'd like you to learn today could substantially increase your abilities to survive (and even thrive) in the rigged and inflation-driven markets we have today. Let me start by reviewing carefully what I told you three weeks ago...

To be successful as an investor, I believe you have to learn to appreciate bear markets. You have to learn to use them to buy great assets at low prices. Most people will never be able to do this. Instead, they allow secular bear markets and corrections – like the one we're having right now – to scare them out of financial assets. Most investors see low prices or falling stock prices as risky. But actually, they create the foundation of safety.

Today, I'd like to give you a wonderful tool to use during corrections like this one. It will allow you to manage your fears of falling prices, while helping you generate gains now. That way, when the bottom comes, you'll have more cash to put to work. This strategy will change the way you look at stocks forever. It will make you a vastly better investor. First though, a word about the best way to handle this correction...

Like I told you three weeks ago... the best way to handle a correction (assuming you have enough cash on hand already) is to simply do nothing. Sooner or later, the government will do something to stem the panic. Politicians cannot allow a full-fledged run on the banks in Europe – or anywhere else. Why not? The power of all modern, Western nation states is tethered to the worldwide acceptance of paper money. The U.S. dollar is what sits at the base of this system.

If the system collapses, so will the dollar... and so will the United States' control over almost all of the world's economy. Our government will do everything it can to prevent that from happening. And that means... sooner or later... you'll see a renewed campaign to print away these bad debts... to smother the panic with fresh dollar bills.

It's all happening just like I told you it would three weeks ago...

I'll also repeat my advice on how you can know when it's time to step back into the markets and buy stocks. Buy when:

If you doubt my prediction that the banking problems in Europe and the resulting fear of a crisis will spark another round of massive monetary inflation, just look at what the price of gold and silver have done lately. For most of this year, gold, gold stocks, and silver have moved in tandem with the stock market. But not this week. Over the last five trading days, gold, gold stocks, and silver were up, while stocks were down. That's a sign, my friends. Don't take it for granted.

You'll recall that my primary advice from three weeks ago was "to do nothing." I warned you that your efforts to hedge against the likely fall in stocks would probably fail because bear markets are tricky beasts. Instead, I simply recommended raising cash and waiting for the right time to buy.

That's still my primary advice... and my only advice for most people. But... this kind of market creates opportunities for investors skilled enough to make certain kinds of trades. These trades are designed to hedge specific ideas... specific opportunities... and to be immune to the general market decline. I'm talking about "pairs" trading.

Here's a simple pairs trading idea: I believe the market action in gold and silver this week is confirmation that eventually we'll see another massive round of monetary inflation. And that will drive up the price of gold to more than $2,000 an ounce and the price of silver to more than $40. Those are big moves in big global markets. I'd like to take advantage of this... while protecting myself if I'm too early and these precious metals resume their recent declines.

At the same time, I am completely convinced the world's oil markets are undergoing a massive change and that the U.S. will soon (over the next five years) become the world's leading producer of oil. That's a shock the markets still haven't priced in. And it's bad news for the producers of expensive, imported oil – like the folks who are mining the tar sands in Canada. The largest tar-sands oil producer is Suncor (SU).

So... to offset the risk I might take, in say, buying a basket of gold stocks like the Market Vectors Gold Miners exchange-traded fund (GDX), I could sell short an equal position in Suncor. In that way, I'd be both long and short stocks – and thus, I'd be immune from general changes to the stock market. I'd make a profit if gold stocks went up relative to expensive oil producers.

You could also add a few other instruments to this trade to reduce the stock-specific volatility. So for example, you might also buy silver and short a failing coal producer, like Consol (CNX). The idea is to balance being long precious metals with being short expensive forms of energy. That's a position likely to do well this year, as precious metals rebound because of the ongoing global inflation, while energy prices fall because of soaring U.S. production.

If you're interested in more of the details of my energy forecast... please listen to this week's episode of Stansberry Radio. I debate author and macro-trend forecaster Chris Martenson about his forecast of "Peak Oil." In fact, we made a pretty big bet...

For me to collect, the U.S. has to set a new all-time high for oil production in the next 10 years. The truth is... it'll happen in less than six years. But I thought having a few years to spare was a good idea. Do yourself a favor: Listen to this show. Think about these ideas. There's not a bigger, more important idea in the world right now.

To hear the show now click here, and to never miss another free episode of Stansberry Radio subscribe here.

Pairs trading is one way the biggest investment banks, like Goldman Sachs, make money regardless of how the market is doing. They also sell options. And they trade low-risk bonds near maturity.

The kind of trading Wall Street relies on (which is foreign to most individual investors) is wildly profitable for the big banks... Goldman routinely makes more than $100 million a day from trading. And it sometimes goes entire quarters without a single money-losing day... That's how effective these strategies are.

How do we know about the inner workings of Wall Street's trading desks? We hired someone from Goldman's proprietary trading desk – Dr. David Eifrig. And in his Retirement Trader newsletter, he brings to his readers one of the most effective Wall Street trading techniques – and one of our personal favorite strategies. The secret behind this technique is that you don't use it to shoot for huge, one-time gains... Instead, it safely and quickly produces small gains. If you repeat the process month after month... it's not long before your portfolio is showing big returns...

Since launching his newsletter in 2010, Doc has compiled a perfect success rate on every series of closed positions. He's 68 for 68... And we know for a fact some of our readers have used this strategy to make hundreds of thousands of dollars in profits.

Even if you're wary of trading, you should try Retirement Trader. Doc's strategy – which produces cash upfront when you put on the trade – is ideal for a falling market with increasing volatility. If you want to try Doc's Retirement Trader, you can subscribe here.

One last thing... we've heard from lots of critics that our predictions about "The End of America" are all exaggerated. Never mind that we cite all of our sources and document every fact. The truth is, the problems with the long-term financial position of both the federal government and many state governments is far worse than even we have published, simply because we have mainly focused on the existing debts, not the future obligations to pension funds and medical benefits. Check out this video of an Illinois lawmaker reacting to a new pension-funding bill...

New 52-week highs (as of 5/31/12): Vanguard Inflation-Protected Securities Fund (VIPSX) and Wal-Mart (WMT).

In the mailbag... catcalls and liars. No, we don't make this stuff up. We couldn't. We're not that creative. Send your accusations, your acrimony, and, if really necessary, your praise to feedback@stansberryresearch.com.

"A real engineer would not time the time to write the essay you claim JT wrote. I would not put it past diarrhea-mouth Bonner editors to concoct the diatribe posted." – Paid-up subscriber John M. Chenosky (Retired Professional Engineer & Truth Disciple)

Porter comment: John might be a good engineer and "truth disciple," but he seems to have a hard time with the English language. It seems like he was accusing "Bonner editors" of fabricating a letter to the Digest. As a point of fact, while Bill Bonner is a shareholder in our business, he has no operational control. I'm the managing director. So if we were fabricating anything it would be my "diarrhea-mouthed" writers who did it. And of course, we don't fabricate any of the letters we publish here. We think it's a bit funny that you'd think we need to do so.

Regards,

Porter Stansberry

New York, New York

June 1, 2012