OK, Amazon… Now you're being downright presumptuous. You obviously don't know me as well as I thought you did...
Every now and then, the computers in charge over at Amazon send me an e-mail. It'll usually contain book recommendations based on my recent purchases. Most of the time, it's something like, "What's New in Investing." But this morning, it said, "Amazon.com Books: Investing for the 'Super Boom.'"
I thought maybe "Super Boom" referred to the title of some new book, so I opened the e-mail to find out who was predicting such a thing. (Considering the business I'm in, chances are I know the guy.) But it didn't. "Super Boom" is just something Amazon's marketing people pulled out of the cultural milieu to interest investors in buying books.
In other words, everybody knows there's a super boom going on and certainly everyone wants to get on board post haste. Not me. I expressed a desire to get off the train a couple weeks ago and was met with derision from all sides...
Just over a week ago, I said you should hold cash because stocks, bonds, and commodities were too risky. Since then, selloffs have hit risky stock and commodity markets... prompting a flight into (what else?) dollars. Today, the Wall Street Journal says Treasury yields are hitting their 2011 lows. Yields hit lows when prices hit highs.
You can tell me everybody hates Treasurys and it's the right thing to do, and I'll agree on both counts. But even that doesn't matter when investors are barely aware of their demand for dollars. They're too eager to get out of whatever they're in to stop and think about that. They become suddenly aware of a desire to unload mining stocks or silver ETFs, and the system does the rest. Perhaps you'll say, "But oh! Mexico has big dollar reserves and it just bought gold!"
True enough, but what did the seller take in payment? Dollars or pesos or some other currency… some form of the cash I've been telling you to hold. And really, who's smarter? Central banks or people who sell things to central banks? Do you really want to be on the same side as a central bank? It's like following a pension fund into a trade. Pension funds wait until everybody else is in and the committees that run them can prove by looking at magazine covers they're right... THEN they buy. They're morons. They're among the worst investors on the planet. Central banks are established and controlled by governments, possibly the only capital allocators worse than pension funds.
When central banks sold gold in the late 1990s, the metal bottomed. Now they're buying. We think it's proof we're right. Since when? What else can it be but a top, even if it's only an interim top on the way to much higher gold and silver prices (and much more central bank and pension-fund buying)?
One day – probably sooner than anyone would believe – it'll matter big time that the dollar is under attack from its own stewards. Then, the gold and silver bullion we continue to recommend you hold will look a lot smarter than it does right now… much the same way earthquake insurance looks smart when your house is lying in ruins.
I saw some research that suggested if you hold 25% of your cash in gold, you'll preserve your purchasing power during times of inflation. And after all, gold is money. So yes, hold gold. Hold cash. Hold money. Lighten up overvalued stocks and bonds and overbought commodity plays.
I'm grateful for your subscriptions. But I must tell you, dear reader, I love it when you hate my ideas so much you're compelled to write in and say so. And when your comments sting so hard Porter feels the need to run interference and even take a step or two back from me himself... well... THAT is when I bet big.
Yes, in the long term, the dollar is doomed. But right now, everyone hates the dollar. So I'm inclined to hold it right now.
It doesn't matter that Porter's as smart as any investor I know – including all the fancy hedge funds you read about in the paper. That you're no slouch either doesn't matter. All that matters is everybody agrees and I'm on the other side of that consensus. (I can't wait to read tomorrow's mailbag!)
Howard Marks of Oaktree Capital gave one of the best presentations I've ever seen at an investment conference. Marks is a brilliant investor. His firm was deploying a half a billion dollars a week in the aftermath of the crash of 2008. But he's best known for his "Memos from our Chairman." They're excellent reading. They cover a broad range of investment topics and spell out a well-articulated investment philosophy centered around risk control and value. Marks recently culled several memos into an excellent, must-read book, The Most Important Thing. His presentation on Tuesday covered some of the ideas in the book.
Speaking via satellite to attendees of the Value Investing Congress in Pasadena on Tuesday, Marks reminded us of Mark Twain, who said, "When you find yourself on the side of the majority, it's time to reform." Then, as if Marks were stumping for my Extreme Value letter, he quickly followed by saying, "It's inherently lonely and uncomfortable [to be right] and we must tolerate it if we are to hold extreme value positions." Hear, hear!
As if he'd read the mountain of e-mails generated by my cash recommendation, Marks told the crowd successful investors must take the chance of doing something embarrassing. As an amateur actor in several comedies, I may have a competitive advantage there...
In the May issue of Extreme Value, due out tomorrow after market close, I'll show you how to make more by holding cash than you'll make in stocks. Click here to sign up. If you aren't prepared to have your expectations shattered, take a pass. But a word of advice: Don't sign up looking for a hot tip and cancel when Extreme Value's rational tone grates on your nerves. The Extreme Value crew is fiercely loyal and close knit. We only like to add new members when they refuse to go home.
Meredith Whitney is once again banging the table on municipal-bond defaults. Whitney rose to fame when she correctly predicted Citigroup would cut its dividend prior to the subprime crisis. Whitney went largely quiet until December 19, 2010 when she told 60 Minutes we would "see 50 sizable defaults, 50 to 100 sizable defaults, more [in the municipal bond market]" that "will amount to hundreds of billions of dollars' worth of defaults."
Whitney's comments caused an exodus in the muni markets. Since November 2010, investors pulled $47 billion from U.S. muni-bond mutual funds. They withdrew funds for 24 straight weeks. After the initial shock, worries of massive defaults waned. The cost to insure the most troubled states' debt against default dropped. And yields on highly rated 10-year muni bonds backed by a government's taxing authority fell to 2.79% from 3.21% at the start of the year (falling yields mean higher prices).
And in the midst of this lull, Whitney took the stage again... Yesterday at the Milken Conference in Los Angeles, Whitney said, "states have been spending at two-and-a-half times their tax receipts. The states then are cutting off aid to their local governments, which rely on them for over one-third of their monies. The local municipalities have nowhere to go, and their bias is to save their constituents before they save their bondholders."
Much like with Porter's End of America thesis, Whitney is pleading with investors to simply look at the facts... "There's nothing controversial about that call, if you look at the numbers… This municipal issue, you can criticize me for anything you want, I'm numb to it, because I have more conviction on this than I've had on any single thing in my career."
We agree with Meredith Whitney. And we've been following the municipal debt crisis for several years. Most recently, Porter and co-editor Braden Copeland dedicated their January issue of Stansberry's Investment Advisory to the municipal crisis. Their thesis for widespread, state-level defaults is simple... The state and local governments have too much debt and no way to repay it:
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According to a study from the Pew Center on the States, state and local governments will need at least another $1 trillion to meet their obligations over the next few years. Total outstanding state and local debt is currently $3 trillion. It's unlikely the states can borrow the money they need or raise it in new taxes. Widespread defaults are imminent. Why? |
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The states can't print money. Their financial problems can't be "kicked down the street" or monetized. These debts will explode in a crisis this year. – Porter Stansberry and Braden Copeland, Stansberry's Investment Advisory, January 2011 |
You can trace states' dire financial situations back to two changes in the nature of the state of government in the 1970s. The first was the ability for governments to levy a progressive income tax (based on a 1973 Supreme Court decision). Politicians could now get people to vote for higher taxes because the majority would not have to pay them – only "the rich."
Bankers saw states' ability to increase taxes as a reason to increase municipal lending. Wall Street realized the power to tax is the greatest power in the economy – and believed, incorrectly, this newfound power would mean better ability to repay loans and interest.
With the progressive income tax came the explosion of unions for government employees. The ballooning wages and pension liabilities eventually bankrupted states...
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The states and their union employees have reached the inevitable endgame. The numbers in many states are mind numbing. Illinois' pension liability now exceeds $100 billion. Roughly half is unfunded. In California, the pension liability is $50 billion. Another 10 states have unfunded pension liabilities in excess of $10 billion. Pew estimates when retiree health care benefits are included, the total unfunded liabilities of the state governments currently exceed $1 trillion. |
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Who will pay these bills? No one. The governments will default, just like every other union employer eventually does. We know this is inevitable. Taxes cannot be raised enough to close the deficits at the state and local level, never mind actually repaying any of these bonds. – Porter Stansberry and Braden Copeland, Stansberry's Investment Advisory, January 2011 |
The question today is how to profit from the municipal crisis. Ultra-high net worth individuals and institutions can find credit default swaps – insurance policies which pay out in case of default – on specific municipal bonds. If you short the municipal bond fund (HYD), you have to cover the 6.3% dividend. Instead, Porter and Braden recommended shorting shares of the "last municipal-bond insurer standing, Assured Guaranty (AGO)."
When Warren Buffett abandons a business, you're wise to follow. And in 2009, he refused to write insurance on municipal bonds saying, "There will be a terrible problem. And then the question becomes will the federal government help... It's a bet on how the federal government will act over time."
But while Buffett and nearly every other municipal insurer exited the market, Assured Guaranty stepped up lending... writing 98% of the municipal policies for the last year. It even brags in its annual report that it has no competition. As Porter and Braden wrote, "We wouldn't own this stock at any price."
It was a good call. Since the January 14 recommendation, Assured Guaranty has far underperformed the S&P 500. Readers are up 14% on the recommendation…
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New 52-week highs (as of 5/4/11): Intel (INTC).
Still hate my pro-cash position? Direct the chorus of boos to feedback@stansberryresearch.com.
"My broker is pleased with your service. He thinks I might be the next Warren Buffett. Seems I know when to get in and when to get out. I just do my homework, read my lesson, practice my subject, stuff like that. Anyway, I thought I'd give credit where credit is due for a job well done. Thank you, you make me look good." – Paid-up subscriber Charlie Brown
"I just read Mexican Central Bank (Banxico) just bought 100 tons of gold, becoming the owner of 3.5% of the world production for march and april. Just to confirm the huge debasing of the USD and it's slow erosion to become just one form of paper money instead of the world reserve currency. Everything is happening as you have told me since day one I became your subscriber. Thanks for the great advice you provide and solid research." – Paid-up subscriber Pablo
"Tell jeff that the reason for all of the tourists from outside the US is that WE have all been there some of us too many times. Its about time that we open the park to foreigners so that they can witness firsthand the Lazy, turkeyleg eating, riding in a motorized scooter, (that dont need one) smoking cigarettes, fools have bought into Disney. Im in peaceful Turks and Caicos enjoying my drumstick. Peace .Man." – Paid-up subscriber TO
Good investing,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
May 5, 2011
Amazon: You don't know me... Treasury yields at 2011 lows... Cash and gold... Howard Marks: Investment legend... Meredith's muni bond call: Part Deux... Porter's AGO short... Jobless claims soar...