"Check writing in the trillions is not a bondholder's friend. It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up."
That's an excerpt from Bond King Bill Gross' latest investment outlook (published today). He says the Federal Reserve's next round of quantitative easing will end the 30-year bull market we've experienced in bonds. It's easy to see he's right. Treasury yields are at record lows. Investors are stretching for yield.
For evidence, look no further than Goldman Sachs' latest bond issuance, its largest in history. Goldman sold $1.3 billion of 50-year bonds yesterday, its longest bond ever (the previous longest issuance was for 30 years). The issuance was aimed at private investors, who bought 80% of it. The bonds were priced to yield 6.125%. Goldman would have had to pay 6.75% in the institutional market.
Goldman Sachs has mastered the art of "ripping faces off." And if the smartest bank on the Street issues its longest-dated debt in history, it's safe to assume it's betting on higher interest rates in the future. You don't want to be on the other end of this trade.
The Fed wants inflation. Those who don't think the government can create enough money to inflate are crazy. The Fed can print into infinity, and it's damned determined to do it. The market is down today because investors think the next round of quantitative easing will be smaller than expected... They're expecting only a few hundred billion dollars of Treasury purchases over the next few months (of course, the Fed can't lower rates any further because they're already at zero).
If this couple hundred billion dollars doesn't goose inflation (which it probably won't) the Fed will buy a few hundred billion dollars more. If that doesn't work, a few hundred billion dollars more... Eventually those numbers add up. And eventually, the Fed will get its inflation.
Famed value investor Jeremy Grantham recently published his latest quarterly letter. Like most value guys, he's advocating the purchase of high-quality U.S. stocks over more-popular bonds. Grantham notes bond prices are being manipulated by the artificially low Treasury rates. They "absolutely do not reflect the substantial fears in many quarters about inflation in the long term."
As we saw with this week's Treasury inflation-protected securities (TIPS) auction, the market is indeed fearful of inflation. The falling interest rates we're seeing are misleading... Once excess capacity decreases and the Fed raises rates, we'll see a huge inflationary boom. For a great explanation on how inflation is hiding, watch Frank Byrd's presentation here. I met Frank at the charity poker tournament I attended. He's a smart guy.
Grantham agrees with our own Dan Ferris regarding high-quality U.S. stocks. Grantham says these stocks are technically overvalued, but they're a relative bargain. He also likes emerging-market equities.
But the best piece of advice Grantham gives... and one we echo... is to hold plenty of cash. When nothing is a screaming buy, it's best to sit on the sidelines. When we do get a correction, you'll have dry powder to buy bargains.
Our third uranium pick [Hathor Exploration] is a potential moonshot.
Hathor's Roughrider deposit, located in Saskatchewan, Canada, is the best uranium discovery in the last 20 years for a junior uranium company. It's in the right, mining-friendly jurisdiction, within a few miles of eight major uranium deposits, including Cameco's McArthur River and Cigar Lake mines.
The company owns 90% of the Midwest Northeast project, which includes Roughrider. In November 2009, it published a resource of 12 million pounds of uranium at about 2.5% uranium. This is a tremendous deposit. – Matt Badiali, August 2010, S&A Resource Report
Hathor skyrocketed more than 14% yesterday on great drill results. Resource Report readers are up more than 50% on the recommendation in two months.
They've made a fortune following Matt over the past two years. He has 36 open recommendations in his portfolio. Only five are down. His track record is incredible. He's had four triple-digit winners this year (gains of 186%, 256%, 115%, and 339%). And he'll have five triple-digit winners after Hathor plays out. Matt's performance over the past couple years will likely go down as one of the greatest string of picks in newsletter history. To see what you're missing, click here...
New highs: Imperial Metals (III.TO), AuEx Ventures (XAU.TO), DirecTV (DTV), Penn Virginia Resource (PVR), Enterprise Products (EPD), McDonald's (MCD), Altria Group (MO), Philip Morris International (PM).
Our thoughts on Buffett yesterday seem to have touched a nerve... Genius? Hypocrite? Send your thoughts on Warren to feedback@stansberryresearch.com.
"Several months ago, National Review published an article about Buffett's Modus Operandi. Berkshire owns Safeco Insurance company. Safeco's biggest line is life insurance for estate taxes. The accountants advising the owner of the Buffalo News told her she needed life insurance to cover her estate. She died without said insurance and Buffett bought the News for pennies. He also bought Dairy Queen under similar circumstances. The reason Buffett supports the estate tax is it is his business plan. He buys businesses cheaply when the owner, or owners, dies without adequate insurance for the taxes. He also sells insurance to cover the taxes. Buffett is a big hypocrite!" – Paid-up subscriber Jim Fisher
"Give me a break! Warren Buffett is the most successful stock picker/financial deal maker the world has ever known. Here comes Dan Ferris and Sean Goldsmith who are nobodies in the world of finance and they are bad mouthing him. I have provided feedback via e-mail on several occasions about how Dan Ferris, in particular with his bird-brained comments, jeopardizes the integrity of the entire Stansberry organization. After reading today’s Digest... I rest my case." – Paid-up subscriber Joe Hoover
Goldsmith comment: Getting a little sensitive, Joe... Dan wasn't bad mouthing Buffett's investment acumen. Buffett's incredible. And he's certainly amassed a substantial net worth. But first and foremost, Buffett is a capitalist. You don't amass a $50 billion fortune without stepping on a few toes.
We disagree with Buffett that the government should take half of the assets you've worked your whole life to gather (which were also taxed on the way in), simply because you died. If you work your whole life to earn a fortune, you should be able to pass that on to your family.
Regards,
Sean Goldsmith
Baltimore, Maryland
October 27, 2010