I think Warren Buffett made an insightful observation on Charlie Rose's talk show last week:
Charlie Rose: This question is asked frequently: Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we're in a crisis?
Warren Bufftett: We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion... so these numbers are unsustainable over time, what we're doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they're going to get less and less and less enthused about your debt. And then, one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy...
What Buffett didn't say here might be even more important than what he did say: The Federal Reserve has already begun to buy Treasury bonds on a large scale (monetizing the debt). In fact, the Fed has said it will buy $1.75 billion of mortgages and Treasury bonds to manipulate interest rates lower. In the short term, this buying will make it painful to bet against the bond market. But we are paying a terrible price for this manipulation. A lower currency devalues all of the assets in America and all of the government bonds outstanding... which could cause our foreign bondholders to dump the dollar en masse.
In fact, the move away from the dollar by other central banks has already begun. The Indian central bank became the first central bank in more than 35 years to make a large-scale gold purchase. It bought 200 metric tons of gold from the International Monetary Fund. Most folks don't realize this was a pure repudiation of the U.S. dollar and paper currencies in general. It's the first sign we've seen in the history of the paper-dollar standard (since the end of Bretton Woods in 1971) that our creditors won't allow America to finance unlimited deficits.
You'll see much more of this going forward... which will require the Fed to monetize even more of our government's bonds.
My friend Chris Weber – a true polymath, economist, and historian – says this about the Indian central bank's actions:
The recent news that India's central bank bought so much of the IMF's gold reminded me of what happened 1,800 years ago, in 215 AD. Rome was the superpower of the time, but it had been slipping for decades. In terms of money, its silver denarius had first been devalued about 150 years earlier, but the devaluations after that had been gradual. But in 215 AD, the emperor Septimus Severus reduced the silver content of the currency from 32 grains to 26. Though it was only a 19% devaluation, it brought the total decline in the value of that period's "reserve" currency to 61%. That act in 215 was a tipping point. Because due to it, India announced that it would no longer accept the denarius, and instead made it known that it only would accept pure gold. After that, with Rome no longer able to buy things with its cheapened currency, Roman living standards went into a tailspin.
So... What does well during a period of manipulated interest rates and inflation? Government-backed banks. Hedge-fund wunderkind John Paulson believes Bank of America, his largest financial position at $2.7 billion, will double to nearly $30 a share by December 2011...
"Banks will have passed the current writedown cycle and have visibility for growth in 2012," Paulson wrote in a letter to his investors. Shares dropped to $2.53 in February (from a high of $55) and have already recovered to just above $16 – a 540% increase.
Together with his new, 300 million-share Citigroup position, Paulson has roughly 10% of his fund in two beaten-down banks. With his position in financials, Paulson has set up his fund to profit from the low fed-funds rate and the near-perfect lending environment for banks. Meanwhile, his massive position in gold is slowly increasing as people realize the U.S. dollar is worthless. By the time the Fed starts increasing rates (making things less advantageous for banks), Paulson will likely have trimmed his financial position, and his gold investments will skyrocket.
In a Bloomberg interview, Marc Faber – publisher of the Gloom, Boom & Doom Report – said within five years, 50% of taxpayer funds will be used just to cover the interest payments on the government's debts (a function of a ballooning balance sheet and higher interest rates). At that point, the government's only choice will be to monetize that debt, and that, Faber said, "will be the end essentially."
Faber's argument for inflation is simple... As long as the Federal Reserve has a money printer, all prices will eventually go up. For every new dollar printed into existence, the value of each existing dollar falls. Therefore, you need more dollars to buy the same asset. But prices increase faster than inflation when you're dealing with assets whose supplies can't increase at the same rate as paper money – assets like wheat, gold, oil, etc...
Faber believes $1,000 is the new support level for gold and the "sky is the limit" for the yellow metal in the future... It all depends on how much money Bernanke prints.
The Dean of Newsletter Writers, Richard Russell of The Dow Theory Letters, recently gave an interesting perspective on gold. Russell acknowledges smart investors around the world now distrust fiat money and are turning to gold:
Today, with the world in turmoil, rich men may be saying to themselves, "I don't know what's going on any more, and frankly, I don't know where I'll be in ten years. But if I own a thousand ounces of gold, I'll know I'm rich. I don't know what the price of gold will be when this whole mess is over, but I know I'll still be wealthy if I own a thousand ounces of gold." And that, to my mind, is some of the thinking behind the rising price of gold and maybe even of stocks.
New highs: Vanguard Inflation Protected Securities (VIPSX), iShares S&P Index ETF (IVV), Cresud (CRESY), Market Vectors Gold Miners ETF (GDX), Burlington Northern (BNI), iShares Silver (SLV), Kinder Morgan Energy Partners (KMP), Enterprise Partners (EPD), Keyera Facilities (KEY-UN.TO), Coca-Cola (KO), Microsoft (MSFT), POSCO (PKX), Automatic Data Processing (ADP), Altius Minerals (ALS.TO), Yamana (AUY), Northgate Minerals (NXG), Royal Gold (RGLD), Silvercorp Metals (SVM), Barrick Gold (ABX), Silver Wheaton (SLW), Sino Gold (SGX.AX), Eldorado Gold (EGO), Martin Midstream (MMLP).
In the mailbag... a return to par. Another upset subscriber, who is convinced we're lazy, arrogant, not worth the money we charge, and doomed to fail. Pretty inspiring stuff. Let us know what you think: feedback@stansberryresearch.com.
"Hi, question about watching insider trading before making a stock purchase. If there is a lot of activity in options being given to insiders, does that carry as much weight as insiders purchasing stock with their own capital? Thanks, keep up the good work! I'm new to the market, but have learned a lot through your service. I look forward to reading your e-mails every day." – Anonymous
Braden Comment: The options grant activity you are seeing is almost certainly part of an established compensation plan and has already been considered by the market and priced into the stock. So it does not have the significance pure insider buying has...
Pure insider buying is a fantastic signal. This is when a senior executive or board member of a company purchases company shares using, as you say, "their own capital." Recently, I caught a major one of these buy signals. A company's CEO purchased $6.4 million worth of stock in his company at the beginning of November. I looked at what was happening and discovered an incredible new investment for my subscribers in a multibillion-dollar industry about to explode. I cover the whole story in today's issue of Inside Strategist, out this evening. I think shares will double by the end of next year – easy.
Insiders are a fantastic resource for new ideas. They have already led us to two doubles this year and helped us put together a portfolio that is up more than 20% on average. If you're not onboard and checking out these great ideas for your own portfolio, click here.
"Even if you just write a 'f/u suckers,' I'll feel better. but too many times you fudge the time/space, pay for something,/get nothing, equalibrium. I'm happy to see you on a lucky streak, but I'm sad to suffer your arrogance. So i light of your arrogance and greed and lack of fudiciary responsibilty; I have decided to take free trials of every single bs letter out their. I won't read a word, but I'll cancel them all, and get my money back. Now aren't you happy that your arrogance has eliminated ANY chance of considering your more costly subscriptions? You see, I am upset because I pay you to not be on time, to express your opinion, with no liability, and if you happen to get lucky, well then there you go off on some confrences or drugs, But us paid-up subscribers?forget us cheap ass bastards, right? you f-in 'rock star'; and you complain about OBAMA not doing his job, what a freaking hippocrate. All I want you to understand, is that your enterage has the same additude as you.; so Port, unless you WAKE-UP!!! , well. the bottom is a long ways down. and it is gunna hurt, when you hit it. call me and I'll give you the # for the made in china replica of what you used to be. your not gunna write to me, I'll keep sending spit for you to read. I paid for sumfin I thought it was newsletters; I guess it was for the privelege to write feedback." – Paid-up subscriber Jerry's Kid
Porter comment: You lost me... but I'm always happy to part as friends if you don't like our work.
"Porter, I had to laugh at the feedback in the Digest today... you were chastised for your opinion on the talent(less) state of teachers, as well as your positive opinion of Singapore. Then another reader offered up advice on having all or your editors collaborate before publishing and my favorite was the suggestion on limiting stock recommendations to only businesses with high 'moral' character. (When I cash my check at the bank I ask for only 'clean' money, none of that trash the stripper or dope dealer has had his hands on please!) I pay for your investment advice, which I am very happy with, I get your opinions and thoughts as a bonus! Thanks, keep up the good work!" – Paid-up subscriber Karen Mize
Porter comment: Thanks for your kind words... Maybe you can decipher the note above.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
November 18, 2009