How to save money... Spend another $1 trillion

Congress says by spending an extra $1 trillion on health care over the next 10 years and raising taxes substantially (but only on the wealthy, of course), our annual deficits can be reduced. This has to be one of the most outlandish claims we've ever seen politicians make. It will so surely end up being a financial disaster that the bond market has actually begun to price government obligations at higher interest rates than highly rated private companies. For example, two-year notes from Warren Buffett's Berkshire Hathaway are yielding less than Treasuries of a similar maturity – same with debt from Procter & Gamble, Johnson & Johnson, Abbott Labs, Royal Bank of Canada, and Lowe's.

We've been predicting this would happen for some time. To keep you informed and hopefully entertained, let us expand on our premise. We believe the debt of nearly every government in the world will soon trade at a significant premium to the best-run private companies.

The reason is quite simple: As long as they don't have to pay for it, people will always vote for more government spending. That leads politicians to implement strategies that shield the true costs of government spending from the majority of voters – using debt and steeply progressive taxes. Today, roughly half of all Americans pay zero federal income taxes. As a result, it's not hard to win an election promising more things, like "free" health care.

This isn't really a political problem. It's actually an economic problem. There's a structural asymmetry between the people who approve the budgets (through elections) and the people who have to finance the budgets. Eventually, this will lead to a complete fiscal collapse. And it's going to happen a lot sooner than people think because the bondholders aren't stupid. They can see where the trend is heading. And that's why, as of today, it costs OBAMA! more to borrow money than Warren Buffett.

This problem isn't unique to America. It's happening all over the Western world. Nearly every single major nation – the so-called G7 – will have debt-to-GDP ratios that exceed 100% by 2014. The exceptions are Canada and Germany – at least if Germany decides not to bail out Greece, Spain, Portugal, and Italy.

The problem is, once creditors begin to fear more and more paper will simply be printed to pay these debts (and, of course, that's what will happen), interest rates will rise. And they could rise suddenly. That would force governments to spend vastly more money on interest payments than they expect. That's the big problem right now in Greece, for example. I believe the U.S. will be spending close to 25% of its income tax receipts on interest by 2015. That's simply not sustainable.

Sooner or later, something will have to give... whether that's taxpayers abandoning the country or the government vastly expanding the tax base. The same will be true for just about every other major Western country. It won't just be the Greeks rioting in the streets. People here, just like over there, have gotten used to getting something for nothing. And they're going to be very angry when the gravy train comes to an end.

Speaking of gravy trains... As you surely know, OBAMA!'s health care bill made it through the Congress over the weekend, bringing us one step closer to a socialist utopia. Employers will be required to provide affordable insurance or pay a penalty of up to $3,000 per worker. And what if an individual doesn't want insurance? Too bad, the government will fine you $695 a year or 2.5% of your income if you aren't insured.

We don't recall reading in the Constitution where Congress was given the right to force citizens to buy health insurance. Of course, we've long since realized there is no true check on the government's power. But we look forward to reading future Supreme Court decisions about this law. It will at least be entertaining to see how it can twist the plain and obvious meaning of the 10th Amendment, which clearly states powers not expressly given to Congress are strictly reserved for the states: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." So much for a constitutional, limited government...

What's the good news? The new health care bill will create a slew of IRS jobs. According to a press release from Rep. Kevin Brady (R-Texas), the bill will spur the largest expansion of the IRS since withholding taxes was introduced during World War II...

A new analysis by the Joint Economic Committee and the House Ways & Means Committee minority staff estimates up to 16,500 new IRS personnel will be needed to collect, examine and audit new tax information mandated on families and small businesses in the "reconciliation" bill being taken up by the U.S. House of Representatives this weekend.

Scores of new federal mandates and fifteen different tax increases totaling $400 billion are imposed under the Democratic House bill. In addition to more complicated tax returns, families and small businesses will be forced to reveal further tax information to the IRS, provide proof of 'government approved' health care and submit detailed sales information to comply with new excise taxes.

As if the increased tax burden from the health care bill wasn't enough, we'll soon be throwing more tax dollars at the Federal Deposit Insurance Corp (FDIC), too... Regulators closed another seven banks over the weekend, bringing this year's total to 37. And that follows the 140 closures in 2009. The FDIC seized one bank in Alabama, three in Georgia, and one each in Minnesota, Utah, and Ohio. It was unable to find a buyer for Utah-based Advanta Bank, which had $1.6 billion in assets and $1.5 billion in deposits. That failure is expected to cost the federal insurance fund $635.6 million. The other six failures will cost around $647 million. Regulators expect the pace of bank failures to increase this year, as losses mount from commercial property loans. The FDIC expects the cost of resolving bank failures to grow to around $100 billion over the next four years.

We wrote it. Did you short it?

The first stock I'd like for you to short this year is absurdly overvalued and overhyped... I'm talking about First Solar (Nasdaq: FSLR). This company, along with a few others, is in the business of making next-generation, 'thin film' solar panels, which are touted as being competitive from a price standpoint with grid power. What a bunch of bull. If that were true, the company's sales wouldn't come almost exclusively from Germany where the government heavily subsidies solar installations...

In its regulatory filings, First Solar notes that it must find a way to reduce its manufacturing costs by another 50% in order to achieve any real, unsubsidized competitiveness with on-grid power prices. How it will do so using expensive materials like cadmium telluride remains to be seen...

Without a substantial price advantage or a substantial technology advantage, how will the company maintain a big profit margin? It won't... What will actually happen is what always happens to very expensive stocks. Things go wrong. The price of oil and energy in general falls as the world slips into recession. Suddenly, the idea of paying for solar panels seems dumb, given the low cost of energy and budgetary constraints on governments around the world. The global-warming fad fades. People forget. And First Solar ends up like so many other promising tech startups – busted. – Porter Stansberry's Investment Advisory, January 2008

When I first recommended shorting the stock, its shares traded near $300. Today, its shares have fallen to around $100. Today's Wall Street Journal says the stock might soon trade less than $75 – for the exact reasons I predicted two years ago:

First Solar's reign as the sun king could be coming to an end... Solar power relies almost completely on subsidies, and those are being slashed in Germany, where First Solar made 65% of its sales last year... Rival-technology panels are falling in price due to oversupply from places like Asia... First Solar has negotiated large power purchase agreements – which are signed before a plant is built and typically before outside investors commit – for selling electricity at around 15 cents a kilowatt-hour. That doesn't look attractive, given that, in Germany, solar electricity gets sold above 35 cents a kilowatt hour...

So far this year, S&P 500 companies have announced a $4.4 billion combined net dividend increase – the best figure since the fourth quarter of 2007. First-quarter 2009 was the worst quarter in history, with companies announcing $38.7 billion in dividend cuts.

The dividend increases come as nonfinancial S&P 500 companies are sitting on a record $832.4 billion as of yearend 2009. Smaller, riskier stocks have largely driven the Dow's 64% rally since the March lows. Larger companies with stable dividends have, on the other hand, lagged. Investors' risk appetite is returning, pushing them toward small-cap stocks and noninvestment grade bonds. They want higher potential returns and greater yields.

So we expect the market stalwarts to use their record cash to increase dividend payments, thereby attracting new investors... Just look at GPS maker Garmin, whose shares rose nearly 4% last week after the company doubled its dividend.

In other words, this is the perfect environment for our 12% Letter editor Tom Dyson, who scours the market for the highest-quality, highest-yielding stocks he can find. Plus, Tom has discovered a way to "boost" the dividend payments you receive from common stocks – in some cases increasing the payout tenfold. His strategy is the absolute best way to grow your wealth over the long term. To learn more, click here...

New highs: Prestige Brands (PBH), Philip Morris (PM), Steak 'n Shake (SNS), Carpenter Technology (CRS).

In the mailbag... a reader who says he's been reading our letters for 15 years. Mmmn... We've only been publishing for 11 years. We'll take the support either way. Please, let us know what you think – about our country's debts, about OBAMA! care and about our battle with the SEC. We can't promise a reply, but we do read every letter we get: feedback@stansberryresearch.com.

"I've been with you off and on for over 15yrs, even before the 21st Century Alert days. Initially, in my early investment years, I didn't think you would survive without putting up your own money. I found that was the most honest way to be a investment advisor and especially when you put on the journalist hat. It is just very unfortunate that the governmental agencies like the SEC, FDA, IRS, etc, has such deep pockets and political influence that getting justice is almost impossible. It is hard to imagine that you would have to go to the Supreme Court to get justice. When you prevail I hope there is a way that the people with the political incentives to take you this far can be relieved of their duties." – Paid-up subscriber Paul

Porter comment: We appreciate your business and your support in regard to our ongoing battle with the SEC... but I fear you might have mixed up our products with our competitors'. We have only been publishing newsletters under our own brand since 1999. And I can't recall ever publishing (or working for) anything called 21st Century Alert. I don't actually recognize the name...

"I am pleased with your research service. Two years ago, after a few nibbles two, I signed up for the Private Wealth Alliance. None of the other Investment letters I followed over the years have provided such in depth and ease to understand information and follow advise. For me it is 75% learning and I enjoy it. I appreciate your outspokenness, which is only possible based on solid research and understanding of the issues. I value the diligence you and your staff apply in your investment letters as well as on social matters.

"The SEC issue is typical for Washington's bureaucracy where honesty and professionalism are unknown qualities. I applaud your courage and determination to stand up to the egoistic bureaucrats at SEC. I'm elated to see that you take on the SEC and tell your readers what harm that Government agency is doing to the citizens rather than follow up on issues to protect the citizens and improve the ethics and performance of the administration. Unfortunately, yet typical in Washington, guidance and leadership by example is not provided by Congress and/or the administrative branch. What can be expected from our mostly corrupt representatives and elected officials? I wish you all the luck in your endeavor to win your SEC case." – Paid-up subscriber George J Heim

Porter comment: Thanks for your support. The more we talk about the case, the more strange things seem to be happening to hurt us. First, a left-wing blogger started a slanderous attack. And last week, Google suddenly kicked us out of its advertising systems. After nearly a decade of running our ads, Google now says we're unfit to advertise with them. Strange, huh? I'm sure it's just a coincidence...

"I'm from Venezuela, I've been reading your newsletters for almost 2 years, and I'm a Resource Report client, I have read your reports and they are very good. In the last 2 years I have found new ways of investing with the facts that you write that have saved me years of research that maybe I've could not ever find elsewhere (selling puts and covered calls). These ways of investing you teach make me comfortable because I understand from A to Z the process, and make you sleep unworried. Thanks for all the sincere and truth you have taught on us." – Paid-up subscriber Mauricio M.

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
March 22, 2010