Editor's note: To make things easier for "End of America" subscribers, we've created an "End of America" section under the Stansberry's Investment Advisory tab on our website. Initially, this section will contain the special reports we referred to yesterday. Over time, we'll make this your portal for all relevant "End of America" information.
You may think we sort through the day's news and only highlight the bearish stories that support our thesis. We don't. These stories dominate the headlines. And they're certainly the most relevant to your investment accounts. If anything, the news should make you more comfortable. You're already aware of the municipal bond crisis. You know how to protect yourself from the global food crisis. You own gold and silver. And you know which stocks can fight inflation. Every day, we're seeing our "End of America" thesis validated. And you now know how to protect yourself…
Earlier this month, we noted Illinois' attempt to solve its $13 billion budget deficit and reiterated our cautious view on municipal bonds. Today, Illinois announced its groundbreaking plan to cut the deficit. After a week of deliberations, the government's big plan is to raise taxes. The Illinois House and Senate passed a bill to temporarily raise the individual income tax rate to 5% from 3% and the corporate tax rate to 7% from 4.8%. The tax hike will raise an estimated $6.8 billion a year.
The government is making one major assumption about the extra, revenue… That the taxpayers will stay. Money goes where it's treated best. Hiking taxes on your wealthiest citizens and productive businesses is the best way to ensure those citizens and businesses leave. Then, you're left with folks who are paying less in taxes and are more dependent on the state. It's a losing proposition. These states are in a downward spiral. They've got too much debt. Their borrowing costs are set to soar. And they can only raise taxes so much before taxpayers flee.
If you won't take our word on municipal bonds, maybe you'll listen to Jamie Dimon, the CEO of JPMorgan Chase…
Yesterday, Dimon told the crowd at a JPMorgan Chase conference to "be very, very careful" if you invest in municipal bonds. "There have been six or seven municipal bankruptcies already," he said. "I think unfortunately you will see more."
This is the CEO of one of the largest retail banks in the world saying you should avoid muni bonds. You can bet his bank isn't lining up for the upcoming municipal bond auctions. What happens when nobody's left to buy the debt? Will the federal government come in with another trillion-dollar bailout?
Meredith Whitney – the analyst famous for her pre-crisis, bearish call on Citigroup – is probably the most outspoken municipal bond bear. A couple months ago, her firm Meredith Whitney Advisory Group released a 600-page report detailing the muni crisis. She appeared on CNBC this morning to discuss her findings. Whitney predicts 50-100 municipalities could declare "sizable" defaults equaling hundreds of billions of dollars. She noted Indiana is trying to reverse a law to allow cities and municipalities to declare bankruptcy. Michigan has said many municipalities will declare bankruptcy and default on loans. In other words, the people in charge of these states' finances are warning the world defaults are on the way.
Meanwhile, the bond brokers, who have a vested interest in the continued purchase of municipal bonds, are saying, "all is well."
The most important point Whitney raised was that some states have already defaulted. They're just being sneaky about it. For example, Michigan recently restructured its debt so its aggregate debt burden is higher, but the payments are lower. It's "extending and pretending." But Moody's doesn't count these types of restructurings as defaults.
Whitney also said states' financial disclosure is "worse than anything I've ever seen." Remember… this is coming from someone who made a name scouring Wall Street's financial statements, the proverbial "black boxes." When the issuer of a financial statement looks like he's trying to hide something, he probably is.
If not municipal bonds, which are traditionally viewed as a safe-haven asset, then where should you put fresh money? We'd recommend you have some money in gold and silver while the latest bond crisis plays out – particularly silver, which is relatively cheap compared to gold. And if you're looking for a way to buy physical silver with hardly any premium, we suggest you read Retirement Millionaire. Editor Dr. David Eifrig – or Doc, as we call him – discovered a way to buy physical silver for as little as $2.08 (with almost zero premium over spot price… normally premiums can run between 25% and 50% for certain silver coins).
You're probably familiar with the case for owning silver. While it was used as money in the past, today more than 95% of the demand for silver comes from industry. And when that silver is consumed, it's gone forever. Silver's current production is just enough to meet the industrial demand. In other words, there is virtually zero new silver available for investment purposes.
The U.S. Congress established its monetary system in 1792 and agreed to mint coins using both gold and silver. At the time, you needed 15 ounces of silver to buy one ounce of gold. (In other words, what we call the "silver-to-gold ratio" was 15:1.) But in the early 20th century, world governments stopped backing their currency with gold. The ratio went haywire, cracking 71:1 during the Great Depression. Today, the silver-to-gold ratio is 47:1.
But for the first time in decades, people are viewing silver as a monetary asset again. And when silver's viewed as money, the ratio contracts. Will we return to the 18th century ratio of 15 to 1? Probably not. But even if silver doubled, the ratio would still only be 23:1.
Doc detailed his strategy for buying inexpensive silver in his report, "How to Buy U.S. Government-Created Silver for $2.08." Retirement Millionaire subscribers can find it posted under the "Special Reports" section on our website. If you don't subscribe and want to learn more about this little-known strategy for investing in silver, click here…
In addition to Doc's silver report, Retirement Millionaire subscribers also get his top-notch financial advice. (Before earning his M.D., Eifrig worked for a decade on Wall Street as a proprietary trader for banks like Goldman Sachs.)
Since March 2009, Doc's made 35 recommendations… and 30 of them made money. That's an 85% win rate… an incredible feat. The average gain through December 31 was 22%. In his latest issue, published yesterday, Doc shares a super-safe, blue chip company that has steadily grown revenue throughout the financial crisis and maintained its nearly 4% dividend. He also tells readers how to receive double market rates for certificates of deposit (CDs). Again, to learn more about Retirement Millionaire, click here…
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New highs: WidsomTree Japan SmallCap Dividend (DFJ), Northern Dynasty (NAK), Automatic Data Processing (ADP), Dun & Bradstreet (DNB), Calpine (CPN), ExxonMobil (XOM), AmeriGas Partners (APU), EV Energy Partners (EVEP).
Do any of you have horror stories about bankrupt state and municipal governments? For example, Arizona was forced to sell and lease back its capitol building. Illinois' government employees are being evicted from their offices because the state isn't paying rent. We'd love to hear your "boots on the ground" accounts… feedback@stansberryresearch.com.
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"What is the best way to short the EURO for a small investor?" –Paid-up subscriber Sherrill Cochran
Goldsmith comment: One easy way is to buy shares of the ProShares UltraShort Euro (EUO) fund. This fund is set up so shares return 200% of the "inverse" (opposite) of the euro. So if the euro falls against the dollar, shares of this fund rise.
Regards,
Sean Goldsmith
Baltimore, Maryland
January 12, 2011