'Inflation is the salve that heals all financial wounds'...

'Inflation is the salve that heals all financial wounds'... Why has Bank of America rallied?... How wealth is stolen from people who don't understand the 'game'... Recommending these stocks has cost me a lot of subscribers...

We wrote it. Did you buy it...?

Yesterday, Bank of America, the second-largest bank in the United States by assets, reported its first-quarter results. The bank continues to struggle with significant operational problems. Its basic, underlying banking business is in a severe decline. Loans outstanding fell by 3% year over year. Total revenue fell to $22.3 billion, down from $26.9 billion last year.

These facts explain, in part, why Bank of America was the single-biggest loser in the Dow Jones Industrial Average of 30 stocks last year. Why, then, am I recommending the stock? Why has it rallied more than 60% already this year?

In today's Friday Digest, I'd like to talk about banking. The subject makes most people's eyes glaze over, I know. But don't stop reading this yet. I'd like you to understand a few simple things about banks. These things happen to be incredibly important right now – both to you as an investor and to us as a nation. Whether you decide to use this information to make money this year or not... you should know what's really happening to our monetary system… and ought to understand why.

One more bit in prelude... Recommending bank stocks in my last issue has already cost me more than a few subscribers... And I'm certain that today's Digest will result in another wave of cancellations and refunds.

Why would recommending bank stocks get me in hot water with our subscribers?

Well, a large contingent of so-called "gold bugs" – or "hard money" investors – will never, ever buy a bank. That's perfectly fine with me... You can do well with your investments if you never, ever own a highly leveraged financial institution. No doubt, owning bank stocks is risky. These equities have been a horrible bet for most of the last six years.

On the other hand, many of the people who would never buy a bank stock know next-to-nothing about how the banking system works. I believe that's a critical mistake. I'd like to show you why...

Most of all, I want to give you the information you need to make a lot of money this year. You see... the system we have in place right now is designed to make billions and billions of dollars for the folks who understand how it works. This is a knowledge game... All of this wealth is stolen from the people who don't understand how the game works. So even if you hate banks... even if you believe the U.S. dollar is soon to be worth nothing more than toilet paper... please read today's Digest.

Bank of America does business with 99% of U.S. Fortune 500 companies and its retail banking "footprint" covers 80% of the U.S. population. It is, by far, the most important financial institution in the United States... And that makes it the most important financial institution in the world (because the U.S. controls the world's reserve currency).

If the U.S. hopes to maintain its financial hegemony over the rest of the world, Bank of America cannot fail. With more than $2 trillion in assets, there's no credible way to bail out the bank. And yet...

Many of its assets are mortgages and real estate and mortgage securities. Some of them sit squarely in the middle of the mess of the last financial crisis.

For example, Bank of America took over many of the loans issued by Countrywide Financial... perhaps the most notorious issuer of rotten subprime loans. Bank of America has taken billion and billions of dollars in charges against these bad loans and the potential future litigation. These costs threatened to sink the bank back in 2008 and 2009.

Last Friday, the bank reported earnings from continuing operations of $0.31 per share – up 35% over last year. That was more than double what Wall Street's leading analysts had forecast. The consensus estimate was only $0.12 per share. How could the earnings have so far exceeded the analysts' expectations? How could Bank of America have done so well, with all those bad loans and despite the struggles of its core banking business?

What the analysts always forget is the amount of leverage in these banks. Bank of America holds about $150 billion in tangible equity. From that base of capital, it controls more than $2 trillion in assets. Assuming the nominal value of these assets increases (thanks to inflation) about 10%... that alone will produce more than a 100% increase in tangible equity.

What you have to understand is... the crisis of 2008-2009 wiped out investors in these banks because as asset values fell, the losses were multiplied by the leverage these banks employ. But as inflation begins to lift asset values (like real estate, stocks, bonds, etc.), the same thing will happen in reverse. That's precisely why the Federal Reserve and European Central Bank (ECB) have printed so much money. It's the only way to save the banking system. They must generate inflation.

As a result, those policies will create huge wealth for bankers and their shareholders. So it will be that the people and policies that created the disastrous real estate bubble of 2001-2009 will reap the largest gains from the bailout. (That's one of the many reasons I abhor paper money systems...)

Looking more carefully at Bank of America's numbers, you can see this happening. The bank made more than an extra $1 billion over the quarter because it was able to reduce its allowance for credit losses from $3.8 billion to only $2.4 billion. This shows you the inflation is filtering down and pushing up the value of its assets.

Another obvious sign? Trading profits. Bank of America generated more than $4.1 billion in bond, commodity, and currency trading in the first quarter of this year. These profits come directly from the Fed's manipulation of the bond market. These two core changes – higher asset values (resulting in less credit losses) and more liquid trading markets – helped Bank of America increase its operating profit by 38% year over year, despite revenue falling by 2.5%.

Keep an eye on those numbers – credit-loss reductions and trading profits. They are the key to understanding how the Fed's inflation will benefit banks, at the expense of the rest of us. Today, Bank of America is trading for less than 0.75 times its book value. As the value of its assets increase, its book value will soar. And as book value continues to grow, the stock market will eventually put a premium on it. Within 12 to 24 months, Bank of America will trade at more than 1.5 times book value... And the stock will have tripled from here.

In my latest issue, I recommended my three favorite bank stocks to profit from the coming inflation. These three stocks offer us a big discount to tangible book value and an adequate cash cushion to protect from any downside risk. I think these stocks could double in the next year. Click here to learn about my newsletter, which will give you access to my latest picks...

Also, in Retirement Millionaire, Dr. David Eifrig recommended another, super-high-quality bank stock. He, like me, believes the banking sector is strong right now. And the stock he recommends pays almost a 3% dividend, a dividend he believes will double in two years or less. You can learn about a Retirement Millionaire subscription here...

Here's the thought I want to leave you with... Whether you profit from these changes or not, the value that's being expressed in Bank of America's operating earnings is being stolen from every other American through the actions of the Federal Reserve. You can either do what's necessary to hedge against this risk... or you can suffer from it. Now you have the information you need to make that decision. But the choice is yours.

New 52-week highs (as of 4/19/2012): W.R. Berkley (WRB), Calpine (CPN), Hershey (HSY), Texas Pacific Land Trust (TPL), and Altria Group (MO).

Are you ready to buy bank stocks and profit from the great inflation that's coming? Or is the mere suggestion heresy? Send us your thoughts here: feedback@stansberryresearch.com.

"'Ben Bernanke is the chairman of the Federal Reserve. He has a dual mandate... His goals are to deliver 1) price stability (no inflation) and 2) full employment.'

"The third goal is for all the incumbent politicians to get re-elected, and actually that is goal number one this year. Nobody in Washington has ever forgotten Bill Clinton's tag line, 'It's the economy, stupid.'" – Paid-up subscriber Stephen Kovaka

"Your comments on Oil Prices today p*ssed me off and I will think hard on discontinuing this newsletter. First, to call the President of the United State 'comrade' is extremely disrespectful. You are following the practices of the Floridia legislator declaring that certain U.S. house representatives are communist. This is totally unfounded, ridiculous and does absolutely no good in moving the United States forward.

"I would like to know how long you have been in the oil business? From 30 years oil experts, it cost about $30 a barrel to break even for the oil companies in terms of drilling and refining. Additional costs come in exploration, paying lobbyists and then there is the Federal and State taxes with state taxes on gasoline being as much 3X to 4X times more then federal taxes. With the Dodd-Frank legislations banks would be pushed out of the oil speculation business. If the banks lawyers would discontinue their blocking practices, we could get on with the proper amount of regulation that provides shareholders and consumers a little bit of protection. Without consumers and customers there are no reasons for corporations to exist." – Paid-up subscriber Bill Stowe

"Okay... you've finally asked a question that I feel smart enough to answer! As a pilot for Delta Air Lines, I regularly fly to Madrid and Barcelona (both are on my top ten list of places I've been) and one thing us pilots like to do is eat well and sight see! So here you go...

"Madrid – Go eat at Botin (near Madrid's Plaza Mayor) and order their Suckling Pig dish. It is THE oldest restaurant in the world, operating continuously since 1725. Then go have a drink at the 'Bull Bar,' La Taurina, which celebrates the bulls (as opposed to the Matadors) with an assortment of stuffed heads of famous bulls hanging overhead and unbelievable pictures of bulls goring Matadors.

"If you have time, take the Bullet Train (30min) North to Segovia and see the castle (one of the better ones in Europe) and the Roman Aqueduct...

"Barcelona – Go see the architecture of on Antoni Gaudi... In particular, the Sagrada Familia, a huge cathedral like nothing you've ever see before. Then, a few blocks away is Casa Mila, a residential apartment building also built like something out of a fantasy. When you get hungry for dinner, head on over to La Flauta... a favorite with the locals for good reason. Or, go to Los Caracoles (a bit touristy) for great food and a really nice atmosphere.

"If there are any art freaks in your entourage, go see the Picasso Museum... I not a big fan of his, so to get myself motivated, I played Pink Floyd's 'The Wall' on my iPod while view his work and by the end of the exhibit my neurons were pretty well shot... I still don't get him, though. I must be too boorish to appreciate something I liken to my daughter's grade school art project... you'll see what I mean when you see his 'pancake dog' in every other piece.

"I personally like Barcelona more than Madrid and you'll find the people friendlier. Oh, and a little tip... DON'T refer to Barcelona's residents as Spaniards! They're Catalonias and proud of it... Have a great trip, and let me know what you go see! Oh, and keep up the great work!" – Paid-up subscriber Han van den Brink

Porter Stansberry

Baltimore, Maryland

April 20, 2012