Here's the next big global problem: Italy. Credit default swaps on Italian sovereign debt are now at record levels and moving higher. Currently, it costs €250,000 per year to insure €10 million worth of Italian bonds. I expect these prices to continue to increase, making it much harder for Italy to get the estimated €250 billion it needs to finance its annual deficit and roll over the €170 billion in principal that will come due in the second half of this year.
And... none of these debt estimates includes the growing likelihood of a major bailout for UniCredit, Italy's largest bank. UniCredit is Europe's largest lender to Eastern Europe, where JPMorgan estimates credit losses will total €40 billion this year. When you see in the news that Hungary's currency is plummeting (as it did today), you can bet UniCredit's losses are growing. Ironically, UniCredit is the successor bank of Kredit-Anstalt, whose failure in 1931 overwhelmed European governments, forcing Austria, Germany, and England off of the gold standard. As I told my subscribers in March, I think history is about to repeat itself:
[R]oughly 75 years after its collapse set off the banking crisis that ended the gold standard and destroyed the world's financial system, Kredit-Anstalt (now known as UniCredit) is once again the largest bank in Eastern Europe. I believe it will soon fail again, setting off another global banking crisis. – Stansberry's Investment Advisory, March 2010
One secret about European sovereign debt most investors around the world fail to understand: Europe's banking regulators have allowed the banks to own European sovereign debt with zero reserves because the banks argued these were "risk-free" assets. The easiest way for European banks to "lever up" and increase their returns on equity was to borrow large amounts of slightly higher-yielding sovereign debt, from places like Greece, Spain, Portugal, and Italy. The policy accomplished two things: It allowed nations privileged access to credit, and it allowed banks to take on much more leverage than they could have otherwise afforded. Now, with credit default swap prices rising on these sovereign credits, the truth of these credit risks is coming out.
What does this mean for investors? You should expect the euro to continue to weaken, as the European Central Bank cannot allow Italy or any large commercial bank to fail. And that means more and bigger bailouts. As the size of these bailouts continues to escalate, investors around the world will turn to gold and silver as the only truly reliable currencies.
I also believe these serial financial crises and the huge increases in money supply they foreshadow will hold down investment, employment, and economic growth. Entrepreneurs will be afraid to take on risk in the face of sharply rising interest rates and taxes. At some point, perhaps after a final global crisis, the world's economies will have to reorganize on the basis of something other than paper money. My bet is the world will once again return to the stability and the honesty of gold. When? That's impossible to say, but the most experienced people I talk to say within this decade.
What should you do? The worst part of paper money systems is they force everyone to become a speculator. You have no choice. Low-risk assets, like bank deposits or Treasury bills, aren't going to pay you anything. Meanwhile, inflation will destroy your purchasing power if you can't make at least 10% a year.
Whether you like it or not, to survive with your wealth intact over the next decade you're going to have to suffer the volatility of owning precious metals (gold, silver). You're going to have to take smart risks when a crisis presents good opportunities. That's what we did in late 2008 and early 2009 by selling puts on high-quality stocks at the market bottom. We averaged about 50% returns on the puts we sold, typically holding each position for only two or three months. Finally, in addition to owning high-quality equities (like Dan's World Dominators), you should keep some of your portfolio hedged via short-selling obsolete or highly indebted firms likely to fail.
Now... you might be saying, "I can't do all that stuff..." But, really, you don't have a choice. You'll have to do these things over the next decade, if only to preserve your wealth.
If you want our help to balance your portfolio, you can get our quarterly model portfolio – the S&A 16, which is available exclusively to our S&A Alliance members. In it, we take 16 positions from across the spectrum of investment choices our services have recommended.
In our current S&A 16, for example, we are long shares of super high-quality companies that are well-protected against inflation, like Hershey. We have speculative positions in stocks like one of the companies pioneering the enormous new Eagle Ford shale play in South Texas. We're generating high income via specialized vehicles like Annaly, where our downside is extremely limited, but where we can earn double-digit yields. And finally, most importantly, we always keep 25% of our portfolio (four positions) in "macro" plays designed to profit from the world's constant uncertainties. Currently, we're short the euro, short U.S. Treasuries, long the world's best gold royalty owner, and short the world's weakest maker of hard drives, which we believe will soon be obsolete.
Balancing our portfolio in this way allows us to remain fully invested and earn average returns above 15% annually, while always protecting our capital against the growing possibility of a severe crisis. And we'll release the new S&A 16 next month.
By the way... I know joining the S&A Alliance (which gets you everything we publish now or in the future except for Phase 1) might seem too expensive ($10,000). But the only other way to get this kind of active long and short money management expertise is via a hedge fund. To get into a good hedge fund requires at least a $1 million investment. You'll pay 2% of that annually in fees ($20,000), and then you'll pay another 20% of whatever you make in the fund. Our one-time $10,000 fee is a relative pittance. If you're interested in joining, please call our head of sales, Michael Cottet, at 888-863-9356. He can get you started in the program immediately. Our S&A Alliance members regularly tell us it was the best investment they've ever made.
Finally... a word about track records. As you know, we publish track records in every publication, and at the end of each year, we analyze of each publication based on all of its recommendations. This annual review is done using average returns. As we explain every year, this is a conservative way of estimating our performance because we are adding positions through time, typically one or two per month, while the market enjoys the privilege of being fully invested for the entire period.
So... what if you measured the market (S&P 500) the same way we measure the results of our recommendations? In other words, what if we compared every recommendation we made in my newsletter (Stansberry's Investment Advisory) with the S&P 500 performance for the same period? You could have either bought my recommendation, or you could have bought the S&P 500. Which do you think has done better, consistently, year after year?
Braden Copeland, who now collaborates with me on the Investment Advisory, dug up the numbers. Looking at all of the recommendations I've made since I told subscribers to BUY stocks again in November 2008 (I titled the issue "This Is It" – as in, this is your best chance to buy stocks in decades), my average return is 20.3%. The S&P's return is 5.5%. You would have done about four times better with my recommendations than you would have done investing in an index fund. That's worth $149 a year, isn't it?
To learn more about Stansberry's Investment Advisory, click here.
In the mailbag... a subscriber who seems to prefer we were poor, friendless, and unable to travel... perhaps like himself. What would you prefer, dear subscriber? Let us know here: feedback@stansberryresearch.com.
"You guys make me sick! A sixth of the country is out of work and Sean is bragging about your big dinner at the Plaza in the 'power meeting' room. The best excuse he can come up with is to try to sell me on the idea of joining the gluttony. Give me investment ideas and news of economic importance to my survival, but please, please don't gloat about your success spending my money! How gauche! I bet you don't have the balls to publish this rant." – Paid up subscriber "TG"
Porter comment: I don't recall exactly what Sean wrote... but we are both at the Plaza Hotel in New York City this weekend. My wife is here, too. Gluttony, however, has nothing to do with our trip. We are hosting the first annual meeting of the global wealth club I founded last year, The Atlas 400. So far, 65 of the world's most successful entrepreneurs, artists, bankers, hedge-fund managers, publishers, and investors have joined with me as founding members.
We all believe in a few, core values – personal responsibility, the benefits of a free and civil society, and man's right to wealth. We are aware of the crisis the world is in now and have no faith in our elected leaders' abilities to protect us – far from it. We recognize their desire to exploit our wealth for their own power – tyranny wrapped in the veil of charity.
But the point of our meetings isn't to organize for politics. It's simply to meet other likeminded people, who have good ideas and know about interesting opportunities. To foster these relationships, the club engages in a series of unique activities – things members are unlikely to do on their own. In our first year, we drove Porsche racecars at the company's private track in Germany and attended Oktoberfest. We got front row seats at the Super Bowl in Miami, where I hosted the group at my house. We went to the Darien jungle in Panama and caught 400-pound black marlin. This weekend, we're meeting to vote on the board of directors, discuss the club's upcoming activities, and enjoy some of New York City's finest restaurants.
Over the last few months, we've received a few pointed criticisms about The Atlas 400 and our involvement with the club (which, by the way, is owned by the members and is a nonprofit endeavor). Frankly, I can't understand the criticism. The club allows us to spend more time and develop close personal relationships with a large group of the world's most successful and knowledgeable people. This has a real and important benefit to all of the subscribers of my newsletters: vastly better sources of information. (For example, I learned about the new Eagle Ford shale play directly from a Texas oilman on our fishing trip in Panama.)
On the other hand, I know a large number of people in the world simply hate to see anyone who enjoys life more – or lives it better – than they do. This is one of the most unfortunate aspects of human nature. If you'd rather get your financial advice from someone who isn't very successful, who doesn't have dozens of top level contacts from around the world, and who can't afford to stay in good hotels... I'm sure you can find them.
Regards,
Porter Stansberry and Sean Goldsmith
New York City, New York
June 4, 2010