Bernie Madoff's client list is out, and there are plenty of "stars" on it – baseball legend Sandy Koufax, actor John Malkovich, talk-show mogul Larry King. No surprise here. These folks got rich by being popular entertainers, not by knowing how or with whom to invest. Come to think of it, hardly anyone does get rich that way...
What's really telling is Madoff's client list is loaded with people who should have known better – private-equity investor Thomas H. Lee and real estate mogul Stephen L. Green of SL Green Realty. You'll even find money managers like Sandy Gottesman, an early Berkshire Hathaway investor and longtime Buffett acquaintance who manages $10 billion at his investment firm, First Manhattan.
The Madoff lesson is simple: Your money is your money, and you're the one who suffers if it disappears. Don't let self-styled experts intimidate you. Always ask all the questions you need to ask. Money is serious business.
This is really shaping up as the Great Depression Part II, with Obama's nearly $900 billion bailout package as the first episode of the New New Deal. Protectionism was one of the highly destructive ideas that helped keep the U.S. economy down during the 1930s. The bailout includes "Buy American" language, requiring bailout money to be spent on U.S. goods, something U.S. trading partners like China, India, Russia, and other signers of trade treaties with the U.S. aren't crazy about.
I bet you some day soon we get something very much like the New Deal's Committee on Continuity of Business and Employment, which put out a report in 1931 stating: "A freedom of action which might have been justified in the relatively simple life of the last century cannot be tolerated today... We have left the period of extreme individualism and are living in a period in which national economy must be recognized as a controlling factor."
Where do you invest if the Great Depression II is in our future? Believe it or not, gold stocks. Homestake Mining shares rose sixfold from October 1929 to December 1935, during which time the Dow Jones Industrials Average lost 64% of its value. A huge run up in Homestake's share price came after FDR stole everyone's gold. It's foolish to think you can impair gold's value by making it illegal. Prohibition usually increases the price of the outlawed commodity.
So it's not completely crazy that I'm watching the destruction of trillions of dollars cause a huge deflationary event AND recommending three gold stocks in the next issue of Extreme Value, due out a week from tomorrow. To get access, click here.
Remember, in our system, inflation is the ever-present risk, deflationary events are the periodic opportunity. As the opportunity is spelled out more clearly day by day, the Fed does its part and ramps up the risk...
The Federal Reserve has expanded its balance sheet by more than 120% since September, from $894 billion to a little less than $2 trillion. You can see the numbers here. You can't expand the supply of gold 120% in five months, and you can't contract it 30%, like the government did with the money supply during the Great Depression.
Poor Bank of America is really cutting back, selling three of its seven corporate jets and the helicopter it acquired from Merrill Lynch. How it will get by on four jets, only time will tell.
Buffett, founder, chairman, and CEO of Extreme Value pick Berkshire Hathaway (BRK-A/B), got ridiculously favorable terms for yet another investment... Shares of Swiss Re, the world's second-largest reinsurer, plunged 27% after the company announced a huge loss and dividend cut. Buffett, who bought a 3% position in Swiss Re in January 2008, injected another $2.6 billion into the company by buying its convertible bonds yielding 12%. Berkshire can convert the notes to Swiss Re shares after three years at a price of 25 francs (they currently trade around 22 francs) apiece, or continue to receive "perpetual" 12% payments.
According to Swiss Re CEO Jacques Aigrain, "The contacts were extremely recent, and the solutions were developed in an extremely short timeframe, leading to a signing of our agreement during the night." In non-CEO speak, Aigrain said, "We were desperate, and we needed cash. Buffett had the cash, so we gave him whatever terms he wanted."
Buffett has become the world's biggest pawnbroker... a guy with cash who lends to people who are so desperate they'll give you whatever terms are necessary to get the cash immediately. I wonder if Buffett sits in a bulletproof cage in Omaha?
In addition to Swiss Re, Buffett did a pawnbroker deal for $5 billion of convertible preferred stock in Goldman Sachs that pays 10% a year and can be converted to common stock at any time at a 10% premium. This includes free warrants to buy $5 billion of Goldman common stock at any time until 2013. He gave $3 billion to GE in exchange for a 10% preferred, callable after three years at a 10% premium (again, with $3 billion of free warrants for common stock with a strike price of $22.25 per share). And earlier this week, Harley-Davidson pawned a piece of itself for $300 million of notes yielding 15%.
Buffett's pawnbrokering spree will provide excellent returns for Berkshire Hathaway for years to come. You and I can't do the kind of deals Buffett does... but right now, we can find a bunch of fantastic companies selling at dirt-cheap prices. I've named some of them. The really stellar business during the crisis has been and continues to be Wal-Mart...
Extreme Value pick Wal-Mart (WMT) saw same-store sales growth (a key retail metric) of 2.1% in January. Wal-Mart proved itself as the ultimate "trade-down" destination in 2008, when its annual same-store sales growth was triple that of 2007.
Notable among retailers was Buckle, the teen apparel store, which posted same-store sales growth of 15% – its 18th consecutive month of double-digit same-store sales growth.
In Orange County, 1,718 homes that last year sold for $1 million or more are either in foreclosure or were seized by a bank. That equals more than half of the county's 2,862 $1 million-plus home sales in 2008. The California beach county was responsible for one-third of default notices on $1 mil
lion homes statewide.
Today, Dr. David Eifrig told me he found a way to get meals at top restaurants all over the country for 60% off. He's giving readers the scoop in his latest report – due out tomorrow.
This morning, he told DailyWealth readers how to take a cross-country trip for one-tenth the price most people pay. You see, David has devoted most of his adult life to finding loopholes and secrets that can save you thousands and make for a much happier retirement. He has formally retired twice in his life, and now he's working for us... sharing secrets he spent years learning in Retirement Millionaire... Some topics he's already covered include how to get free prescription drugs and how you can actually get paid to own gold. And for this week, we're offering his service for only $39. If you'd like to learn more secrets and government loopholes that can make your retirement infinitely wealthier, click here...
New highs: none.
In today's mailbag... who's the puppet and who's pulling the strings? Send your theories to feedback@stansberryresearch.com.
"Regarding the Ferris comment on 1/29 about politicians buying power with our stolen money: That is perhaps true but it presumes that the politicians are free agents, in control of their own will, gaining power for themselves, which I do not believe is true. The reality is that the politicians give the real substance of any power they gain away to their masters in exchange for the appearance of power. Follow the money because the path of that fraudulent transaction shows where the power is being taken from (We the People) and to whom it is being given (nameless people who apparently control the politicians to the degree that they have given them the bailout trillions they have looted from us without any accountability). The politicians are merely 'useful idiots,' cowards and quislings willing to sell themselves out (and the rest of us) in order to gain the appearance of power and/or to avoid the loss of it. Our nation, indeed our world, is not being overtaken by a destructive political ideology, it is being overtaken by a destructive psychotherapy cult. And the politicians are just chief among those who have been brainwashed by it." – Paid-up subscriber Leland Hosford
Ferris comment: I agree that what's going on in banking right now is an evil government assault on the free market. Those big banks, the ones Paulson forced to take the bailout, thrive on their "too big to fail" status. It entrenches them and makes others less competitive.
A recent headline in American Banker is typical, "Industry Backs Bill Giving FDIC More Power." The more power the deposit insurer gets, the more risk and leverage the bankers can take on, keeping in mind their goal is to cash out quickly, not safeguard customers' deposits.
So at the very least, it's a partnership of big banking and government, designed to increase the power of both. It harkens back to the creation of the Federal Reserve, by which bankers took over the financial system, having failed to do so by other means.
"Speaking to the subject of the success of your various advisors, I agree with subscriber 'Nancy' that I would hope that all of you were getting wealthy from your advice as well as us. The former CEO of Guardian Insurance Co. was a patient of mine (I'm a dentist), and he stated rather emphatically that he was glad I was successful because to him it meant that I must be good at what I did and was delivering a quality service to him as well as many others." – Paid-up subscriber Dennis Pipher
Regards,
Dan Ferris
Medford, Oregon
February 5, 2009