A brief personal note... My older brother, Mills, turns 40 today. I remember when he turned 16 like it was yesterday. My parents bought him an old, beat-up VW van. We thought it was the coolest thing in the whole world. I was probably more excited than Mills because I knew if my brother got a car, it wouldn't be long until I got one, too. Likewise when he went off to college or when he bought his first house, etc. Seeing my older brother mature and accomplish milestones in life, I knew I'd be following right behind him. Only now, the prospect isn't so exciting...
The Federal Housing Administration (FHA), which guaranteed about a quarter of all U.S. home loans made this year, is nearing insolvency. Soaring mortgage defaults have pushed the FHA's reserves to below the minimum level set by Congress... "It's very serious," FHA Commissioner David Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."
As we pointed out earlier in the week, FHA loans currently account for 80% of all new loans for many mortgage lenders across the country. If the FHA goes bust, the housing resurgence we've seen is finished. To keep housing going, the organization must get a multibillion-dollar bailout from Congress or start charging borrowers more. Which do you bet will happen, dear subscriber?
We would like to know where in the Constitution it says every citizen is entitled to a home he cannot afford and medical services that taxpayers will provide...
One of the strange things about the world economy is the way Federal Reserve policies end up influencing other economies all the way around the world. The Fed is pumping as much money and credit as it can into the global financial system. In America, which is drowning in debt, this hasn't yet caused any significant inflation. But what about in other parts of the world that are better run and better managed?
Take, for example Hong Kong. Hong Kong outsources its monetary policy to the U.S. Federal Reserve via a currency board that pegs the local Hong Kong dollar to the U.S. dollar. Wonder what's happening over there? Real estate is going through the roof, thanks to the Fed's ongoing inflation. Two new luxury apartments in Hong Kong have been listed at a record $9,640 per square foot. Sun Hung Kai Properties, the world's largest developer by market value, hopes to sell the three-story apartments – on the 91st to 93rd floors of twin 270m towers – for nearly $39 million. Luxury real estate prices in Hong Kong have risen 26% since just before the collapse of Lehman Brothers (in September 2008).
The Hong Kong market is a warning of what will happen here if the Fed and Congress keep going with their current massive inflation.
Obama's pay czar, Kenneth Feinberg, apparently didn't offer enough oversight of the compensation policies of Wall Street. Now, the Federal Reserve is planning on handling Wall Street compensation. Under the proposal, the Fed would work closely with corporate boards and executives at the country's financial institutions to set companywide policies for pay, hoping to deter incentives that encourage risk. The Fed believes it has the legal authority to do this through its existing powers, which aim to oversee a bank's soundness. And at the G20 meeting in Pittsburgh next week, U.S. and foreign officials plan to coordinate their financial compensation rules, so no countries can attract talent away from others.
We think it's ridiculous how much money bankers make... But that's mostly because we're jealous. We greatly fear the government beginning to set pay at privately held companies. And we dread the day they come for the newsletter publishers...
The roster is full for the inaugural Atlas 400 trip to Germany... We're arriving in Munich next week for two days of Oktoberfest and racing cars at BMW's private track outside Munich. We'll then take a private plane to Leipzig, where the CEO of Porsche will host the group at the company's new test track. We'll have some pictures to share with those who missed it.
If you aren't able to join us for the Germany event, don't worry. We've got many more coming up. We're organizing a private jet for our members to the grand opening of Doug Casey's new development in Argentina at the end of October. We've also rented out the best fishing lodge in the world, Tropic Star Lodge in Pinas Bay, Panama, for a private fishing tournament.
Future plans include an event called "Porter's Miami." I'll host club members in Miami, where I just purchased a home on the water. I'll take members to all my favorite spots in the city. We'll hit the beach, go fishing on my boat, and take a day trip to the Bahamas.
Also, Bill Bonner is discussing plans with us to lead a private tour of Bordeaux. And remember, if anyone in the club who wants to suggest a trip or volunteer to lead a trip, just let us know and we'll happily set it up.
If you'd like more information on The Atlas 400, contact Sean Goldsmith at sean@theatlas400.com.
New highs: Morgan Stanley Emerging Markets (EDD), Annaly (NLY), European Goldfields (EGFDF.PK).
In the mailbag... a few good, profound questions about gold, speculation, and the banking system. Send your best questions here: feedback@stansberryresearch.com.
"In yesterdays Digest you said 'When these ETFs move to sell their gold stockpiles, who will buy from them?' Are you saying we should sell our gold before we reach this point? I remember reading that you buy gold but would never sell. I'm not too bright about these things and just wanted some clarification about what you wrote yesterday. I've learned a lot reading your newsletter and [The 12% Letter]." – Paid-up subscriber Steve Pierce
Porter comment: As I've written many times, I don't personally speculate in gold. I do speculate in stocks, but not gold. Why? I view gold as my private savings. I add to my gold position regularly, via bullion coins. I put them away and forget about them. If I were a gold speculator (and I'm not), I would view the current price of gold as relatively unattractive. And I would view the growth of the various ETFs as worrisome.
"The beauty of owning gold in bars, coins, or even jewelry (with diamonds its better not to mention, it keeps the wife happy) is that it can always be used to buy goods and services. My grandparents lived through the German hyperinflation. One of their favorite stories was how they would carve out small slivers of gold from my grandfather's cigarette case to buy whatever they needed that day. The slivers always stayed the same size regardless of what that day's price of bread was in the fiat paper money." – Paid-up subscriber Tony
Porter comment: That's one of the main reasons why I keep my personal savings in gold... not paper dollars. The other main reason is I know, at some point in my life, the U.S. dollar paper standard will completely collapse. Folks who trusted the government's money are going to get what they deserve. Just like they always do.
"Hi, could you reiterate again why you think natural gas is a good buy at this time. And how you feel about buying into natty gas stocks, like maybe UNG? And if the price of natty gas does rise, when do you think this might happen. I always read your emails and Id appreciate your opinion on this." – Paid-up subscriber Mike Yacuk
Porter comment: I've never recommended UNG. It is not a natty gas stock. It is an ETF that invests in natural gas futures contracts. I most likely will never recommend it. It seems to do a bad job of tracking the price of natural gas. I haven't invested the time required to figure out why. And I probably won't. You have to know lots of things – the inner workings of UNG, for one. It's much easier to speculate in the gas companies themselves (like Anadarko) or the drillers (like Patterson UTI), as I've explained many times in my newsletter. (Perhaps you'd enjoy reading an issue...)
"Porter, your anniversary analysis in the Sept. 14th Digest is one of the best things you have written. 'What caused the banking system to collapse was not what the bankers did with the money they borrowed, but the fact that they were allowed to borrow an unlimited amount of money in the first place'...' Brilliant! A textbook entry. Nobody said it better so far. Yet are you out of your libertarian mind with it, may I ask? Who or what was it that supposedly might not allow them to do what they did? Are you now a proponent of government regulation of the financial industry? Was not it you who said repeatedly that the government should not mess with the economy?" – Paid-up subscriber Michael Brailovsky
Porter comment: I wonder where this idea comes from... that without the government, nothing would control or restrain any of society's civil institutions. I find the idea most curious because, with or without a government, there will always be a market and a civil society. Another way of thinking about this is to simply realize the government itself was, originally, a product of the free market. The free market will remain – no matter the attempts to regulate or control it. The government's various restrictions and ordnances merely increase the transactional costs of the market. The government is a tax. It cannot make the market "more fair" or "more transparent." It simply serves to increase the costs of doing business.
In regards to the question of banking... Do you really think banks didn't exist before there were national federal governments? Do you really think before nation states began issuing paper currencies there wasn't any money? Money and banking predate nation states by thousands of years.
The reason banks were allowed to borrow an unlimited amount of money was, in part, due to government regulations. But far more importantly, the banks were enabled by the nature of the paper money system, which builds credit in a pyramid based solely on other paper credits. In this system, there is no fundamental limit to the amount of money and credit that can be created.
I would prefer a sound banking system, where the amount of money and credit is strictly limited by the supply of gold. In this system, banks would compete for gold deposits and make loans against these gold reserves. The expansion of the money supply would be strictly limited to the inflows of gold and by increases to gold production. This would end the ability of our government to borrow endlessly from foreign creditors and would prevent Wall Street from having access to an unlimited supply of credit.
Just look at the latest Fed action – regulating pay. The reason banking requires so many regulations is because the most important regulating factor – a limited supply of money – is missing.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
September 18, 2009