Porter on the State of the Union

Have you ever wondered why the State of the Union speech involves so much pomp and posing?

You don't have to be an astute political analyst to realize the whole charade is propaganda designed to make people feel good about the government. But why bother?

Why risk embarrassing yourself on Jon Stewart's "Daily Show" program by saying something stupid... or something that's exactly the opposite of what you promised last year?

For example, in 2009, President Obama said, "Done right, earmarks have given legislators the opportunity to direct federal money to worthy projects that benefit people in their districts and that's why I've opposed their outright elimination."

If you're a new subscriber to Stansberry's Investment Advisory, you can find the five End of America special reports we promised on our homepage. Log in and look for "Publications" on the left side of the screen. Click on "Stansberry's Investment Advisory." You'll see a list of options... Choose the fourth option, "End of America." You will find every report there.

But last night, the same president, standing in the very same room, talking to essentially the same audience, said exactly the opposite. He was grandstanding to the new political mood and scolded the assembled lawmakers. He issued a "warning" that he would veto any bill that contained so much as a single earmark.

What a phony. What a liar. Why go on national TV and prove it? 

If Obama doesn't want to, who's going to force him? His government is the world's only superpower, with troops in more than 100 countries. It listens to every phone call that's dialed. It reads every e-mail that's sent. It watches every road. It looks at every financial transaction.

Our government is so powerful, it can borrow $0.40 of every dollar it spends while demanding the rest of the world use its paper money. Its own courts are afraid of ruling against it, to the point of ignoring the plain language of our own Constitution.

So... why bother with this charade?

The most important element to a stable society is the idea (the lie, mostly) that the government is legitimate. Government is violence and coercion. Government is force. And for that force to be tolerated by millions, it must appear to be legitimate.

Any information or arguments that the government is corrupt or inept is dangerous because it threatens its legitimacy. That's why there's such a tremendous fight over the obvious corruption between state employee unions and elected officials. That's why no one wants to explain to the American people that our federal government is bankrupt. We're printing money because it's better to steal from our creditors than admit our government is inept.

And that's why the State of the Union is such a spectacle. See The State in all its glory...

But remember this: Our State, as powerful as it is, relies on an assumption that's made collectively by millions of Americans.

We must believe the people we saw on TV last night are fundamentally good and honest people. We must never come to doubt the character of those people or the process they used to gain power.

If that happens, our State, even though it's the most powerful in the world, could quickly collapse. It is nothing without the consent of the governed. And our consent depends entirely on its legitimacy.

I believe our government is in imminent danger of losing its legitimacy. Why?

Our federal government is bankrupt and threatening to bankrupt several generations of Americans. At some point – one that is rapidly approaching –Americans will repudiate these debts and the legitimacy of the government that incurred them.

Unaffordable foreign debts and the obvious perfidy of "quantative easing" will soon render our currency worthless. It is a shame upon the honor of our country that we would even consider using the printing press to finance our debts... It is a high crime that we have done so. The world will long remember the way we have treated our creditors.

Over the last 50 years, the government became a socialist tool. It steals assets from responsible, hard-working citizens and distributes them to others, mainly on the basis of political patronage. At some point, these policies become self-destructive. So many people end up on the dole, the government has no way to finance their needs. We have reached that point. Today, more than half of all voters pay zero federal income taxes.

Our aggressive foreign policy has created billions of enemies overseas while propping up regimes that would disgust most Americans – like the Saudis.

 Most critically... our government is for sale. As the price of influence in Washington continues to escalate, it will become impossible to deny the patently obvious truth: Government policy is awarded to the highest bidder and our "free" elections are essentially rigged by the massive sums spent on advertising for candidates.

While I look forward to the day my fellow citizens begin to see their government as it really is, I also fear that day for it will surely mark the beginning of an "interesting" moment in history.

End of America Watch

The Wall Street Journal commissioned a study by DPC DATA, a specialist in municipal disclosure, to expose how poor the financial reporting is for municipalities. The report shows the problem has worsened since the company's previous 2008 study. Of the 17,000 bond issues studied, more than 56% filed no financial statements in at least one year between 2005 and 2009. More than one-third skipped three or more years (up from 40% in 2008).

As Peter Schmitt, CEO of DPC DATA, puts it, "This works out to insufficient ongoing disclosure information for more than $2 trillion of the $3 trillion in outstanding bonds."

The analysts and brokers saying the municipal bond crisis is nothing to worry about probably aren't basing that opinion on fact... Hardly any financials are available. And when the public borrowers do file financial records, the documents are "often so confusing or spotty that even professionals can't make sense of them."

If you're holding municipal bonds, you probably won't know of any problems until it's too late. Consider this your warning. Here are a few examples from the WSJ article:

The Clay Gas and Utility District of Clay County, Tennessee, didn't file disclosures for 10 years, until one in November saying it didn't expect to make future payments.

Helen Kirkpatrick, a retired journalist in Chevy Chase, Maryland, spent $25,000 10 years ago on Maryland Health and Higher Education bonds. She said she checked regularly for updates online and didn't see anything amiss. But then in October, she was stunned to get a letter from a broker offering 50 cents on the dollar. The letter said the issuer could not promise to pay more in the future. She searched for information and found none and couldn't reach the issuer. Confused, she took the deal.

Chowchilla, California, defaulted on its bonds used to renovate city hall earlier this month. The city, which bills itself the "Gateway to Prosperity," had never filed documents notifying investors that a default was coming. The city's most-recent financial statement currently on file is for the fiscal year ending in June 2009.

The Congressional Budget Office (CBO), a nonpartisan agency, said today the U.S.'s budget deficit will jump to nearly $1.5 trillion this year – up from a $1.3 trillion deficit last year. Largely because of the tax-cut extension last year, the deficit as a percentage of gross domestic product would jump to 9.8% from 8.9% in 2010. Unemployment will fall to 9.2% from 9.4% and won't return to its "natural rate" of 5.3% until 2016.

To see the End of America video that started it all, click here...

Also, to read an exclusive interview with Porter Stansberry explaining how to protect yourself from the End of America, click here...

New highs: Nautilus Minerals (NUS.TO), Automatic Data Processing (ADP), Dun & Bradstreet (DNB), Procter & Gamble (PG), Wal-Mart (WMT).

In today's mailbag, a question about trailing stops and praise for Dan's World Dominators. Questions or praise? Send it here... feedback@stansberryresearch.com.

"I'm glad someone asked the question about the 50% trailing stop. It meant something different than I thought it did. Please explain how dividends play into that." – Paid-up subscriber JP Mayo

Goldsmith comment: Some editors disregard dividends when calculating trailing stop losses. Others add the accumulated dividends to the current price. Please consult the individual publication for the correct strategy.

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"I am an adherent to your investment philosophy and have made the World Dominators the core of my portfolio. I have spent a career on trading desks and being responsible for a department of risk taking bond traders spread across New York, London and Tokyo. We had to bid and offer in competition with the largest banks in the world and take the positions on our books. We also took proprietary positions. So I know a lot about risk and the psychology of gains and losses.

"Your advice on the World Dominators and Porter's global macro-economic picks make up 95% of my risk in the market. I realize short time periods are artificial but the performance of the last two years has been what I have looked for my whole investing career – positive returns on positions that I most likely won't get scared out of. My portfolio was up 60% in 2009 and 27% last year (a doubling of portfolio value in two years). Goldsmith published my monthly returns in 2010 in the January 21 Digest. I have started out at a loss on many of the Extreme Value picks. I have only sold two for a loss, St. Joe and HRB. All others have come back to profitability. Often I have stayed with a stock that was down because of your repeated emphasis on studying the business, not the stock price.

"I did not set out to achieve such returns so quickly, it just happened from trading the picks which are well thought out and sticking with the macro themes. Keep it coming, guys." – Paid-up subscriber Anonymous

Goldsmith comment: For safe, consistent gains, nothing beats Dan's Extreme Value. It's hands-off investing. You only buy top-quality companies. And you sit on them for years – reaping huge profits the whole time. To learn more, click here...

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
January 26, 2011

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