Porter Responds to the Deluge of E-mails

The weirdest phenomenon of the modern financial era... How in the world did oil prices go negative?... Big changes in the quest for oil storage... Why you should avoid trading futures... Three tips to avoid blowing yourself up in the markets... Porter responds to the deluge of e-mails...

A Note From Stansberry Research Publisher Brett Aitken

Gold has been on a roller-coaster ride since the beginning of 2020...

It went from $1,500 per ounce up to about $1,675... then quickly back down to around $1,475 before once again surging up to roughly $1,725 per ounce as I write today.

Many folks even expect gold to soar as high as $3,000 per ounce in the coming months.

We've received hundreds of e-mails from subscribers like you, asking whether now is a good time to load up on gold. And dozens more want to know the best way to buy gold today.

That's why I've asked two of our in-house gold experts, John Doody and Garrett Goggin, to join me for a "Gold Rally Kickoff Call" as soon as the markets open on Monday, April 27.

From 2001 through 2019, John and Garrett's unique approach to gold investing helped their subscribers realize 923% cumulative gains – during both bull and bear markets in gold. Those types of returns turn every $10,000 into more than $100,000.

On Monday morning, they'll explain what's going on in the gold and silver markets... what's behind the recent price swings... and most importantly, where gold is headed next (and what you should do about it today).

Simply head to www.StansberryGold.com at 9:30 a.m. Eastern time on Monday morning to watch. (We'll also send you a reminder early Monday morning, so you don't forget.)

I hope to see you there!

Porter responds!

Last Friday's Digest from our founder Porter Stansberry on the COVID-19 lockdowns was one of the most provocative pieces we've published in years.

As we've shared throughout the week, it spawned a flood of e-mails to our Digest mailbag. And while a lot of it was positive, we received more than a few irate letters.

So today... Porter is back.

This morning, he sent us a short update about his piece from last week. So in lieu of a regular mailbag, we're running it at the end of today's Digest.

Whatever you do, don't close today's e-mail without reading it.

But before you get there, we hope you'll take the time to read Dan Ferris' regularly scheduled Digest to soak in more of his timeless advice on the markets...

Perhaps the weirdest phenomenon of the modern financial era is negative pricing...

And now, we've just seen it happen for the second time in recent years.

First, we saw negative interest rates after the last financial crisis. That hadn't happened in 5,000 years, according to Sydney Homer's classic book, A History of Interest Rates.

So how in the world did it happen after all that time? Well, it was simple...

After the financial crisis, then-European Central Bank President Mario Draghi famously pledged to do "whatever it takes" to help European economies recover... including sending interest rates into negative territory.

Negative interest rates also occurred because investors were expecting negative inflation... If a bond yields negative-1% and you're expecting negative-2% inflation, you'll still wind up ahead 1% per year by owning the negative-yielding bond.

Global negative-yielding debt peaked around $17 trillion last August. Recently, the amount of negative-yielding debt dipped to around $11 trillion... but it's still near historic highs.

Of course, interest rates aren't tangible. They're something we can't see with our own eyes or touch with our own hands. So perhaps it's not so crazy to believe they can be negative.

However, what happened Monday is far weirder...

Crude oil is tangible.

It's viscous black muck pumped under enormous pressure from the bowels of the Earth.

You can't deliver it over the Internet. You need pipelines and gigantic oil tankers to transport it to massive refining complexes. Then, it's split into myriad other products, requiring even more pipelines and trucks (which travel over roads made from oil-based products) to transport it to gas stations and chemical plants...

You get the point.

Crude oil, its many byproducts, and the related infrastructure is perhaps the most vast, ubiquitous, and (at times obnoxiously) tangible feature of the modern world.

It's the most widely traded commodity in the world. It's the one upon which most others depend... whether as transportation fuel, industrial solvents, lubricants, or chemical feedstock.

It's nearly impossible to live through a single day without consuming oil in multiple forms.

(By the way, anyone who thinks this is some type of crime against nature is hard to take seriously. The greenest, most "woke" vegan socialist owes his standard of living to fossil fuels, no matter what nonsense he might spout to the contrary.)

Given how much our standard of living depends on it, it's super weird that we just saw negative oil prices for the first time since the Chinese began transporting the stuff through bamboo pipelines in 600 B.C.

As we reported in Monday's Digest, the May futures contract for West Texas Intermediate ("WTI") crude oil traded that day at prices as low as negative-$40 per barrel.

Nobody saw it coming... The whole concept seems insanely absurd – paying someone up to $40 just to take a barrel of crude oil off your hands.

How in the world could such a thing happen?

In retrospect, it seems like a primitively simple confluence of circumstances... A lot of people were trying to sell barrels of crude oil amidst a shortage of places to store it.

Monthly WTI crude-oil futures contracts trade on the COMEX commodity exchange in New York. Unlike the other big oil contract – Brent crude oil, the international benchmark – the WTI contract is designed for physical delivery.

However, the sellers who dumped futures contracts this week were mostly futures-trading operations that have no intention or ability to take possession of a single barrel of oil.

For example, the United States Oil Fund (USO) is essentially a publicly traded way to buy oil futures. In recent months, as oil prices have fallen, USO has seen record inflows of capital... The fund has taken in nearly $6.5 billion this year, even though its share price is down 70%.

Most futures contracts are settled in cash, meaning that traders sell them without taking delivery. So by the time the contracts expire each month, few requiring the delivery of crude oil are left trading... Two months ago, just 45 contracts were held for delivery.

But dramatically reduced demand due to the COVID-19 response worldwide has resulted in a glut of crude oil and a shortage of storage facilities. And that's leading to an anomaly with how these futures contracts play out ... A month ago, 3,200 contracts were left open into expiration. This month, the number of physical-delivery contracts skyrocketed to 109,000.

In practice, traders who want the physical barrels of crude oil buy contracts near expiration from purely financial futures traders who have no intention of actually holding the oil.

However, this time, the physical traders weren't bidding... because they have nowhere to store the crude oil. And of course, when nobody is bidding but the seller can't take physical delivery, the only thing he can do is keep lowering the price until someone finally bids.

Here's the bottom line... Physical traders weren't bidding on futures contracts because they had nowhere to store the oil, so the price dropped... to as low as negative-$40 per barrel.

The storage situation is so desperate that it's leading to big changes across the industry...

Oil tankers are being pulled out of service to store crude oil, causing tanker rates to soar.

Hugo De Stoop, CEO of tanker provider Euronav (EURN), said recently that his company's bottom line is exploding as the global tanker fleet is reduced to provide storage.

Recent voyages between Saudi Arabia and China fetched as much as $165,000 per day. Euronav's breakeven operating costs equal around $28,000 per day, according to a recent Bloomberg interview with De Stoop. So as you can see, that's a fat operating margin.

And De Stoop believes rates will go even higher because so many ships are being used for storage. If rates stay at their currently elevated levels long enough, De Stoop projects that his company will earn more than its market cap this year.

Now, I (Dan Ferris) don't recommend buying Euronav's stock right now. But you must admit... the possibility that you're buying shares at less than one-times earnings makes the stock indisputably dirt-cheap if tanker rates stay elevated.

You might recall that a similar thing recently happened in the gold market...

In that case, as we noted in the April 3 Digest, traders wanted to take physical delivery of gold... But it wasn't clear if enough available gold existed to deliver into the record demand.

Like crude-oil futures contracts, most gold futures contracts are traditionally settled in cash... not gold. However, in late March... as the COVID-19 crisis started shutting down mines, refiners, and air-transportation capacity... traders wanted to take delivery of physical gold in record numbers.

As a result, the gold futures price traded as high as $70 over the price of gold bars in London (a well-supplied physical gold market). As I write today, three weeks later, a $30 difference still exists between the current futures contract and the London physical price.

I assume the status quo in the gold market will return when the "all clear" signal allows miners and refiners to reopen and commercial air-transportation capacity is restored.

But for now, similar to the oil space, we're seeing some weird things happen with gold.

On Tuesday, I wrote an entire Digest on the No. 1 secret of investing (and life)...

"Via negativa" – the Latin word for the "negative way." I quoted famous trader and author Nassim Taleb, who once explained, "The learning of life is about what to avoid."

Well, today and every day, I urge you to avoid the futures market.

It's an insanely volatile place where price is everything and value is nothing. If crude oil trading at negative-$40 per barrel doesn't convince you of that, I doubt anything will.

You might think this advice is a little silly if you're just a casual investor. But the odds are pretty good that many of you have been in the futures market... maybe without even knowing it.

You see, many exchange-traded products own nothing but futures contracts...

For example, market volatility has become more popular as an asset class these days.

Many equity investors like to trade the Volatility Index ("VIX") – the market's so-called "fear gauge"... And they do that through exchange-traded funds ("ETFs") and exchange-traded notes ("ETNs") like the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), which only owns VIX futures contracts.

The real VIX is an index based on S&P 500 options pricing roughly 30 days prior to expiration. Meanwhile, the VIX futures are bets on which way the VIX will go in the future.

And they're garbage.

I know because I've tried trading them. They routinely underperform the actual VIX. On March 18, according to closing-price data provided by market-research firm FactSet, the VIX was up 440% so far this year... but VXX's value was up about 360%.

The VIX products have lived up (or maybe down) to their potential. In early February 2018, three VIX futures-based exchange-traded products blew up and ceased trading amidst a spike in equity volatility. Two of those products were exchange-traded notes.

In other words, they were debt instruments that lost all their value... borrowed money that'll never get paid back. As Todd Rosenbluth, director of ETFs and mutual-fund research at investment-research firm CFRA Research said in October...

That's how it was constructed. The lesson from that is investors need to know what they own. With inverse and leveraged products, you take on significantly higher risk when the trade goes against you and that's what happened in this case.

Products that are designed to blow up eventually will blow up.

And the VXX ETN is designed to go to zero. It says so, right in the prospectus...

The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.

"But hey, Dan," you might say, "No worries, I just want to trade them, not hold for the long term."

One of the VIX ETFs that blew up in February 2018 dropped 85% in minutes when it blew up. Still feel like trading this garbage?

I hope not... Investors should rebel against the pure toxic waste Wall Street tries to stuff down their throats, not lap it up like horses at a trough on a hot day.

Plain and simple... don't blindly trade ETFs without knowing what's in them.

It's up to you to recognize garbage with blow-up potential before the blow-up happens. Generally speaking... if you trade commodity, inverse, or leveraged ETFs and ETNs, I bet you have no idea of the amount of risk you're taking... and have exposed yourself to at least partial ruin.

That gets us back to the point I made on Tuesday...

Your first job in the markets – and in life – is to avoid ruin.

Avoiding ruin in life means avoiding sickness and death. Using the current example, COVID-19 is a virus that has killed thousands upon thousands of people worldwide.

You want to avoid getting it. But you don't need the government to tell you that you really want to avoid anything that's likely to hurt you, kill you, or make you sick.

Likewise, you shouldn't need anyone to tell you that your first job as an investor is to avoid situations where prices can go negative, or where weirdly structured ETFs can wipe you out in an instant.

Now, I want to share three tips that make it highly unlikely you'll blow yourself up in the financial markets. Doing these three things will make it much easier to avoid financial ruin...

First, practice true diversification...

This is an essential but rarely practiced part of investing. If you own a diversified equity portfolio and a handful of bonds... that's not true diversification in my view.

Cash is the ultimate diversifier.

It's what everybody wants when asset prices are falling. I've yet to find a better way to reduce risk in an equity portfolio than by holding a large chunk of cash.

While speaking with an investor friend yesterday, I said exactly what I just told you... And he nodded his head vigorously. For good diversification, I believe you should hold around 20% of your portfolio in cash.

That's a very round number... But the main point is that it's not 5% and it's not 50%. It's not too little and not too much.

My investor friend and I both agreed that when the stock market presents opportunities, you should use some of your cash... then perhaps rebalance back to your desired cash holding level after some time has passed.

Another way to practice true diversification is to get out of financial assets...

You can do this with assets like land, gold, and – believe it or not – art... if you know what you're doing there. (Don't just buy a duct-taped banana!) Those assets don't change over time. They're the sort of thing you want to own to preserve value over decades... or possibly even centuries.

Second, I recommend building your equity portfolio around a single core idea...

Learn to identify great businesses.

You won't likely time the market well. You won't likely forecast the next hot trend. You won't likely become the next George Soros-style, bet-the-farm, macro-trading genius.

But if you're reading this, I'm certain you have what it takes to identify a great business...

Look for businesses that sell products you can't get anywhere else, generate plenty of excess cash, have great balance sheets, reward their shareholders with dividends and share repurchases, and generate high returns on the money they reinvest in the business.

For example, online retail juggernaut Amazon (AMZN) is a great business...

In fact, I think Amazon will likely take over all the boring parts of shopping. Instead of its Prime users spending around $1,500 per year, they'll eventually spend closer to $15,000 per year.

Would you really hate it so much if you never thought about toilet paper again for the rest of your life? Now, multiply that by the dozens of products you use every week... the ones you use every month... and things like socks, underwear, and other items you replace regularly but less frequently.

In the age of the Internet, buying all of those mundane items should be a lot easier... And Amazon is in a great position to continue to dominate that part of your pocketbook.

Likewise, look at software giant Microsoft (MSFT). Some people hate using Microsoft Office, but it's nearly impossible to avoid doing so. It's an essential part of our everyday lives.

I'm not saying Amazon and Microsoft are table-pounding buys right now. I'm just using them as examples of how much easier it is to identify great businesses than most of the other noisy, expensive, ultimately money-losing actions the average individual investor takes in the financial markets.

Focusing on great businesses will naturally cause you to avoid the thousands of pure garbage stocks in the market without even thinking about it too much.

Finally, learn to focus on the long term...

If you can keep your gaze fixed on the likely performance of a business over the next few years, you're way ahead of the average investor... who has trouble holding stocks over a long weekend.

Rather than trying to predict which way a stock will go in the next two weeks, it's far easier to identify a business that's highly likely to be earning more – and is therefore, higher in value – over the next few years.

Learning to identify great businesses will help you focus on the long term naturally. You'll be less likely to get scared out of the stocks of great businesses when their share prices fall.

In short, knowing a great business when you see one helps give you the conviction to hang on for the long term – where the big money is.

To avoid ruin in life... avoid illness and death.

To avoid ruin in finance... practice true diversification, learn to focus on great businesses, and be able to hold on for the long term.

Legendary "gonzo" journalist and author Hunter S. Thompson once wrote, "When the going gets weird, the weird turn pro." It's a fun version of the old saying, "When the going gets tough, the tough get going"... and it means the same thing.

Today, financial markets are both weird and tough...

But the three tips I've shared with you today will help you build and preserve wealth, no matter how much weirder and tougher they get.

New 52-week highs (as of 4/23/20): Alamos Gold (AGI), DocuSign (DOCU), Franco-Nevada (FNV), SPDR Gold Shares (GLD), Barrick Gold (GOLD), KraneShares MSCI All China Health Care Fund (KURE), Sprott Physical Gold Trust (PHYS), Polymetal International (POLY.L), and Wheaton Precious Metals (WPM).

As we said earlier, we're skipping today's regular mailbag to share a critical response from Porter. If you missed his Digest last Friday, you can catch up right here. As always, send your thoughts to feedback@stansberryresearch.com. With that said, here's Porter to wrap up today's Digest...

Porter comment: Last week, I (Porter) described, in some detail, why I believe our current response to the COVID-19 pandemic was a vast mass delusion – the largest in history.

A lot of people got very angry... And in short, they told me that I was the devil himself. Or just too stupid to know better.

But... shocker... as more data come in, you'll never guess what's becoming more and more clear... that it's virtually impossible to stop the spread of an airborne virus that's this contagious... and that it very rarely kills anyone who wasn't already on the way out anyway.

Oh, also, guess what? Ventilators don't help. Almost 90% of the people put on ventilators die anyway. It just makes their deaths that much more horrible.

As always, for those of you interested in facts and not the media's manipulation of your emotions, I've updated my two core assumptions below...

First, I knew that vastly more people had to be infected than had so far been identified.

I knew this because there were plenty of test cases available – like the Diamond Princess cruise ship, where 20% of the population was infected in just four days!

I also knew that the virus had spread to the very ends of the Earth – including 12 reported cases in the Falkland Islands. Believe me, if it has spread that far, into the most distant and isolated parts of the world's largest oceans, essentially everyone in America has already been exposed to it.

Everyone.

And sure enough, testing in New York and other places now shows conclusively that between 15% and 20% of the general population has already had the virus and are now immune. Most of these people had no symptoms.

If you knew how widely the virus had already spread, you wouldn't have ordered people to stay in their homes – not unless they were particularly at risk – because you would have known this virus isn't dangerous to anyone in good health.

You can completely forget everything the media and the government is selling you about how this is going to kill millions of people. It's just a total lie.

Even on a cruise ship populated by a bunch of obese people with high blood pressure and with an average age close to 60, the fatality rate was still only around 1%. Researchers looking at all of the fatality factors estimated a 0.5% mortality rate for this virus.

Yes, that's more than the flu... But that's also because the old and the sick are much more likely to become infected in the first place.

Almost 4,000 of the 23,000-plus deaths the U.S. Centers for Disease Control and Prevention ("CDC") has formally recognized happened in nursing homes. These people were, sadly, already at great risk of dying. That's almost 20%.

Meanwhile, the total deaths of folks younger than 45 – including people who were already at great risk of dying – is only 698 so far, according to the CDC. That's roughly 3%.

(You may see the mainstream media cite a higher number of U.S. deaths. But remember that's a "preliminary" figure that hasn't been confirmed by the states. I'm citing confirmed cases based on death certificate data.)

My point is that this virus – like the regular flu – is primarily killing the old and the sick. And while that's a shame, it's also a normal part of life and the health care system.

To put the COVID-19 deaths in better perspective for you, consider that 53,768 old and sick people died from regular, old pneumonia in the same period, according to the CDC. That's more than twice as many who died from COVID-19.

Should we all wear masks because pneumonia is killing a lot of old people? Should we all go bankrupt? Should we print hundreds of billions of dollars and borrow trillions more and destroy our currency and our way of life?

This is total madness.

And here's the worst part... We know from the examples of hospitals and the boats that this virus is incredibly contagious. It's airborne, dummies.

If you're breathing, you're spreading the virus.

Washing your hands ain't gonna help. That means that we can't stop it from spreading – not unless we literally lock people in their homes. We're still breathing the same air in grocery stores... and on buses and subways. How in the world does it make sense to close schools because of a virus that doesn't kill kids... but leave buses full of old and sick people running?

It doesn't. And that's why random testing now shows that at least 40 times more people have been infected already than anyone realized.

The reason the virus is dying out is because more and more people have already gotten it. Most of them had no symptoms at all. And virtually no one in good health died.

This was just a bad flu season and a lot of old people died. It's a shame. But there's nothing we can do about it. So, can we all please get back to work now?

Good investing,

Dan Ferris
Vancouver, Washington
April 24, 2020