Porter's dire outlook for 2015...

This is our last Friday Digest of the year.

That's right. I'm saying goodbye to 2014 a few days early. I'm taking the next two Fridays off to spend time with my family. Next week my wife, our children, Traveler (7) and Seaton (3), my parents, my wife's parents, my wife's sister, her family, and my wife's brother will all be joining us at our mountaintop cabin in central Pennsylvania.

Ideally, there will be snow. Whether or not the weather cooperates, with four children under 10 years old, there will surely be a ton of presents, wonder, and joy... not to mention a 20-foot Christmas tree in the center of our lodge. I hope all of you will take some time over the next few days to think about the joy and wonder in your life. Remember your blessings. And forgive your grudges. Remember: we only have a short time together here.

I end this year happy to be alive... and very grateful to Doc Eifrig, who may well have saved my life with a timely medical intervention. I'm also very grateful to all of our longtime subscribers – especially the folks who have joined the ranks of our Alliance membership. Through your trust and support, you've given us the best jobs in the world. It is a rare pleasure to do well in your career by doing good things for other people. And that's the opportunity you've given us.

I want to wrap up this year of Friday Digests by briefly circling back to where we started. Then I want to show you what I believe is one of the most powerful examples of just how completely messed up the world economy has become thanks to the incredibly risky actions of our central bankers.

For those of you interested in the never-ending debate of inflation versus deflation, I beg you to read all of today's Digest. What's in this Digest will change your thinking about those terms forever.

First, though... I began this year by sharing the most valuable financial secret of all. It's hidden in plain sight. And it's not really about finance. It's really simply about understanding your emotions.

The secret is: To be successful as an investor over the long term, the most important goal you should have is to manage fear.

Not many people need to work on generating greed. It lies inside us all. But fear causes all of the trouble at the intersection of emotions and finance. Fear is what will destroy you. It will cause you to avoid the best times to buy securities and make you sell them at the worst moments. But... what if you could banish fear forever? What if, over the course of your life, you never – not once – looked at the market or your investments with fear? What if being afraid never even occurred to you?

In the January 3 Digest, I told you what I believe is the key to achieving this goal. You can banish fear from your investing life forever if you'll think about your investments in a new way. The trick is simple: Think about the stocks you own the same way you would think about a business you owned.

What matters in business is how much cash the business can produce each year for its owners. I believe the same thing to be true about the stocks I own. As I explained...

The best way for most investors to banish fear forever from their investing is to focus on owning capital-efficient businesses, in basic industries, with management teams they can trust. These are the companies that are capable of growing cash distributions year after year. There are hundreds of these kinds of businesses that most investors completely overlook.

I've explained many times that a great place for long-term investors is in the property and casualty insurance sector. Our oldest pick in the sector – W.R. Berkley – rose 21% this year. That's more than double the performance of the Dow Jones Industrial Average.

Far more importantly, though, it maintained its underwriting discipline and was able to pay out a special $1-per-share dividend. That brought its annual yield to its owners who bought on our recommendation (back at $35 per share) to 4% for the year.

That might not seem like much, but these dividends will increase over time. Meanwhile, the stock only trades at 10 times earnings. You're not getting rich owning shares of W.R. Berkley because some other foolish investor is offering you far too much for your shares. (It's up more than 50% since our 2012 recommendation.)

You're getting rich in W.R. Berkley because it's a great business with great managers (who own 22% of the stock), who are building the business conservatively and treating their shareholders right. This is the kind of stock you will never have to worry about – not even for one day – the entire time you own it.

And there are lots of businesses like these... even some in unusual places, where most investors would never look. Last January, I shared the most unlikely name on our Stansberry Data Capital Efficiency Monitor: Heartland Express, a trucking company.

Talk about a business most investors would overlook! We discovered Heartland because it returns stupendous amounts of capital to its owners. How it does so is difficult to understand. Trucking is a capital-intensive business. But understanding why it does so is easy to grasp: Heartland's insiders own 44% of the company. These incredible operators treat shareholder money like it's their own... because it is. (Heartland, by the way, is up about 40% this year.)

So... let me end this year with the same advice I began with in January. If there was one gift I would give all my subscribers, it would be the ability to invest confidently, without any fear whatsoever.

If I could, I would build a portfolio for you so boring and so bulletproof – that paid such rich dividends – that you would never even bother to check your portfolio's prices. Trailing stops? What are those? You wouldn't ever need them, because you would be earning so much money every year.

You would own the world's best businesses, which you purchased at reasonable prices (or sometimes at better-than-reasonable prices). The management teams are completely trustworthy. The economics of these industries is excellent. And year after year, these businesses will continue to make you money.

If you want to know what stocks would be in that portfolio, you'll find them on the back page of my Investment Advisory newsletter. Companies like Johnson & Johnson, Wal-Mart, Union Pacific, Natural Resource Partners, Hershey, Activision-Blizzard, Microsoft, McDonald's, Lorillard, W.R. Berkley, American Financial Group, Travelers, Chubb, and Axis Capital.

These are the cash-dividend-paying members of our "No Risk," "Trophy Asset," "Capital Efficient," and "Property & Casualty" portfolios. I'm not trying to mislead you. These aren't necessarily buys today. On average, these stocks are up 54% from where we originally recommended them.

But that's not the point. Here's what matters: a portfolio of these names would have earned more than 10% – in cash – for the folks who bought on our recommendation. With cash yields like that, generated from super-stable businesses, you can make fear a thing of your past. Especially because you know that these yields will almost surely increase, year after year. That's real investing. Try it. You'll never be afraid again.

Now that you know how to invest without fear, let me show you what you should be afraid of...

Do you know what a M.C. Escher painting looks like? If you don't, here's an example. The work is called "Relativity." It's a lithograph that Escher made in 1953. Escher's work is famous for these types of physically impossible, paradoxical, never-ending, never-beginning loops.

In this particular picture, the figures depicted exist in separate spheres, which have different gravity orientations. There's no up. There's no down. And none of the stairs really lead anywhere. Keep that Escher painting in mind when you think about the following...

In 2008, the Swiss central bank held $47 billion in Swiss francs worth of "foreign currency investments." These were mostly euro bonds and U.S. Treasury bonds. (By the way, my source for this data and the facts that follow is the Swiss National Bank. You can see these numbers for yourself right here.)

When the Federal Reserve began its manic printing and buying spree in the U.S. in 2009, the Swiss economy witnessed a huge influx of capital. Investors believed their money would be safer in Swiss assets than it would be in the U.S., with its ongoing experiment in paper-money printing. As people bought Swiss assets, they needed Swiss currency. The clearing of these transactions left Switzerland's central bank holding a lot more dollars.

By the end of 2009, the Swiss central bank saw its foreign currency investments double, reaching $94 billion Swiss francs. Then, as you'll recall in 2010 the banking panic spread to Europe. This caused a dramatic increase of capital flight into Switzerland.

To prevent the value of the Swiss franc from rising astronomically – which would have been a big impediment for the export-driven Swiss economy – the Swiss central bank began printing new Swiss francs and actively buying foreign currencies, bonds, and even stocks.

This major change in policy – to not allow the Swiss franc to cross above 1.20 euros – led to the accumulation of massive investments abroad for the Swiss central bank. (When I say massive, I mean huge on a scale that bears no relationship whatsoever to the size of Switzerland's entire economy.)

Here are the numbers... By the end of 2010, the Swiss central bank owned $203 billion worth of foreign investments. By the end of 2011, it owned $257 billion. In 2012, after the European Central Bank began its version of quantitative easing, the Swiss central bank's foreign investments nearly doubled again – to $432 billion. Today, it sits at $457 billion in foreign investments. That's nearly the size of Switzerland's entire gross domestic product. (And that doesn't include the gold the Swiss bank owns, either.)

In round numbers, the Swiss central bank portfolio is allocated into government bonds (75%), stocks (15%), and corporate bonds (10%). Almost all of the bonds it owns are rated "AA" or higher. The duration of its bond portfolio is short, with an average maturity of less than four years.

Most of its assets are held in either euros (46%) or dollars (27%), with the balance mainly in Japanese yen. For those of you who are interested in the long, slow demise of the dollar as the world's currency (as I am), note that as recently as 1997, the Swiss central bank held 80% of its foreign currency assets in dollars.

When central banks print reserves far in excess of domestic savings, the result is inevitably inflation. The U.S. has printed $4 trillion, more or less. Japan has printed similar amounts, as have the Europeans. This is monetary inflation on a massive scale – unprecedented outside of efforts to finance World War I and World War II. And yet, far from seeing any lasting increase to commodity prices and wages, we see collapsing profit margins, moribund unemployment figures, and even falling commodity prices.

The more we print, the more capital is available for institutions – like the Swiss central bank – to invest. Is that inflation? You bet. It is asset inflation, and it has caused the price of things that central bankers buy – like bonds, stocks, and real estate – to soar in economies all around the globe.

The activities these bonds finance, like oil drilling and agriculture production, have led to a glut in commodities. It's like an Escher painting. In this process, because our capital markets have worked so well, the massive inflation being created at our central banks has been used in mostly productive ways, which has resulted in deflation.

The oil and gas industry, for example, is the single-largest issuer in the U.S. junk-bond market. This glut of capital and financing is just as responsible as fracking is for the doubling of U.S. oil production in the last seven years. I'm not surprised oil prices fell. I'm surprised they haven't collapsed. And I still believe they will...

Sooner or later, the world will lose faith in the ability of central banks – even the Swiss. The world's economy cannot productively absorb this massive amount of capital. Instead of producing immediate currency flight, like you might see in Argentina or Rwanda, this inflation has instead produced an investment-led boom.

In the short term, that's going to cause profit margins to contract, and sooner or later, a bona fide panic in the corporate-bond market. I don't believe stock prices will prove immune to soaring defaults. At some point (soon)... you will see massive write-offs as vastly inflated assets are revalued based on their real earning capacity...

Let me give you two examples of big, obvious problems that will come undone in the next year. Here's an easy one: With oil at $60 or less – and supply continuing to grow every month – what's the future for the tens of billions of dollars that have been invested in the Canadian oil sands?

What about U.S. real estate? Retailers in almost every category are finding it impossible to compete with Amazon and other online retailers. Amazon – which doesn't make money – is nevertheless valued at over $100 billion! This is a prime example of how financial excesses can translate into real-world problems. Amazon couldn't run its business at a loss if capital wasn't free.

The result is that Sears and JC Penney are collapsing. And yet... the largest mall operator in America – Simon Property Group – currently has an enterprise value of almost $80 billion. How can malls be worth so much if retailers can't make a profit operating inside them? They won't be for long. It's like an Escher painting. It will cycle back around.

Perhaps the best example of a bubble in search of a pin is the boom in "frontier" market bonds. A decade ago, the total debt issuance to countries like willful defaulter Ecuador, corrupt sheikdoms like Bahrain, and communist states like Vietnam was less than $20 billion year.

So far this year, it's almost $80 billion. That follows record-level issuance in 2009, 2010, 2012, and 2013. Who is borrowing all of this money? Well, Ethiopia borrowed $1 billion in early December on a 10-year bond paying more than 6.5% interest. Yes, that's right. Ethiopia. How will all of these hundreds of billions that have been lent to tiny, corrupt, governments all around the world be repaid? They won't be, of course.

The question you should be asking isn't whether inflation or deflation is the inevitable result of our central banks gone mad. That's like trying to argue how to hang an Escher painting. There is no up. There is no down. There's only a cycle. Money is printed. Then it's invested. This imaginary capital is not yet being consumed. It's just cycling through the world's economy.

And so, for now, the central bankers have the world fooled. We believe – because we need to believe, because we must believe – that these paper currencies are sound. The global financial system they've built is reliable. We really can become wealthy by slicing each piece of the pie a little bit smaller...

Ask yourself this easy question: When the game falls apart... when 30% of the U.S. corporate-bond market defaults (and it absolutely will)... when more than half of the malls close in the U.S. (and they absolutely will)... when the oilfields go bust and the banks that lent the money close... what's going to happen then?

Booms are always followed by busts. You can judge the severity of the coming bust by looking at the scope, the magnitude, and the folly of the boom that preceded it. The Internet boom was minor compared with the absurdity that followed it in the real estate boom. And the real estate bust was much worse, too.

Today, the ongoing global financial boom is a folly of historic portions. The idea that we can successfully invest tens of trillions of newly printed dollars, euros, and yen is the greatest financial hubris I have ever seen. It's the most absurd thing we have ever witnessed since John Law used notes from the Royal Bank of France to create the first paper-money bubble in the early 1700s.

Never before has so much money and credit been created so quickly. Fast enough to allow Switzerland to build an investment portfolio as big as its gross domestic product in only four years! And that capital has never been invested so foolishly. Ethiopia isn't going to pay anyone back. Amazon is never going to reward its shareholders. We are not running out of oil.

Friends... the bust that's just now beginning will dwarf all of the others before it. As these problems appear, multiply, and spread... what do you think people will want to hold in their savings accounts? Do you think they will trust the dollar or yen or euro? No, that's the whole point. They won't trust any of these paper monies.

It won't be Bitcoin that gives relief, either. It will be what people have always trusted... what can't be printed... and what is never consumed. The answer to this coming crisis is gold. Make sure you own some. Put it somewhere safe.

I hope today's Digest gives you a better understanding of the so-called battle of deflation versus inflation. As you now understand, inflation always wins in the end. Still, this concept is one of the most important things for you to understand in today's markets.

For a more complete explanation of why inflation is happening – and why it will eventually break the global monetary system – I highly recommend reading currency expert Jim Rickards' newest book, The Death of Money. It's a must-read for all investors.

We even convinced Jim to write a "bonus" chapter for Stansberry Research subscribers. No one else who buys this book on Amazon or anywhere else will receive this chapter. In it, Jim explains exactly which assets to own when inflation runs rampant (hint: one of them is gold).

We think Jim's book is so important that we've purchased thousands of copies to give away for free to Stansberry Research subscribers. We simply ask that you pay the $4.95 to cover the shipping and handling costs. You can get your copy right here.

New 52-week highs (as of 12/18/14): Bristol-Myers Squibb (BMY), Berkshire Hathaway (BRK), Cempra (CEMP), CME Group (CME), CVS Health (CVS), Dominion Resources (D), Dollar General (DG), Fidelity Select Medical Equipment & Systems Fund (FSMEX), 3M (MMM), Altria (MO), Procter & Gamble (PG), Sysco (SYY), Target (TGT), Travelers (TRV), and ProShares Ultra Utilities Fund (UPW).

We've gone on long enough for today, so we're skipping the mailbag. We'll resume our normal publishing schedule in January. In the meantime, we hope you have a wonderful holiday season.

Regards,

Porter Stansberry

Baltimore, Maryland

December 19, 2014