Yesterday, before Congress, Federal Reserve Chairman Ben Bernanke warned, "The federal budget appears to be on an unsustainable path." Then, he said we can't cut spending yet because the economy's still fragile.
Bernanke seems to be perplexed by the economy, particularly the gold price. He said inflation-indexed bonds (mostly a government contrivance) and commodity prices forecast low or no inflation. Meanwhile, he says, "Gold is out there doing something different from the rest of the commodity group." At least he admitted he doesn't "fully understand the movements in the gold price."
Bernanke continued, "I do think there's a great deal of uncertainty and anxiety in financial markets right now. And some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point."
Helicopter Ben uttered nary a word about his own culpability. He simply muses quietly before the microphone, like a sedated serial killer describing the dismemberment of his victims with kitchen utensils. Or perhaps he's more like a child who is scared because he doesn't understand why the sky is so big. He just tells you what he sees and wonders aloud what it all means...
Bernanke and his colleague, former professor Obama, strike me as deeply superficial men possessing an encyclopedic ignorance of the myriad horrendous unintended consequences of their actions. They think they can fix anything, but they break everything they touch.
That, Professor H. Ben Bernanke, is why gold prices are up. That's why gold is "doing something different" from the assets you find it so difficult to inflate back to life.
And that's why, after I finish writing this, I'll be making my monthly sojourn over to my coin dealer to buy some more Krugerrands.
The folks at the Pragmatic Capitalist blog listened to Bernanke's testimony, looked into the future, and predicted we'll soon see "an irrational bubble in gold."
I wonder, though... Is it irrational to believe paper money will revert to its intrinsic value (whatever the paper is worth, maybe a penny or two)? It might not be imminent, but you have to believe it's inevitable, don't you? The mother of all reversions to the mean seems an eminently rational expectation... which is why I'm skeptical it'll ever happen.
I've seen a lot of behavior in the financial markets over the last two decades, none of it especially rational. I figure gold will make a run like it did in the 1970s. It'll soar into the stratosphere... and fall back to Earth. I'll sell my gold stocks in the run-up, but I'll never sell my gold coins. My gold coins are like the mountain view out my bedroom window. That feeling is too priceless to sell.
Speaking of bubbles...
The Naked Law blog points out eight reasons we're in a college tuition bubble. One of the eight reasons is a familiar topic to S&A Digest readers. The for-profit education industry is shoving student loans on anybody who can fog a mirror. One source says these outfits are even paying homeless people to enroll in their schools.
Student loans are a perfect vehicle through which to create a massive debt bubble and a decades-long financial disaster. Anyone with a pulse can get one of these loans. And a 1998 law change made both student and private loans impossible to discharge via bankruptcy. While thecompanies like Apollo, Career Education, DeVry, and ITT Educational Services make hay, their students – most of whom never graduate – are saddling themselves with enormous financial burdens for life. These loans aren't like mortgages, either. You can't take the "jingle mail" route – dropping the keys in the mailbox and moving on. You're stuck. If you try not to pay, they'll garnish your wages, intercept your tax refunds, and maybe seize your assets. Maybe we should add student loan repayment to Ben Franklin's short list of life's other two certainties, death and taxes.
Back in 2001, education companies got less than half their revenues from federally funded student loans. Today, federal student loans provide 75% of their revenues. The legal limit is 90%.
With all this borrowed money comes profligacy and waste. Colleges are spending money left and right. While attendance is up only 40% the last 20 years, non-teaching college staff has more than doubled. Since they don't need more teachers, they have to spend money on something. So they hire environmental sustainability officers and student lifestyle coordinators. When they can't hire more staff, they buy more stuff, like gyms, swimming pools, and luxury dorm rooms. High Point University in North Carolina boasts valet student parking, live music in the cafeteria, and Starbucks gift cards on your birthday.
Steve Eisman and T2 Partners are among the astute hedge-fund investors selling short the education stocks. I've added this group to my list of short candidates, which so far includes overleveraged homebuilders trading at premiums to inflated book values and the select semiconductor stocks. I'm looking to add a new short position to the Extreme Value Model Portfolio. If you want to get access to my list of shorts, as well as the long positions I've found that will stomp inflation over the next several years, click here.
There aren't many businesses that you can realistically expect to make you 20 times your money. There are even fewer businesses that you can expect to hold safely for 20 years. But in this case, you can. This company's leading product has remained totally unchanged for more than 100 years and is known throughout the world as a leading "luxury staple"... There is a tremendous amount of international growth that's still to come... If sales accelerate, the rate of capital return will grow much faster than 15% per year. And if anything like that happens, this stock could easily become the best investment you make in your entire life. – Porter Stansberry, December 2007, Stansberry's Investment Advisory
Last quarter, Hershey increased sales by 14% and earnings by 70%. Sales volume and prices both increased (Hershey's pricing power was a key reason Porter recommended the stock). The company's cash balance is also building, which could translate into another dividend raise (the company has raised its dividend every year since 1974). Meanwhile, the company increased advertising spending by 67%. Since the announcement, shares have soared. They're currently trading at 52-week highs. Readers are up 34% on the trade.
If you're interested in learning how to increase the dividends you're currently earning from your portfolio, watch our new video presentation featuring 12% Letter editor Tom Dyson. Tom explains a little-known way to increase the dividend payments you receive from U.S. corporations... in some cases, by hundreds of percent. All it takes is a single phone call.
But the SEC bans companies from advertising this phone number. If you depend on dividends for your monthly income or you're interested in building an income-producing portfolio, you don't want to miss this video. You can watch it here.
New highs: Hershey (HSY), San Juan Basin (SJT).
We've received lots of letters in response to Rattner's Wall Street Journal op-ed. We'll let Porter handle those tomorrow. Also, don't miss his rebuttal of Robert Prechter's deflation argument (you can read the Prechter interview here). In the meantime, let us know what's on your mind... feedback@stansberryresearch.com.
"In today's Digest you claim that MCD has gained 30% since April. This is patently false – the stock has been FLAT! I am used to your exaggerated claims about your performance, but to tell an outright lie that can be disproved by looking at the chart is not only unethical but outright stupid. You have lost all shred of credibility. By the way, I am a subscriber to the 12% Letter." – Paid-up subscriber Zeke
Goldsmith comment: In Tuesday's Digest, I excerpted Tom's most recent mention of McDonald's in The 12% Letter. That happened to be the April 2010 issue. I wanted to demonstrate Tom's reasons for holding the stock, which were proved valid with the company's announcement. As a subscriber to his letter, you should know Tom recommended the stock in November 2008. The stock was trading at $55. And we did not say MCD has gained 30% since April. The stated gains were for the life of the trade... and they were accurate.
"How do we who already have Daily Wealth Premium get a copy of The Stansberry & Associates Gold Investor's Bible?" – Paid-up subscriber Lou Davila
Goldsmith comment: If you're already a DailyWealth Premium subscriber, go to www.dailywealth.com, log in, and click on "Research Reports" at the top. The Gold Bible is fifth down from the top. If you are an Alliance member, simply click here to access The Gold Bible.
For those of you unfamiliar with The S&A Gold Investor's Bible, it is a collection of gold investing tips and tricks we've compiled over nearly a decade. It includes some of our best ideas and the best ideas from our friends in the gold business (including the country's top coin dealer and one of the world's top gold stock analysts). We cover investing in gold bullion, rare coins, ETFs... everything. We tell readers how to collect income from their gold, how to avoid paying premiums on bullion, the three best rare coins you can buy today, and much more. You can receive The Gold Bible for free (plus $5 shipping & handling) by clicking here...
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 10, 2010