I'm in Baltimore for a couple of days, visiting Stansberry headquarters. I've been to Baltimore several times since I left eight years ago, but as I drove through town yesterday, I hardly recognized the city where I was born and raised.
As you move east past the Inner Harbor toward the Fell's Point neighborhood, you no longer have a pristine view of the other side of the harbor. Now, high-rises obscure the vista. It was claustrophobic, as though I were driving through New York, but on narrower streets.
I turned right from Pratt Street to President Street, a turn I've probably made a few hundred times in my life. It used to be that you turned right and saw the iconic Domino Sugar sign on the other side of the water. Now, you can only see half the sign... and even that is barely visible due to some gold sculpture I've never noticed before. Tall buildings line the waterfront on the east side of the harbor, where for years there stood nothing.
I guess that's progress. The trouble with progress, though, is it usually consists of 10 steps forward and nine steps back. None of these big new buildings were here when I left Baltimore in August 2001. In other words, they all went up during the bubble, like fiat money itself – lent into existence by bankers with blinders...
Apparently nobody wants to bail out the bankers with blinders, despite a huge new government program designed to make it easy and cheap... The fourth monthly deadline for the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) – the U.S.'s program to spur commercial-mortgage lending – is today, and zero deals have emerged.
Under terms of the TALF, the Fed will lend $200 billion on a nonrecourse basis to holders of certain newly or recently originated triple-A-rated asset-backed securities – including commercial mortgage-backed securities. The government will also provide $20 billion in credit protection.
So the government has agreed to lend money to and absorb losses for anyone buying recent issuances from commercial real estate companies... and no one is stepping up.
This situation puts me in a moral dilemma. I should be thrilled the industry refuses to participate in a government program. All industries should tell Uncle Sam to go peddle his perverted programs elsewhere.
Then again, I know most businesses just want to survive. So they take what they can get, even if it's from Uncle Sam, especially when times are this tough. So if banks and other commercial real estate players won't even take government money... they must be truly terrified to invest one more dime in these assets.
I've got a favorite short-sale candidate among the weakening regional banks. I told my readers to short it again on Monday. The market responded by promptly bopping us on the nose with a 20% rise in the stock price.
It's difficult to sell short when a speculative fever takes hold... And shorting is the hardest way there is to make money from stocks.
In the current issue of Extreme Value, I outline the three ways you can make money in stocks. No matter how you slice it, if you're going to make money in stocks (or stock options), you have to master these three concepts. If investing were a secret society – and in some ways it is – you could never become a member without knowing and mastering these three secrets. To get access to the current issue of Extreme Value, click here...
Black Swan theorist and professional investor Nassim Taleb says the economy is still in shambles:
Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer.
Taleb says the socialization of these losses hasn't solved anything, and the U.S. is still plagued by the problems that originally caused this crisis... "We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking."
He recommends investing in "very low-risk securities" and a little bit in high-risk securities that would give you exposure to a dramatic, unpredictable event (what Taleb terms a "Black Swan") – in this case, a massive rally.
With stocks at 26 times earnings, yielding just 2%, I'd say the Black Swan rally has come and gone.
After its massive rally, the S&P 500 closed more than 20% above its 200-day moving average for the first time since May 1983. And that comes just six months after the index traded at its furthest point below its 200-day moving average. Take a look at the chart from Bespoke Investment Group...
I don't know stock chart patterns from ink blot tests, but Jeff Clark has made a ton of money knowing all about them. He and all the best traders he knows are short the market, due to the patterns they see on charts just like the one above.
If you think the market is set for a downturn, you should definitely be reading Jeff Clark's S&A Short Report. To learn more about it, click here...
Deflationists rightly tell me I have some explaining to do for the ongoing destruction of bank collateral. My only reply is that, for every $1 destroyed, how many do you think the Fed will magically print into existence in the next year or so? It has already more than doubled its balance sheet since the crisis began.
If you're in the deflation camp, you need to explain our new highs list... It's almost all silver and gold, the stuff people buy when they're worried about inflation.
New highs: Morgan Stanley Emerging Markets (EDD), PowerShares Insured National Muni Bond (PZA), Hatteras (HTS), Annaly (NLY), Market Vectors Gold Miners ETF (GDX), iShares High Yield Bond Fund (HYG), Visa (V), Kinder Morgan Energy Partners (KMP), Coca Cola (KO), Enterprise Partners (EPD), Markel Corp 7.5% Senior Debentures (MKV), Fairfax Financial (FFH), POSCO (PKX), International Royalty (ROY), Goldcorp (GG), Steak 'n Shake (SNS), Silvercorp Metals (SVM), Kinross Gold (KGC), Silver Wheaton (SLW), Sino Gold (SGX.AX), Eldorado Gold (EGO).
In the mailbag... Currency Death Match: Gold vs Paper. Place your bets at feedback@stansberryresearch.com.
"The WSJ article in The Daily Crux asks the question... how much is gold really worth? They struggle to put a value on it. The same thing can be said about any paper currency. So the answer is no value to having some value. It just depends on how useful it is to obtain goods, that's all. I thought the gold rally was fun. But lets face it, gold is no better than anything else. You can't eat paper money and you can't eat gold." – Paid-up subscriber Allen Whitmore
Ferris comment: It's not a question of whether you can eat it. It's a question of whether or not it's appropriate to make money out of it.
In the case of paper, you have something that's easily destructible, easily produced, and easily reproducible. If you seek to inflate, paper is the ideal currency. Anyway, most of our money isn't even paper. It's electrons, stored on bank computers. What's easier or cheaper than copying those digits multiple times, via loans and deposits? That's how easy it is to inflate.
But if you want to keep inflation in check, you do it by insisting on gold. Gold has to be dug out of the ground, and it costs so much to dig it up that you'd never do it unless you were pretty certain you could sell it for something at least as valuable to you.
Aside from possessing the attributes of being durable and divisible, there's no special reason why we should use gold as money. Shininess and the ability to conduct electricity aren't requirements.
As far as its value, everyone always gets this wrong. They say gold is too hard to value. But nothing could be further from the truth. A hundred years ago or so, you could buy a nice men's suit with an ounce of gold. You can still do that today. Gold holds its value.
"Here's how I understand it. If a bank has x amount of assets, it can lend out 100 + y% of that asset. (don't know exactly what the number is but definitely a hell of a lot more than the bank actually has). Now, how much a bank can lend is broken down further based on the quality of its assets. Not all assets are of equal quality. So the x amount of assets that the bank has will be broken down into various categories like very poor, poor. Good, very good, etc. (Don't know how many categories there are or exactly what they are called).
"So, for the very poor category of assets, the bank can lend 100+a%. For poor category of assets, the bank can lend 100+a+b%. And so on. So the banks are kinda restricted by the quality of their assets (god only knows who determines the definition of quality). To overcome this barrier, the bank takes the poor and very poor quality stuff and divides them into extremely small pieces and mixes them in with the good stuff. They mix in just enough to ensure that the good stuff does not get downgraded. Now, they can lend out 100+a+b+c% on even the bad stuff. TA-DA.
"You have to wonder, how the hell can you lend out 150 bucks when u only have a 100 bucks. The banks can. That's the beauty of it. This is my understanding of the term fractional banking. I realise its rudimentary. But im no finance guy. Im an engineer." – Paid-up subscriber Manu
Ferris comment: It's even worse than you think. The reserve requirement is 10% of deposits. So for every $1 of deposits, you can make $10 of loans. For some smaller institutions, the reserve requirement is even less, just 3% of deposits.
This is how our money is created. The Fed doesn't create the entire money forest we live in. It only plants the seeds, the reserves. The money trees, the dollars, multiply and grow branches, which multiple further... They're created by the banks, as they lend each $1 of deposits out, multiplying them through the system. That's how inflation works... and that's why so many people are talking about deflation today. Banks can't lend when their collateral is being destroyed. Our currency is just so many electronic digits lent into existence based on banking rules. When you can't lend any more digits into existence, the forces of inflation grind to a halt.
The response, of course, is to print more new digits to try to goose inflation back into existence by creating a whole slew of special lending programs. Over the last two years, the Fed has created no less than 10 new major lending programs for financial institutions and other businesses.
Sooner or later, new money will find a way to multiply. When it does, you'll wish you'd bought a bunch of gold.
Regards,
Dan Ferris & Sean Goldsmith
Baltimore, Maryland
September 17, 2009