S&A Holiday Best-of: An Update to the End of America

Editor's note: Today marks the start of our S&A Holiday Best-of series. Every year around this time, we run a series of the best Digests we've published in the past, new interviews, and other special features. In short, we feel it's the most valuable information we've provided in 2011. We've always received great feedback on these Digests in the past... We hope you enjoy this year's series. And Happy Holidays from everyone at Stansberry Research.

One of the largest trends we've covered this year in the Digest is the European financial crisis. Today's Digest – a reprint from January 7, 2011 – was the first comprehensive essay we wrote on the topic.

In this Digest, we explain Europe's suffocating debts and why they will eventually lead to a euro collapse. We also explained three simple ways you could protect your wealth and actually make money... I don't want to ruin the surprise, but all three trades are in-the-money so far this year.

Since we first published this Digest, we've seen world central banks devise numerous plans to save Europe... But none of them have worked. Therefore, in our minds, there's still money to be made.

An update to the End of America... Why Europe's crisis could mean a correction in gold/silver... Why Ireland matters... The correction starts?... How to trade like Goldman and make money no matter what the market does...

As longtime readers know, I often use Friday's Digest to introduce you to new techniques and strategies you're unlikely to learn about anywhere else. I've written extensively about why I believe most investors should focus on investing in corporate bonds... why selling stocks short will make your portfolio safer (not riskier)... and why selling puts can be the only real way to make a lot of money without taking any risk at all.

This week, I want to give you something I know will be far more valuable than just learning about another strategy. I want to give you a key update on what I call the "End of America."

When I talk about the End of America, I don't mean the end of our political union (although I won't rule that out). I'm talking about the end of the U.S. dollar as the world's reserve currency. Most people think that's unlikely to occur. But it's already happening, and a complete collapse of the dollar is now inevitable.

This is the most important financial problem you will ever face. And I want you to know exactly how this crisis will unfold, so you can completely protect yourself. Save this Digest. Print out a copy. Put it somewhere where you'll see it. Keep reminding yourself that this process is underway... and that you have to prepare NOW.

Why do you need to take steps now? Why not just wait and see what happens? Two reasons...

First, when you look at the numbers, you can see the problems we face will not be solved by any normal or legitimate means. How do I know this? Just consider this one fact: Even if federal tax revenue were doubled, we would still have an annual deficit.

I've got to be making that up, right? Surely that can't be true, right? It's true. Income tax receipts are roughly $900 billion a year. Corporate taxes are roughly $200 billion annually. That's $1.1 trillion in tax revenue. Our current government expenditure is $3.5 trillion. Even if you doubled tax revenue, we would still be facing a $1.4 trillion deficit.

"Wait a minute," you say. "How can that be? Doesn't the mainstream media report that our deficit is only around $1 trillion per year right now?" Yes, that's what they report. But that's because the government counts all $850 billion of payroll taxes (Medicare and Social Security) as current income. It's not. Those taxes are supposed to be funding the future liabilities of those programs, but we're spending all that money now. If a private corporation did the same thing, its executives would all go to jail.

Second, you have to act now because when the situation finally turns, it will happen suddenly. If our government suddenly finds itself unable to sell bonds at a reasonable price, the rule of law will evaporate overnight.

This will happen at some point. The only question is when. You don't have to believe me. Listen to what congressman Ron Paul said in an interview with our friends at Casey Research:

Yes, Ron Paul is a libertarian. But he has also been in Congress (off and on) since the 1970s, and he is now the chairman of the Joint Finance Committee. He knows more than almost anyone else about the true financial condition of the government. He is giving you a clear warning. What are you going to do about it?

Most people will do nothing. They will continue to assume tomorrow is likely to be pretty much the same. Sure, we might have some tough times... but this will pass. Nothing serious is going to happen.

If you feel this way, that's fine. But ask yourself these questions:

1. How high will gold have to get before you think something is seriously wrong?
2. How high will silver have to get?
3. How many banks will the FDIC have to close before you consider the dollar to be unsafe?
4. How many municipalities will have to go under before you think there's a crisis?
5. How many European states will have to leave the euro before you begin to doubt the stability of the world's paper currencies?
6. How high will agriculture prices have to go before you see that a global food panic is underway?

I suggest you write down the answers to these questions now. Because almost no matter what you answered, you'll get to that point soon.

So how will it happen? That's what people keep asking me. My answer is: The collapse of the global fiat money system is already under way. Gold has gone up for 10 straight years. Gold is the counterbalance to fiat (paper) money. For 10 years in a row, investors around the world have been favoring gold. This trend is going to continue, and it will not stop until serious actions are taken to put a floor under the value of the world's major paper currencies: the euro, dollar, and yen. And that can't happen because the governments backing these three currencies are all bankrupt. The euro will die first. Just look at the numbers...

Greece, Ireland, Spain, Portugal, and Italy have all made the same mistake. They responded to the collapse of real estate prices and debts by guaranteeing the private obligations of their banks with their country's treasury. (America is doing the same, by the way.) The problem is, the debts are vastly larger than the governments can afford to repay... far larger.

So for example, when Anglo Irish Bank failed, it announced it required $35 billion. That's equal to 25% of Ireland's GDP. And that's only one of Ireland's failed banks. Ireland will never be able to afford these obligations.

As a result, Germany, France, and the other euro nations have put together a bailout plan. All of the European treasuries will act to save any member state. Let's look at the numbers. Total debts owed to foreign investors in the so-called "PIIGS" countries are $2.6 trillion. The bailout package that's been assembled totals $1 trillion. That sounds pretty good... at first.

But Italy and Spain have pledged $130 billion to the bailout. Where will they get that money? Greece has pledged $12 billion. Ireland, $7 billion. Portugal, $11 billion. Only about half this money will ever be raised and almost all that can be raised will have to come from France and Germany. Sooner or later, the taxpayers in those countries will say "enough" and the whole thing will unravel.

It will happen suddenly. And very, very soon. Even if you pretend Europe can raise that size of a bailout fund, that figure simply isn't nearly large enough to bail out either Spain or Italy. And both are likely to suffer a default if either Greece or Ireland defaults. That's why interest rates in Ireland and Greece are back to crisis levels, despite the bail out promise. That's why the euro continues to fall. And that's why shorting the euro is one of 2011's sure bets.

Ironically, the worsening crisis in Europe will give our own dollar a bit of a reprieve this year. In a crisis, investors will prefer the liquidity of short-term Treasurys to any other asset, including gold and silver. Look at the precious metals markets this week...

The euro (FXE) fell almost 2% Wednesday. Silver (SLV) fell 7%. Gold (GLD) fell 4%. What went up? The U.S. dollar (UUP) rose 2%. Don't forget... in 2008, the dollar rallied tremendously. Gold and silver fell sharply. In a short-term panic, investors are still buying dollars, not gold or silver.

The collapse of the euro will cause all kinds of big problems this year and almost surely lead to a huge correction in commodities. Does that mean the U.S. dollar's problems are just a mirage? Nope. Sooner or later, the U.S. will face a stark choice...

If we let the euro fail, it will result in terrible short-term consequences. So the Fed will crank up the presses yet again. Quantitative easing 3 will be another $1 trillion effort, this time focused on buying European sovereign debt. The Fed must become the lender of last resort not only for the U.S., but for the world. That's the last step before its eventual collapse. After that point, people will no longer flee to Treasurys when a crisis erupts. They will flee to gold.

What should you do about this? It's pretty simple. First, you should use the correction in silver and gold to stock up on physical bullion. Make sure you've got a year's living expenses (at least) in gold and silver bullion. Store a portion of it overseas.

If you can, buy some real estate overseas. Look into getting a resident's permit or, even better, a foreign passport. If leaving isn't an option for you, then use this year to build some safeguards for yourself here. It could be buying a local farm... or maybe just planting a garden... or digging a well... or installing a big propane tank. Store a bit of food. Stockpile medicines. Buy a gun. Get some ammunition. Imagine what it would be like for you if the dollar wouldn't buy anything. Imagine what would happen if the 43 million Americans on food stamps couldn't eat. Plan your affairs accordingly.

In regards to your portfolio, here's what I recommend, assuming you haven't done anything yet. First, research oil and gas companies. And research gold and silver companies. Research agricultural companies. You'll find this information in several of our publications, including my newsletter, Stansberry's Investment Advisory. Put together a wish list of companies that own the world's best trophy assets – food, energy, and sound money. Those are the key assets. There are others too, like transportation networks, refineries, key trans-shipment points. If the world's currencies collapse, what assets do you want to end up owning? That's the question to answer this year. Once you have made some good choices... wait. Wait? Yes. Wait.

Wait for a correction. It will come this year. Wait for a crisis to buy. It will come. Wait for signs of massive volatility, like when the volatility index (VIX) – a key measure of fear in the market – shoots above 40 or 50. Wait for junk bonds to yield 15 or 20 percentage points more than U.S. Treasurys. It will happen. Just be patient.

Then, go to your list of trophy assets/corporations. And get out of the U.S. dollar. By the time the big selloff in U.S. Treasurys has begun in earnest (let's say 18-24 months from now), you want to be 100% invested in gold and silver, high-quality short-term corporate debt, trophy equity, trophy real estate. But the key, as always, will be to move out of the dollar as it experiences the rare counter-cyclical rally – one of which is under way right now.

Who will guide you in these trades? Who has the most experience on my staff for making these kinds of precise moves? Dr. David Eifrig.

"Doc," as we call him, was a proprietary trader for Goldman Sachs and other top banks on Wall Street for more than a decade. Then, he went to medical school. There isn't anyone smarter or more experienced available, perhaps anywhere. And you can get his expertise for a song. You don't have to spend $100,000 on a hedge fund to use the same techniques. You just have to read Eifrig's trading service, Retirement Trader.

It's specifically designed to bring you Wall Street's most sophisticated trading techniques. Don't you wonder how Goldman Sachs makes money on every trade it makes? Doc can show you. That's why 13 of the 13 positions he closed last year were winners. [Editor's note: Doc has now closed 41 winners in a row.] Yes, that's right. He made his readers money on every trade he closed.

You may say to yourself, "I'm no trader. I'm an investor." And while that may normally work well for you, this year it won't. This year, you're going to have to deal with massive changes in the world's economies and markets. This year, you will have to be a trader to do well. And no one in the world is better to help you than Doc Eifrig. Try his service. It will make you money. But far more importantly, Doc will give you the tools and the knowledge you will need to prosper during this crisis. I would encourage everyone to read Doc's work... here.

Some readers write in to criticize our views and tell us what to recommend... Send your messages to feedback@stansberryresearch.com.

Regards,

Porter Stansberry

Baltimore, Maryland

January 7, 2011