Editor's note: It's been a year since Porter unveiled his End of America video, predicting that America's enormous debts had led us to the brink of crisis – hyperinflation, deterioration of our standard of living, and civil unrest. As the year unfolded, the events in Europe, the debt ceiling debates, and civic protests around the globe bore out his concerns.
In today's installment of our S&A Holiday Best-of series, we publish an interview with Porter that originally appeared in November on The Daily Crux, our financial news aggregator. In it, Porter reviews his thesis... describes how the crisis has reached a breaking point... and predicts how events will play out in the coming months...
An urgent warning from Porter Stansberry
Our colleague Porter Stansberry recently issued an urgent update to his "End of America" warnings.
Typically, this information would be available only to subscribers of his Stansberry's Investment Advisory newsletter... But Porter believes this message is so important, he agreed to sit down with us and share it with Daily Crux readers.
We urge you to take a few moments and read this immediately.
The Daily Crux: Porter, it's now been more than a year since you first released your End of America video. Most readers have seen the video and are familiar with your predictions... But some may be unaware you recently issued your most serious warning yet. Can you explain?
Porter Stansberry: Well, it's hard to believe it's been a year since I first publicly warned of these problems.
When we published the video, almost no one believed a crisis could be coming. The mainstream media and my colleagues in newsletter publishing have both been very critical of me personally. Lots of people have taken pot shots at me... But I haven't seen anyone, anywhere, refute any of the facts in my report. Not a single one.
Now just one year later, I'm sorry to say that many of my predictions have already begun to come true.
I warned that our country's debts had become too large to be financed legitimately, and the Federal Reserve would have no choice but to inflate... And since that time we've seen a second huge round of quantitative easing, also known as QE2, followed by "Operation Twist."
I warned of large-scale civil unrest... And since then, we've seen massive public protests spread across the Middle East, to Europe, and to nearly every major city in the U.S.
I also warned that the world would begin to flee to the safety of gold and the dollar would lose its place as the world's reserve currency... And in the past year we've seen gold soar to new record highs, central banks buying up record amounts of gold, our creditors issue warning after warning about the debasement of our currency, and America lose its triple-A credit rating.
But I'm now concerned the crisis could worsen very soon...
Crux: Please explain...
Stansberry: I've been following the problems in Europe for more than two years now, as I expected the next phase of the crisis to begin in the European banking system... and the latest data suggest it may have started last week.
It's no secret that most of Europe's major banks are insolvent... But it's only been in the past week or so that they've lost access to a large source of additional funding.
The key source of funds for many of these banks has been U.S. money-market funds. But these funds are now leaving Europe as quickly as possible... This has created a virtual run on the European banking system.
I believe this crisis has now crossed the point where the European governments can no longer hope to repair the situation. We are likely now just days away from the first major bank failures.
Longtime readers of my newsletter know I've long believed Italy's UniCredit – one of the largest banks in Europe – would be the first catastrophic bank failure of the crisis. Here's why...
UniCredit has over 1.2 trillion euros in assets. But it only has 74 billion euros in equity. This equity includes close to 24 billion euros in things like goodwill and tax losses – these items are known as "intangible" equity that can't be sold or traded... So they're really only equity in an accounting sense.
What this means is UniCredit is leveraged about 24-to-1. Leverage this high is risky for any bank, but when you consider that UniCredit owns tons of European sovereign debt that will have to be marked down significantly, it can be fatal. With 24-to-1 leverage, an average loss of just 4.1% will completely wipe out the bank.
Based on my research, I estimate UniCredit will experience average losses of at least 10% on its European debt, which would result in losses of more than 100 billion euros... dwarfing its 74 billion euros in equity.
Typically, a bank in this situation would turn to private investors or its government for funding. But these options are essentially closed as well.
I believe UniCredit has reached the point where private investors will no longer provide financing. The bank has more bonds coming due next year than any other major European bank – $51 billion. Unfortunately, its bonds are currently trading at prices that represent four notches below investment-grade and eight notches below its official Moody's rating of A2.
This is a huge problem. It can't operate without an investment-grade credit rating, and it can't possibly refinance the $51 billion coming due over the next year.
The bank has organized a huge equity offering out of desperation... But if investors won't buy the bank's bonds, why would they buy its equity? So I expect this move will fail.
Italy, which is already the world's third-largest sovereign borrower, simply doesn't have the money to bail out the bank. That only leaves the European Central Bank... But according to Article 125 of the European Union's treaty, they are forbidden to do so.
So there are no good options left for UniCredit...
In the meantime, the problems at UniCredit have already spread into the European banking system. Like I mentioned earlier, the money markets that banks use for funding have all but seized up completely.
Because the banks can no longer fund themselves without government support, you can view this as a virtual run on Europe's banks. This next phase of the crisis is underway.
Crux: What happens next?
Stansberry: I'm sorry to say that this next phase will be far worse than the Lehman Brothers failure. We're not talking about the failure of just one bank. UniCredit could be the first, but there will be many more. We're talking about the failure of an entire system... the largest banking system on Earth.
The European banking system has approximately 55 billion euros in assets. That's the same size as the total debt in the entire U.S. economy.
Europe's banking system is four times larger than the U.S. banking system. And it is stuffed to the brim with sovereign debts that will never be repaid.
As I told my readers, this isn't a crisis... It's a catastrophe. And I fear most U.S. investors are completely unprepared.
Crux: How will this catastrophe affect the United States?
Stansberry: The problems will first reach the U.S. through the money-market funds I mentioned earlier.
While these funds are currently fleeing Europe, they still hold up to $500 billion in European bank bonds and certificates of deposit (CDs).
Because of this, you can rest assured the Federal Reserve will do anything it can to stop the collapse. It will not stand by and let Europe collapse and cause $500 billion losses to U.S. money-market funds, consequences be damned. They will act, even at the risk of setting off runaway inflation or a panic out of the euro and dollars.
Crux: How should folks prepare now?
Stansberry: Well, like I've said since the first End of America video, I can't know for sure when these things will happen, only that the facts say they will. So I continue to advise all readers to be as cautious and risk-averse as possible, no matter how unlikely these problems may seem at the moment.
That said, I see two big opportunities ahead...
I expect huge volatility in the coming weeks and months that will give us the chance to buy great businesses and assets at once-in-a-lifetime prices. You'll need cash on hand to take advantage of those opportunities.
Besides holding cash, you must also own plenty of gold and silver bullion. I – along with several other Stansberry & Associates analysts – have been urging readers to buy gold for years, and continue to do so.
What we're seeing now is the slow-motion death of the U.S. dollar and other fiat currencies... Gold – and likely silver as well – will be the biggest beneficiary by far. When the dollar crisis really gets going, gold could soar higher than anyone believes possible.
Just look up central bank gold buying. It doubled from last year, setting a new modern record. As I explained in my last issue of Stansberry's Investment Advisory, central banks moving to gold is literally the end of the paper, U.S. dollar global standard. It's what I've been calling the "End of America"... It's the end of America's global economic hegemony.
It's happening right now. It's underway as we speak.
Crux: Any closing thoughts?
Stansberry: I decided to go public with my End of America warnings because I sincerely believe this crisis will destroy the dollar and dramatically change the lives of most Americans, but frankly – and this may surprise some readers – I sometimes wish I had never done it.
Saying these things in public has affected my life in ways I never would have imagined. I've been personally attacked. My family has been threatened. While it's not hard to believe that a few random wackos would send me threatening letters, what I was surprised by was the amount of censorship we've experienced.
None of the major networks would take our advertising. No major journalists would cover our story. There's a total lockout in the mainstream media about these problems and their likely consequences. I believe that spells the end of mainstream media... After this crisis, everyone will know they can't be trusted.
Crux: Thanks for talking with us.
Stansberry: My pleasure.
P.S. Porter's End of America thesis is among the most controversial ideas we've ever published... subjecting him to waves of criticism that question his motives and his patriotism. Regardless, the information remains as critical today as it was when we released the video. To see the piece that started it all, click here.