You'll get a break this week, long-suffering Digest readers. Goldsmith – who does a lot of the legwork for The Digest – is on vacation. And I'm heading to a conference in D.C. (or the "heart of the beast," as I call it). So... we're forced to be brief. And as you know, that's not easy for us...
Many of you seem to think I've lost my marbles, or at least my bearings, in regard to my fears of a coming massive inflation and resulting crackdown on economic freedom. (See the mailbag, below.)
"Just another rich guy who hates taxes..." sums up the logic of my critics. If taxes were our only problem, I would sleep well at night. Taxes are a great problem to have. No, what has me concerned isn't the tax burden but the financial stability of our country. Quite honestly, I don't know how you could look at our government's balance sheet and not be extremely worried. Let me show you a set of numbers I'm pretty sure you haven't seen yet...
On April 3, James Grant – the legendary newsletter writer and longtime publisher of the most respected newsletter in America, Grant's Interest Rate Observer – took an unbiased and apolitical look at the current stimulus plan. He compared the government's current actions to previous attempts in modern history to stimulate the economy. For example, the Great Depression, which began with a 43-month-long recession.
This recession started in August 1929 and continued until March 1933. From peak to trough, the economy declined 27% in real terms. That is, adjusted for inflation, the output of our economy fell by nearly a third. The government responded by increasing the size of the Fed's balance sheet (increasing the money supply) and ratcheting up deficit spending (fiscal stimulus). Against the size of our economy at the time, the combined stimulus measured 8.3%. (In detail, the stimulus was 3.4% of GDP monetary stimulus plus 4.9% of GDP fiscal stimulus.)
It's important to remember, when the Great Depression began, our currency was still linked officially to gold. You could exchange notes for gold at any Federal Reserve Bank. Additionally, America was still a net creditor to the world. Thus, even though the 8.3% of GDP stimulus caused us to default on the gold standard, it did not completely destroy America's credit – simply because we were owed more than we borrowed.
Today, our relative standing in the world is a lot more precarious. We are not only a net debtor, we are the world's largest debtor. In total, we Americans owe more than 300% of our GDP in debt. (That's public, corporate, and private.) We are roughly 40 years away from the discipline of the weak gold standard that existed after World War II. And since then, our government has racked up obligations that boggle the mind. We currently owe more than $10 trillion to bondholders and have future, unfunded liabilities that exceed $50 trillion.
Worse, it is now likely the annual deficit will soar to more than $2 trillion. To finance these deficits, the Federal Reserve has begun purchasing long-term government bonds – printing money to finance additional government spending. Very few people realize how dangerous this is. It removes an important obstacle to government spending while immediately adding significantly to the size of the Fed's balance sheet. These actions show an acute lack of financial discipline. And they would be dangerous to citizens of any country, but these actions represent a unique threat to America... As the owners of the world's reserve currency, we haven't been forced to pay for our imports with real savings since before World War II. We are on the verge of losing this most valuable trade advantage. And if we do, the consequences will be catastrophic – especially to the middle class.
Are my concerns overblown? Well, recall that a much smaller and more solvent U.S. government reacted to the Great Depression – 43 months of economic decline – with an 8.3% of GDP fiscal and monetary stimulus. Today's "Great Recession" is currently in its 15th month. The total decline in real GDP has so far been 1.8% – barely a blip. But the amount of stimulus our government is throwing at the problem is unprecedented in American history: 29.9% of GDP. That's 18% of GDP monetary stimulus and 11.9% of GDP fiscal stimulus. What happens when a nearly bankrupt government goes on a wild spending spree, in response to a relatively minor economic downturn? We are about to find out. History isn't optimistic. My bet is we're about to learn a difficult lesson... the hard way.
A stock to keep your eye on this week: Gannett (GCI). On Thursday, the publisher of USAToday and 80 other U.S. daily newspapers will report its latest results. We're bearish on newspapers. We made a considerable amount of money for PSIA subscribers last year by recommending a short sell on Gannett when the stock was still trading above $15 per share.
We were moved to act when we saw the CEO saying the company's huge writeoff of goodwill was merely "accounting" and wouldn't hurt the stock. He then promised not to cut the dividend (which the company couldn't afford to keep paying). He sounded like a finance minister on the eve of devaluation. It was easy money.
The stock has rallied over the past several weeks. And unlike many of the other companies we've shorted over the past two years, Gannett still has positive cash flow. That is, it's making enough money from its operations to pay for its debts. That's attracted deep value investors. I think the stock could rally significantly – back to more than $10 perhaps. If you believe the $250 million or so Gannett is earning in cash each year is sustainable, you might pay 10 times that amount for the business, or $2.5 billion. The stock is currently worth less than $1 billion.
One thing is for certain though: The economics of newspapers are never going to get any better. They will only get worse. Gannett owes creditors nearly $4 billion – money that will be impossible to repay and difficult to refinance. And therefore, it's only a matter of time before Gannett's share price reaches zero.
New highs: none – Markets were closed Friday for the holiday.
In the mailbag... Readers think I'm losing my marbles. Send your comments: feedback@stansberryresearch.com.
"My subscription to your investment advisory letter attest to a respect and appreciation for the totality of your work on the practice and art of investing. Understanding impressions formed solely on what a pe
rson has written to be narrow ones, nonetheless, in my mind's eye your words draw a caricature of a man suffering all the disadvantages of wealth. Your money seems to have gotten twisted around your feet, and interferes with the freedom of your movement.
Instead of you possessing your wealth, your wealth seems to have possessed you. The golden mountain piled from your accumulated treasures advances to the skies. Wealth only aggravates the natural imbecility of fools. Only a clever man can rise above the disadvantages of wealth and live rich gracefully – a sagacious King of his mountain. The wealthy fool – often self-made – tumbles from his vista, a pathetic paradigm of greed, a Sisyphus pushing his golden boulder up the yellow incline...
"While you appear wise enough to be the Master of your own domain, your incredulous cynicism often cast you as a weary archetype of Atlas – stuck holding up the world for the enjoyment of the undeserving rabble. Running breathlessly after lucre stirs up a prevailing rustle of banknotes, leaving a gentleman with a protracted nightmare: How to protect his heap, grown too large to hide and too heavy to move. Be wise my friend, less the alchemy of delusion morphs your golden calf into a golden ball and chain." – Paid-up subscriber Charles Drayer
Porter comment: What you say is true... but the concern you sense in my writing isn't so much about protecting my own wealth, but for the wealth – and the well-being – of my subscribers. I feel an enormous obligation to help protect the people who read my newsletters from the events I see unfolding. I pray I am wrong.
"You guys have really done a first rate job of explaining the sub-prime mortgage crisis but I think the attached video might make it a bit easier for the average moron voter to understand. Perhaps instead of trying to ban this from the air, NBC ought to make it required watching in every classroom in America." – Paid-up subscriber Mike Riley
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Regards,
Porter Stansberry
Baltimore, Maryland
April 13, 2009