It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?
How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.
When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."
The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.
So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.
According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.
Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.
So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.
So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.
One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.
I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry's Investment Advisory, which we published last Friday. Coincidentally, the New York Times repeated our warnings – nearly word for word – in its paper today. (They didn't mention Greenspan-Guidotti, however... It's a real secret of international speculators.)
I urge you to read my newsletter. It is by far the most important letter I've ever written. If you don't act right now to protect yourself from the dollar, the odds are very high you'll be wiped out over the next 12 months. For more information on PSIA, click here.
In addition to reflating the housing bubble by insuring subprime loans and offering below-market mortgage rates, the Federal Housing Administration (FHA) is now subsidizing hedge-fund profits and passing the risk to us taxpayers… Vulture investors are currently buying blocks of mortgages from distressed banks for huge discounts (around 40 cents on the dollar). The investor then reduces the borrowers' principal loan amount and convinces them to refinance through FHA-approved lenders.
Then, the investor makes a huge profit selling the newly insured loan to an agency like Ginnie Mae – which packages the loan and sells it to other investors. These deals are win-win for the vulture funds and the homeowners. The funds bank a quick profit and the homeowners reduce their home loans by an average of 11% – which unlike payment reductions or loan extensions, actually works. However, these mortgage refinancings are placing more burden on an already broke FHA. And eventually, taxpayers will be on the hook for another government bailout.
[T]here's only one eBay and no realistic way to compete with it, since it already commands so much traffic. I believe eBay will be one of the world's most dominant franchises for a very long time – for at least the next 20 years.
Given its continuing growth, its high margins, its cash-rich balance sheet, and its likely resistance to a recession (more people will probably need to sell their junk), I believe the stock is a fantastic bargain at less than $20. – Porter Stansberry in the October 2008 issue of Porter Stansberry's Investment Advisory
While my eBay trade didn't work – we stopped out last December – my investment thesis still stands. As the economy worsens, more people are using eBay to buy and sell products. Just this weekend, so many people were listing items to sell on eBay that the site crashed. eBay first noticed the problems at 11 a.m. on Saturday, and as of Sunday, was still working to fix everything. The company said it currently has more than 200 million items up for auction, up 33% from this time last year.
Last month, Penny Stock Specialist editor Frank Curzio told Alliance members to buy shares of beaten-down telecom company Sprint. His readers are already up 26%. But Frank says his next pick, due out Wednesday, has even more short-term upside than Sprint. He's been watching this stock for two years. And shares just recently hit his buy price. Frank says the potential from here is huge…
The company's shares trade for $5. It's a beaten-up infrastructure company that's about to get part of a $5.7 billion government stimulus package. More important, the stimulus bill says the government has to allocate this money (specifically to upgrade this sector) in the next 15 months. And Frank isn't the only one who sees huge upside in the stock. An insider – a retired general partner of private-equity giant Kohlberg, Kravis & Roberts (KKR) – is buying shares.
Frank's Penny Stock Specialist, which covers stocks that trade for less than $10 a share, is still in "beta mode." It's only available to Alliance members, who can access it here. We're close to launching Frank's research to the public. We'll continue updating you in The Digest.
New highs: Johnson & Johnson (JNJ), Burlington Northern Santa Fe (BNI), Coca-Cola (KO), 3SBio (SSRX), Jinshan (JIN.TO).
In the mailbag… a debate about Hong Kong real estate. Send us your questions here: feedback@stansberryresearch.com
"The lead-in reference to the Hong Kong residential real estate sale at $9000HK dollars per square foot as being perhaps the highest anywhere to date must be in error… New luxury condominium construction in Manhattan at the residential real estate peak not infrequently exceeded $2,000 USD per square foot, and hasn't fallen even close yet to the $1,200 USD per square foot level." – Paid-up subscriber Norman Weil
Porter comment: Actually what happened was the editors working on my newsletter on Friday couldn't believe the numbers and assumed I must have meant HK dollars. Nope. The prices were in U.S. dollars. The penthouse condo (6,000 square feet) at the top of Henderson Land's new building sold for nearly US$10,000 per square foot, making it the most expensive residential real estate in the world. As I explain in my newsletter, soaring real estate prices in Hong Kong are being caused by the enormous inflation of the U.S. dollar. The full story is in my issue.
"You presented as comprehensive as any analysis of why I should buy silver. Your Investment Advisory issue was a long read but well worth it. Thanks for the good stuff." – Paid-up subscriber George C.
Porter comment: As I said, my most recent issue of PSIA was by far the most important letter I've ever written. If you read it, you already know why.
Regards,
Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
November 23, 3009