Porter comment: Goldsmith is on vacation. And as hard as it must be for him to believe, the office didn't collapse into chaos in his absence. It's me, all alone, on The Digest today. Yes, the boss still knows how to type, Goldsmith...
The anniversary of the fall of Lehman Brothers is upon us, and the pundits and economists have begun their preaching. The "causes" of the crisis have been "examined." The "lessons" are now said to have been "learned." And the mistakes we made, our president promises, will not be "repeated." The public, it is understood, must be persuaded nothing has gone so wrong that it cannot be fixed...
And perhaps the mainstream voices will be proven correct. Perhaps. Maybe we can fix a crisis brought about by too much money and credit... with still more money and credit. But we don't believe it. Not for one minute. And even if we were to speak alone against every other voice in the world, we will still express our honest conclusion: We doubt it very much. We think the entire charade is nothing more than government-approved humbug and hokum.
We don't think replacing the balance sheets of Lehman, Bear, Merrill, Citigroup, etc. with the balance sheet of the Federal Reserve improves the real situation by one red, paper-money cent. It merely moves the entire folly of the so-called modern financial system that much closer to its inevitable collapse. Why? Well, the reason is so simple even a fifth-grader will understand it.
The collapse of the banking system last year wasn't caused by any of the proximate causes – the obvious troubles now being so carefully examined. The problem wasn't caused by bad mortgages. Or by banks using too much leverage. Or by an insurance company (AIG) selling far more insurance than it could ever hope to cover.
Yes, the collapse of these systems is what led to the crisis of the moment. But blaming these events – which were easy to predict (and which we, among others, certainly did predict) – would be like blaming a forest fire for destroying your new home and ignoring the hundred years of fuel that surrounded your lot when you built.
What caused the banking system to collapse was not what the bankers did with the money they borrowed, but the fact that they were allowed to borrow an unlimited amount of money in the first place – money that had no intrinsic value and could be created at will by the 20-something Harvard MBAs working at the investment banks that invented mortgage securities.
Our president and his minions have gathered on Wall Street today to denounce the fire. They have no recognition that by "solving" this crisis, they have merely increased the amount of fuel for the next fire – a fire that will completely destroy the value of the U.S. dollar.
So what really caused this crisis? Simple: historically low interest rates on a paper-backed world reserve currency. What's the real solution to the constant boom and bust of our credit markets? Simple: a sound currency whose price (interest rates) is set by the demands of the global market, not by any government.
Calling our current system "modern" is a misnomer. Our current system is barbaric. It has proven to be a failure every single time in history when it has been tried. Paper money has been used for thousands of years to steal the wealth of the middle class, impose a secret tax on the productive, and swindle, through speculation, the fortunes of those who are honest and hard working. On the other hand, only one monetary system has proven to work, every single time it has been tried – gold. And yet it is the gold system that has been labeled "barbaric" by the politicians who fear it.
Just because the U.S. is unlikely to ever return to the gold standard doesn't mean you can't. One year ago today, gold was trading for $635. Today, it sits near $1,000. There is a very good reason for this. Gold is no one else's liability. And it is difficult to produce. Over the last year, our Federal Reserve increased the size of its balance sheet by 126%. So far, this has only resulted in roughly 20% more currency in circulation. But eventually, all of this new credit will end up as money, greatly devaluing the value of the paper you hold in your wallet.
The same thing, at various rates of growth, is happening around the world at every major central bank. And that is why, according to sources in the gold market, central banks themselves are for the first time in more than a decade net purchasers of gold. The politicians want you to use their paper money. Meanwhile, they've decided to stockpile gold. So should you.
I've just seen some figures on the marks made by BB&T on the assets they acquired from Colonial Bank, in the FDIC-led deal. The overall loan book was marked down by 37%. That's twice the size of the markdowns taken by Wachovia and Washington Mutual when they were acquired in FDIC-led deals. And there's an even bigger problem: BB&T marked down the value of Colonial's construction loans by more than two-thirds. If the commercial real estate loans on the books at Metlife are anything like these marks suggests they must be, it's hard to imagine how the equity holders will escape unscathed.
New highs: Morgan Stanley Emerging Markets fund (EDD), Hatteras (HTS), Cresud (CRESY), Market Vectors Gold Miners ETF (GDX), Markel (MKL), Silver Wheaton (SLV), International Royalty (ROY), Kinross Gold (KGC), Sino Gold (SGX.AX), Eldorado Gold (EGO).
In the mailbag today... a debate about natural gas. Longtime readers will recall I've been a natty bear since about 2006. A little early, certainly. But definitely on the right side of the trade. In my most recent issue, though, I explained why I'm now bullish on natural gas. Once again, I might be early... but I know I'm on the right side of the trade again:
We are approaching a once-in-a-decade opportunity in natural gas. It's worth watching closely. And I know every great investor in the world is doing the same thing. I know because I've spoken to a handful of them about natural gas. I know because legendary investors have been buying lots of natural gas-related stocks. Finally, I've been in the markets long enough to know, when you see an anomaly like this, it's going to attract a lot of capital... From a valuation perspective, there's no doubt in my mind it is time to buy natural gas. – Porter Stansberry's Investment Advisory, September 2009
As always, you can join our debate by e-mailing us at feedback@stansberryresearch.com.
"I know you'll accuse me of 'drinking the kool-aid' or something, but I just have to say 'thank you' to everyone for the outstanding value of the Private Wealth Alliance. I was just thinking to myself, maybe I should subscribe to that Inside Strategist letter at the rate they're offering it... and BAM! I have an e-mail update just minutes later that tells me I'm now not only going to get that one, but the Penny one too as part of the subscription I already bought – I can't believe the value! Thank you and keep up the great work!" – Paid-up subscriber Sarah Grooms
"I subscribe to The S&A Digest but it is not what I expected it to be. I want my money back..." – Paid up subscriber Mary Olah
Porter comment: Mary, we're certainly sorry to lose you as a reader... but we don't owe you anything. The S&A Digest is free. You can unsubscribe at any time by simply following the "unsubscribe" instructions we include in each copy we send you.
"I just wonder why you are so bullish on Miami. Have you been reading the marketing brochures? The proponents have used the same story for the past ten years. As a resident, I wonder what propels your optimism? The county has a small increase in new driver's licenses but only because children are moving back home. The state just reported more people moving out than into the state. The county has a massive deficit of $500 million and needs to lay off a thousand plus people. Tourism is down and the port doesn't publish data anymore after one of the politicians had to get Washington money to keep it afloat...
"Even the economic arm of the county isn't that optimistic. In a recent report, they admitted that companies don't want to come here. The original reasons a few years ago were: political corruption, lack of quality education for the workers and affordable housing. Even with prices falling from foreclosures, the good deal may not be so good when your taxes and insurance are more than your mortgage payment. If you choose a condo, your fees could be $2,000 a month (not a misprint) and the luxury services are not there. Some of the buildings you mentioned are in foreclosure or on the verge. Plus, there are now reports coming out about code violations and questionable construction in the new buildings...
"I am involved to some degree in real estate here and I do see some increase in property sales no doubt. It will be interesting to see how these people who just bought feel about the deal they got when they get their tax and insurance bill. You must think the market hit bottom, and I wonder why? Oh yeah, don't forget about the Chinese dry wall problems in the newly constructed homes, some of them where a million dollars and now worth what? What do you say to someone who purchased a home that has to be gutted because of this problem? Caveat Emptor!" – Paid-up subscriber Rich
Porter comment: Markets make opinions. Miami is the de facto capital of Latin America. It is a beautiful place to live, with tax rates among the lowest in the United States – if you have a high income. (Florida imposes no state income tax.) It offers an incredibly high standard of living at a very reasonable price. With luxury homes and condos now selling for less than $250 per square foot, I'm bullish. And I've put my money where my mouth is. I'm now a resident.
"I agree with your thesis that nat. gas may be 'oversold'. [But] I question your use of [the recommended drilling company] as a way to play from a long-term fundamental strategy. I want to share some info with you on drilling business cycles from an oil man's perspective...
"I started working on drilling rigs as an Engineer when I graduated from college in 1976. I now own a small, private oil and gas company. I contacted [one of the company's] rigs in 2005 to drill 3 wells in North Texas. The rig was built in the 1950s. Stacked in 1967. Refurbished (i.e. re-painted and repaired) in 1979. Stacked in 1982. Pulled out of the weeds and re-painted in 2003 (valued at $200,000). Merged in 2005 (with a new value of $2.5 million). Now stacked back in OKLA (Book value $2.5 million, auction value $300,000???) The rig was worn out in 2005, but had a fresh paint job, and looked good. For every 20 days of drilling, we had 3 days of repairs...
"I have drilled 20 wells in the Barnett Shale for other oil companies. It was a true drilling boom that has collapsed. 1 in 10 wells made money for their investors. The rig count has dropped from 1,400 to 600 and is still falling. It is just like the drilling boom and bust of 1981. I have been through the busts of 1981, 1999, and now, 2009. Business mentors told me about the boom of 1960 and the bust of 1970. History tells us that we can expect another drilling boom/bust cycle in 10 to 20 years. Gas storage is full. Many wells are shut in. LNG tankers are delivering more gas to Freeport, Texas, and Lake Charles, La. I have personally watched the ships come into port under security escort...
"We are in a long-term bear market for land-based drilling in the U.S. The book value of the drilling equipment will be marked down to the liquidation value over the next 10 years. Much of the drilling equipment that is stacked is old and worn out. The new equipment brought in from China is not holding up. Beware of predicting short-term bounces in a long-term bear market..." – Paid-up subscriber George Todd
Porter comment: Markets make opinions. Buying drilling rigs for $0.30 on the dollar might be too high a price to pay... but I doubt it. I don't expect a quick rebound in the price of natural gas. I just expect the price to be a lot higher in three to five years. I know the drilling companies I've recommended won't go out of business. If we're unlucky, it might take us five years to make 10 times our money in these stocks. But... if I'm anything close to right about the amount of inflation we're going to have after next year, then I expect to see profits of 500%-1,000% in less than three years. If we're wrong, we'll take our 25% loss and move on. You can't be right about everything.
"Thought you might be interested in a little transaction an associate of mine was involved in. Brief background – I own a fair number of royalty and working interests in oil and gas wells; and I'll be drilling a new gas/oil well in Kansas next month, so I'm intimately familiar with the daily price of crude and nat gas...
"Nat gas has been trading in the $2.50-$3.00 per MCF range for quite a while. I'm also familiar with the conventional media stories of the 'huge' nat gas production overhang, including a few from the scribes in your shop... Here's the tidbit – and it's only a tidbit. My associate just entered into a contract with a heavyweight distribution company to take his production of a few of thousand MCF per day, for 18 months – at $6.11 per MCF. Obviously, they're either daft, or they know something we don't. Guess where I'm betting?
"I've also experienced (firsthand) some of the majors temporarily shutting-in high producing wells. They don't do that without reason, and they don't do that for years – or even for many months – they need cash flow just like any other business. Bottom line – I don't think the medium-term outlook for nat gas is as bleak as many in the media have portrayed it. I'd like to think that's not optimism talking – I have too many oil interests that take up the slack in lean nat gas times. Second bottom line – with the conventional wisdom about nat gas overproduction prevalent even in the industry, drilling costs have plummeted. If you've got the leases, drill, baby, drill. Git 'er done for half the price, reap the rewards in a year." – Paid-up subscriber Ken P.
Regards,
Porter Stansberry
Baltimore, Maryland
September 14, 2009