The global bond-market collapse is here...

I (Porter) spent last weekend in New York for the annual meeting of my private wealth club, The Atlas 400.

Each year, we meet once, in New York City, to discuss business and investments. Yes, of course, these topics do come up on our other adventures, but once a year we get together to specifically discuss serious matters. And of course, we meet in New York, as it is the world's current financial capital.

The Atlas 400 is unique. It's a global social club for entrepreneurs, senior business leaders, and highly successful professionals – the world's best doctors, lawyers, accountants, developers, writers, etc. The club is designed to provide these people with a network of like-minded individuals, with similar means, who are interested in contrarian ideas and the kind of travel you can't buy from a travel agent. We're able to use the club's contacts to make the kind of arrangements – like racing 911 sports cars on Porsche's test track at the invitation of the company's CEO – that most people will simply never have the opportunity to experience.

But even beyond the incredible experiences... traveling with folks is a great way to get to know them, a great way to build a network of friends. What better way to get to know someone and build a friendship than visiting Oktoberfest together... or hunting ducks in Patagonia... or touring the finest Chateau in Bordeaux (a trip we're planning for 2014).

We disclaim, completely, that the club is about business. It's not. It's a social club. We've structured it that way because we firmly believe that friendship comes first. Just about every great business opportunity I've ever gotten came to me by someone who was a close friend.

Great example: Dr. Steve Sjuggerud got me my first job in financial research (and I later hired him to launch our second newsletter, True Wealth). Why did we call each other? Because we spent the first decade of our friendship surfing all around the world together. We got to know each other very well – even trusted each other with our lives in some of the biggest and most challenging surf breaks in Central America.

And it's not just great business contacts. Last year, I ruptured a disk in my back on a fishing trip to Bimini. I was in a kind of pain I couldn't have imagined. After a long and excruciating boat ride back to Miami, I finally made it to the hospital. I was told I had to have surgery to at least clean up the ruptured material, which was sitting on a nerve. (I had almost no strength in my right leg.)

Obviously, I was scared, tired, and in a lot of pain. So I picked up my cell phone and called a friend I'd met the year before, through Atlas – Dr. Todd Lanman. We'd become fast friends. Like me, he's a self-made guy who's been far more successful than he ever dreamed was likely. He's one of the top neurosurgeons in the U.S. He's on the staff at UCLA. He helps companies develop medical products. He's got a slew of patents.

Now... keep in mind... we didn't become friends because I was hoping to get back surgery. No, we simply have a similar view of the world. We have lots in common despite our different ages and careers. I'd hosted him at my home in Miami Beach. He'd been out on my boat. He'd met my wife and kids. We aren't just folks who met at a conference once. We are friends.

I knew he'd take my call. And I knew he'd care enough about my situation to give me the advice I needed. He spoke to my surgeon, got a quick and rough overview of the situation, and told me what I needed to hear: "Do the surgery. You'll be fine. And if anything goes wrong – don't worry, it won't – but if it does, I can fix it. Your leg will be fine."

Think about what that simple phone call was worth to me. Now, when Dr. Lanman needs a favor, he's got it. In fact, we're going to work together this year on a book – a guide to managing back issues. That's how the club was meant to work – giving people a chance to build great relationships with other successful people.

I hope you'll think about the club for a moment. After you've been successful and acquired a certain level of financial resources... what do you really need and want to do? If you've become a multimillionaire by the time you're 40 or 50, what are you really after with the rest of your life? As you know, getting more and more money quickly losses its appeal. Not that it's not important... but it becomes a lot less rewarding over time.

The one thing I've found that hasn't lost its appeal is meeting great new people. I truly enjoy hearing their stories... learning about their passions in life... and finding out how much we have in common, despite our various backgrounds. That's the primary reason I founded The Atlas 400. I figured, if this is what I really want to do with the rest of my life – travel the world with interesting people, doing interesting things, and building great friendships – then surely there are a few hundred other people out there who feel the same way.

We're approaching 100 members. (I believe we're at 94 currently.) Our strategy has always been to substantially raise the price to join the club after we reached 100 members because we wanted to reward our founding members and we know the value of our network grows along with our numbers. Please, if you've ever thought you might want to be part of the club, act now. To contact the club about applying, click here.

– Porter Stansberry with Sean Goldsmith

The one way I've found that money actually can buy happiness...

If you've been successful in your life and career... what do you want or really need to do at that point?

In today's Digest Premium, Porter describes how he answered that question... and how that realization has taken him around the globe.

To subscribe to Digest Premium and access today's analysis, click here.

The global bond-market collapse is here... Japan falls apart... Why this sovereign debt crisis will be different than Europe's... Introducing a new type of 'fidiot'... Our government lies, steals, and murders? No, really?...

Well... surprise, surprise, surprise... apparently you can't borrow endless sums of money and then print hundreds of billions of new dollars to pay off your foreign creditors.

The Japanese bond market has collapsed over the past few weeks. I (Porter) am going to give you the details below. But I don't want you to get lost in the mind-numbing figures. You can sum them up very simply: the Japanese government's debts have grown so large (almost 250% of GDP) that for the last several months, the government has been forced to borrow additional sums merely to meet its interest payments.

Thus, the country is literally bankrupt. Japan, as the most indebted large democracy, is a likely place for the global bond-market panic to begin. So I believe the situation deserves your full attention.

Rather than cut the size of their government and reduce their borrowing, the Japanese have taken a page from Fed Chairman Ben Bernanke's playbook. Japan's central bank has been printing huge sums of money. And it's been buying government debt to help finance the country's huge deficits (which equal 10% of its gross domestic product).

Keep in mind, interest rates on 10-year Japanese bonds were already well below 0.5%. The result of this enormous money and credit stimulus was predictable: Stock prices have gone up (at least temporarily). And consumption has increased since people would rather spend money now before prices start going up. The problem, of course, is that when you're bankrupt and you begin to deliberately destroy the value of your currency, everyone begins to sell it. The yen is collapsing. And Japan has begun to suffer a trade deficit for the first time in living memory. Investors are now fleeing the Japanese bond market in a near panic.

Finally, we see the Keynesian lie laid bare. Japan's efforts to "stimulate" its economy with unlimited government borrowing and central-bank printing aren't working out so well for anyone who lent the poor bastards any money. We've been warning of this ultimate end game since 2008. It's the same scenario we've described as the "End of America" because the U.S. dollar undergirds the entire global system of sovereign credit/paper money.

What caused the panic in Japan is simple to understand. For the first time in modern history, Japan began to run a serious trade deficit, forcing it to get foreign financing for its government bonds. It's easier for America to get foreign financing because more than 60% of the world's bank reserves are held in dollars. It's much harder for the Japanese to get foreigners to invest in a bankrupt government that's printing money as fast as it can. No wonder, right?

The point you've got to remember is that America will only keep this privilege as long as it's solvent. Not many people understand that limitation today. And that's why I'm so worried.

Believe it or not, governments are just like everyone else... They can't borrow unlimited amounts of money. And central banks can't print unlimited amounts of money without putting their bond and capital markets at serious risk.

Sooner or later, investors do recognize the inevitability of inflation... And sooner or later, they panic. Investors know it's better to panic first than to panic last. That's exactly what's happening in Japan right now.

None of this should surprise anyone. The entire history of sovereign finance is essentially the story of governments that borrow too much and then try to print the debts away. (They all fail, of course... Otherwise, Zimbabwe would be Switzerland.)

The funny thing is these events have surprised a lot of the world's bankers. So for the remainder of this Friday Digest, I will refer to this cohort of well-dressed fools as fidiots.

Maybe you're familiar with the slang term "fidiot": An extremely foolish person whose antics and failures are better pared with an expletive. I propose a more precise meaning that's applicable to a smaller subset. In economic circles, fidiots are those semi-financially literate people who believe the various inflationary schemes (also called "Keynesian approaches") employed by the world's central bankers are likely to work. Even more stupidly, they believe a massive expansion of the world's sovereign credit system is likely to lead to deflation.

I'm sure you know the fidiots I'm talking about. These are the folks who've been bidding up the U.S. Treasury market. These folks have been talking down the price of gold and gold-mining stocks. Even now, the fidiots are still paying much more than par for dodgy U.S. corporate bonds. At their most recent peak, fidiots were paying, on average, an all-time-record price above par ($106 last month) for junk bonds. Remember... these pieces of paper are usually priced by the creditworthiness of the company that issues the debt and the likelihood of lower interest rates in the future.

I believe future generations will view the current market for high-yield bonds as a prime example of the fidiot madness that has gripped the world's markets since September, when the Federal Reserve began the monthly printing and purchase of $85 billion worth of government debt.

You might recall roughly one month ago, I warned you about the ongoing fidiot insanity of the world's bond markets. I said it was "without a doubt the single greatest threat to your wealth you will ever face." I explained exactly why:

The timing of these kinds of watershed changes to investor perception is always uncertain. But it is guaranteed to happen. As I wrote:

Bonds, especially junk bonds, have been falling almost every day since I wrote those words. The chart below shows you the prices of the leading U.S. junk bonds, as measured by the iShares iBoxx High Yield Corporate Bond (HYG) exchange-traded fund – one of the most popular ways of investing in high-yield bonds. Believe me, the recent correction here is only the beginning.

Now... about those numbers I promised. Over the last two decades, Japan's government has piled up $14.6 trillion in debt. That's roughly 250% of the country's gross domestic product (GDP) – far worse than Greece's 165% or America's 107%. Japan continues to run an annual government deficit of nearly 10% of GDP. Half of every yen spent by the government is borrowed. Meanwhile, tax revenues have been declining for more than two decades.

There is no way Japan can repay these debts. Today, with interest rates still extremely low, the government must spend 24% of its tax revenues on interest payments.

There was never any doubt that Japan would default. But... with 95% of its government debt held in the hands of domestic borrowers, the fidiot opinion was that the bond market would never collapse. Japan's latest finance minister has promised to continue printing money until the inflation rate goes above 2% – but how much above 2%, he doesn't know, nor can he control.

The result was predictable, to anyone who actually manages his own money (as opposed to other people's money). The local Japanese bondholders are selling, in droves. Even pension funds are selling – something the fidiots thought would never happen.

Today, the same fidiots around the world are telling people that Japan is an aberration... And they'll tell you that as the system of sovereign credit in Japan collapses, fixed-income investors will flee to safety and buy more U.S. Treasurys and European sovereign debt.

This move, they say, will mirror what happened during the last sovereign crisis in Europe: Everyone will flee to the dollar. Gold will fall. U.S. long bond yields will fall. The U.S. dollar will rise. U.S. sovereign bonds will rise. Inflation will fall. And deflation will become a big risk. Don't laugh. That's what these guys think.

You can believe the fidiots if you want. I have to admit, they've been right (about U.S. sovereign bonds) for far longer than I thought was possible. But here's the thing... they can't be right forever. No one in his right mind should want to own the obligations of a bankrupt sovereign borrower. And eventually, no one will.

And since America is every bit as broke as the Japanese, I think it is far more likely that the world's fidiots will finally be revealed as such. After all, the world's savers will reason... if Japan's entire economy can fall apart because of a huge sovereign debt bubble... why can't ours?

And so, I repeat my warnings of the last several years. We are in the late, terminal stages of the U.S. dollar/paper-money reserve system. Soon people around the world will question what the dollar is really worth. They will ask themselves why they hold their savings in a paper currency that's backed by nothing more than another bankrupt Western democracy... one that wastes nearly all of its resources on useless military adventures and a social welfare system that's riddled with fraud and abuse.

The answers won't be good for our country, which has grown totally dependent on foreign creditors. So when you're watching the collapse of Japan, just remember: 95% of Japan's sovereign debt is held by the Japanese people. They're merely bankrupting themselves. In America, roughly 40% of our government and agency (mortgage) debt is held by foreign investors – mostly the Chinese. You can bet their selling won't be so orderly.

When this house of cards finally collapses, the holders of dollars, euros, and yen will suffer a giant wipeout. Gold, the currency central banks cannot print, will double, maybe even triple in price. That's why I encourage everyone to hold a large allocation of gold. But take your position soon...

Contrary to popular perception, the supply of real gold is vanishing – quickly.

Millions of people, perhaps even you, are "buying" gold investments without ever seeing, holding, or possessing this gold in any way. This enables companies to sell gold in the form of certificates and shares for which the actual bullion doesn't really exist.

Mark my words: In the next few years, scandals will erupt all around the world. It's going to send shockwaves through the industry. "Share" gold investments like exchange-traded funds could get hit hard, whether they really have the gold to back up their shares or not.

Lots of people are going to be sadly disappointed and hurt financially, when it becomes clear that not everyone's gold is safe, secure, and accounted for. Even if you haven't invested in gold, you need to be aware of this story. I've put together a full presentation on how you can get prepared and protect yourself. You can check it out here (without watching a long video).

New 52-week highs (as of 6/6/2013): Cisco (CSCO).

A subscriber, who has made more than $1 million with our bond recommendations over the last few years, writes in to ask if he should begin selling his high-yield corporate bonds.

Our answer might surprise you. Keep in mind, we can't provide any individual advice, so don't bother asking us to review your portfolio. But we are always eager to read your feedback, both good and bad. Send it to feedback@stansberryresearch.com.

"Recently, I read your article about the coming bond collapse... Not being a bond expert, I am somewhat concerned. Since 2008, I have invested 1/2 to 2/3 of my IRA in high yield bonds recommended in True Income. I still have six bonds from the True Income portfolio (Albertson's, Liberty Media, Tenneco Packaging, Rite-Aid, Rite-Aid convertible, and FreeScale). These bonds represent about 50% of my IRA...

"I have taken some big hits (Aleris, Great A&P Tea, and General Maritime). I actually made money on the Tribune bond that defaulted because I bought more on the way down. Overall, however, I am more than $1 million ahead, so no complaints.

"I see we are headed for a big bond collapse, so I should sell all four of the bonds that mature in the mid 2020s. Since the Rite-Aid convertible matures in 2015 and the FreeScale in 2016. I don't see any pressing reason to sell these two.

"I know you can't give individual advice. Does Stephen Smart agree with your assessment? If he does, may we expect some warning before the deluge? If not, could you address the bond collapse vis a vis the high-yield bonds featured in True Income? I don't want to lose everything I have worked so hard to accumulate. If you can't give me any further insight I will sell my longer dated bonds soon. Thanks for all of your excellent work and that of your associates." – Paid-up subscriber Jim Flowers

Porter comment: I can't comment on your portfolio, as you know – except to say congratulations on your successful investing. I'm truly thrilled to hear from a subscriber who has gotten so much from our work in bonds. I believed our bond recommendations in 2008 and 2009 were some of the best work we've ever done... and I was urging subscribers to buy bonds in 2009 and 2010.

Now, I'm telling people, in general, to get out. To answer your questions, Stephen Smart isn't as worried as I am because he knows that the coupons on bonds help to protect people from capital losses. And for bonds that were purchased at a discount to par, I would probably agree with him. Anyone holding bonds should ask himself: What did you pay for the bond? How much income is it providing? Those are the critical questions to answer.

Here's what I know... buying high-yielding bonds ("junk" bonds) at a premium to par ($100) almost never works out. I believe it will prove to be a disaster over the next several months, as I expect benchmark rates on the U.S. 10-year bond to move to at least 3% (from today's 2.15%)... and maybe 4%. That implies huge losses for folks who buy junk bonds today, where yields are still (incredibly) less than 7%.

If the U.S. 10-year benchmark yield moves to 4% over the next year, you'll see high-yield bond yields rise to more than 10%. That move will be painful to anyone who bought high-yield bonds today.

"WOW what a great addition to already the best financial advisory resource site in the industry. I checked out the Education Center and found that I quickly spent an hour and wanted more, but I am a full time investor! Now I know visit it on weekends and evenings, so much to learn and now a resource that addresses that need. Keep up the good work. I think you stepped it up a notch with this addition." – Paid-up subscriber Kim Benner

Porter comment: The Education Center (on our website) was the brainchild of our Editor in Chief, Brian Hunt. Lots of people here worked hard on putting that together over the last two months, and I want to express my gratitude for their efforts. I agree... This is a great resource for our subscribers and increases the value of our work.

"What does it say about our 'Fifth Estate' when we must read the UK press to find out that our government is spying on us?" – Paid-up subscriber Michael Gamble

Porter comment: Well, nothing that shouldn't have been obvious a long time ago.

Dear friends... if you think the government is here to help... you're a fidiot. The government is here to serve itself. It will take whatever it wants and do whatever it must to maintain and grow its power. Count on it.

I must admit... I have enjoyed watching the liberal left come to realize that no matter who they put in power, he'll abuse his authority just like everyone else. Even ol' saint OBAMA! It's a real shocker, isn't it?

Power corrupts. That's why the founders of America did everything they could to keep the power of the government in check. And the most important of these freedoms were the rights to free speech and bear arms. Those rights have nothing to do with knowing where the day's traffic jams are or hunting. They have everything to do with knowing which politician is lying... and being able to remove him from office.

Regards,

Porter Stansberry
Baltimore, Maryland
June 7, 2013

The one way I've found that money actually can buy happiness...

If you've been successful in your life and career... what do you want or really need to do at that point?

In today's Digest Premium, Porter describes how he answered that question... and how that realization has taken him around the globe.

To continue reading, scroll down or click here.

The one way I've found that money actually can buy happiness...