Doug Casey is greatly underappreciated. He's been expecting the debacle we see unfolding today – a collapsing financial sector, government spending growing out of control, and a public backlash against capitalism – for as long as I've known him, almost 15 years. He calls the scenario "The Greater Depression." And now, he thinks it's going to be even worse than he expected...
At his conference last weekend in Las Vegas, he told the audience what he's doing to protect himself from what he sees coming next: soaring inflation, capital controls around the world, and vast increases to America's already confiscatory tax regime. What is Doug doing? First, he built a very private community in a very safe place about as far away from the centers of government power as you can get. His development is called Estancia Cafayate. It's located in the southern part of Salta province in northwest Argentina. Why in the world would you want to live in a valley of the Andes Mountains in rural Argentina? Well, Uruguay is nearby, a place where you can still bank privately and where you can still arrange for citizenship.
Second, Salta is incredibly rich in natural resources – water, farmland, oil and gas, vineyards, cattle, cultural attractions, etc. All of the things you need to lead a very wealthy, civilized life are in great abundance. And everything is cheap. A first-class steak dinner at a good restaurant on the central square in Cafayate costs about $4 per head, including wine. Finally, you have plenty of opportunities to make money with commodities. Doug has become a large-scale dairy farmer.
While you might think moving out of the United States is a dramatic overreaction to the current crisis, I think Doug is absolutely right about one thing: capital controls. The last time America experienced a debt collapse on this scale (the Great Depression), the government seized all of the privately held gold in the country, then devalued the dollar by 60%. Most people have forgotten this lesson: When the government gets desperate, it will openly steal from its own citizens. Back in the 1930s, currencies around the world were based on different weights of gold. Today, currencies aren't backed by gold, they're backed by U.S. dollars. As the Fed devalues these dollars, everyone is going to want out of the dollar. And our government will do everything it can to prevent anyone from selling the dollar...
That will mean rules against taking money out of the country. It will mean rules against buying gold, silver, or foreign currencies. And I can even tell you the exact day these controls will take effect: The day after the Treasury secretary promises America will never institute exchange controls. There's no liar in the world more full of crap than a Treasury secretary in the midst of a devaluation. If you don't have a foreign bank account, I highly suggest you open one now, while you still can. At the very least, you ought to own gold, silver, and oil, either directly or via securities. (And currently oil seems cheaper than gold...)
One of the more interesting speakers at the conference was "Simon Black." He uses a pen name to protect his privacy. He is a graduate of West Point and was an intelligence officer in the Army during the Gulf War. He told us he decided to leave the Army and America when he saw Colin Powell use fraudulent intelligence at the U.N. to justify America's invasion of Iraq. Specifically, Black says Powell was using satellite imagery from 1991, claiming it was from 2003. And he says everyone senior to him in the Army knew the intelligence was false. Black now lives in Panama and holds several passports. As he says, becoming an expatriot is "change you can believe in."
Another very interesting (and controversial) speaker was Robert Friedland...
There's probably nobody in the resource sector who is more polarizing than "Toxic Bob." Friedland is infamous for his ownership of Galactic Mining, which was found to be dumping cyanide into rivers surrounding its Summitville, Colorado, mine. The mine ended up as the largest EPA Superfund cleanup in the U.S.
Friedland was in Vegas pitching his enormous gold and copper mine. His company, Ivanhoe Mines, holds what may be the largest gold and copper deposit ever discovered. The downside is, it's in central Mongolia. It will cost tens of billions of dollars to bring this resource to the market. I wouldn't bet against Friedland... but it was disappointing to hear him claim repeatedly that Ivanhoe has no debt. According to the Bloomberg, at the end of the third quarter last year, Ivanhoe had $339 million in long-term debt. Ivanhoe's total common equity is $439 million. So Ivanhoe is actually about 77% leveraged. That's a far cry from being "debt free." But... we've never seen Bob let facts get in the way of a good story...
What did I tell people at the conference? I pointed out Continental Airlines and SL Green (a New York commercial real estate firm) are both very likely to go bankrupt. Continental simply can't earn enough money flying tourists from place to place to afford its debt and its losses on oil hedges.
My SL Green analysis is even simpler. As the company explains: "We may not be able to refinance existing indebtedness, which in all cases requires substantial principal payments at maturity. In 2009, approximately $200.0 million of corporate indebtedness, and $823.1 million of debt on our unconsolidated joint venture properties will mature."
Why won't SL Green be able to repay its debt? Because its three biggest tenants are all going broke. Citigroup, Viacom, and Credit Suisse collectively account for nearly 20% of SL Green's rent revenue.
I also told the audience about Calpine, the largest natural gas fueled producer of electricity in the U.S. The stock is cheap and safe, trading for about 60% of book value. More interestingly, if Obama's huge new energy tax (his so-called "cap & trade" proposal) is passed, Calpine will become the lowest-cost electricity producer in the U.S. (Currently, coal-fueled plants are more cost efficient than natural gas. But that will change should the U.S. impose a "carbon" tax.)
We started warning you in January 2008 about massive looming defaults in commercial real estate. In that issue of PSIA, I covered Corus Bancshares, the largest lender in the U.S. to condo developers. At the time, the company had $3 billion in outstanding loans to condo builders and $4 billion committed to projects but not yet disbursed. Of its loans, 30% were in the Miami area. Of course, the real estate crisis wors
ened (with Miami being hit especially hard), and Corus was destroyed. Its shares traded for around $10 then... They're trading for less than 30 cents today.
Since then, we told you about the coming carnage in REITs. We warned you about the real estate crash in Manhattan and how that would hurt SL Green and Vornado Realty Trust. We predicted MGM's CityCenter project would be a disaster. And of course, there was my write up on General Growth Properties, which is still stubbornly fighting off its inevitable bankruptcy.
Now the mainstream media is catching on. Bloomberg reports the 10 largest banks in the U.S. hold $327.6 billion in commercial mortgages – Wells Fargo and Bank of America hold close to half of that. Declining property values and rising defaults could destroy their equity positions.
Commercial prices are down around 20% in the past year, and there's still "significant stress" according to one credit analyst. With retail behemoths like Circuit City and Linens 'n Things closing their doors, huge mall owners teetering on bankruptcy, and financial firms across the globe reducing office space and backing out of leases, a further correction is likely. Currently, Moody's has 23 regional lenders on negative watch, including Bank of Hawaii, City National, and Comerica.
And when this wave of defaults begins, which large bank will be safest? The answer, surprisingly, is Citigroup. According to Bloomberg, Citi only has $6.6 billion, or 0.9% of its loans, in real estate. That compares to 12% at Wells Fargo (the single largest holder), 7.5% at JPMorgan, and 6.9% at Bank of America.
Everyone knows about the problems surrounding banks... A lot of fear is already priced in. But no one is talking about the coming disaster in insurance stocks... except Dan Ferris. Insurance companies are the largest owners of corporate debt and major owners of commercial mortgages.
Dan predicts one major North American life insurer will fail within a year... and he's singled out one insurer as his favorite short. If all this company's unrealized losses turn to permanent ones, which will happen if its debt holdings are downgraded, it could easily fall in half. And these downgrades are likely. From his most recent issue of Extreme Value:
If Berkshire Hathaway and its financial fortress balance sheet can be downgraded from triple-A status (by Fitch Ratings last week), you should assume a great swath of investment-grade corporate debt is in imminent danger of being downgraded to junk. When that happens, life insurance companies – the largest purchasers of corporate debt every year since the 1930s – will fall well below the capital requirements of the risk-based models used by the states.
To learn more about Extreme Value, and access Dan's favorite short sale in the insurance sector, click here...
Kudos to Matt Badiali. In the March 11 Growth Stock Wire, he wrote:
If the copper rally is real (and it looks real to me) then Freeport – the world's largest publicly traded copper company – looks pretty good...
We're going to need copper when the economy recovers, and Freeport is still the world's largest public copper company. As long as you use a trailing stop, I think it's worth a speculation.
Since then, Freeport-McMoRan (FCX) shares have soared. Readers who jumped into the trade are up around 20%.
New highs: none.
In the 'bag... political outrage is in season (isn't it always)... Direct your ire here: feedback@stansberryresearch.com.
"The goverment's cancellation of the bonuses constitutes a taking of private property for public use. If I were a bonusee, I would file an inverse condemnation siut against the federal government seeking just compensation for the taking. Perhaps I would even go further... file a lawsuit seeking damages from Barney Frank et al for denial of due process? Could be fun." – Paid-up subscriber Joe
"I have no problem with the government trying to halt bonuses IN THE FUTURE, but a deal is a deal, and they have no business trying to block payments to folks who fulfilled their end of the deal. For that, the Congressmen who voted for the bill should penalize themselves... for stupidity." – Paid-up subscriber Britt Conner
"To graduate from a university in Public Speaking is already a joke! Part of the 'everybody must go to university' stupidity propogated by far-lefties (eg. acquaintances of mine who used to consider Cuba the mecca of modern civilisation – they say everyone goes to univ.). But who in their right mind would vote for such a person who considers this to be valid political affair? Was it the 5 minutes break to laugh and relax? Apart from that, thank you Stansberry Team for extremely interesting and accurate reporting, comments and of course, investing advice...
"Why is it that most politicians in most governments appear to be equally stupid (and dishonest) in applying the same non-solution to the crisis problem, ie. throw money at those who screwed-up, criminally or incompetently? Could be a good university subject 'Masters in Criminal and Incompetent Finance!'" – Paid-up subscriber Ray Bate
Editor's note: Ray is talking about the absurd video of Florida Rep. Corrine Brown. You can watch it here.
Regards,
Porter Stansberry
Las Vegas, Nevada
March 23, 2009