The problem with Europe's latest deal... Gross 'tweets'... Soros buys big... Major development in China... An investment that could double... America's true unemployment rate... Thanks, Dan!...
Markets, including agriculture, boomed on Friday... The 17 countries that use the euro currency agreed to allow a central, European authority to manage future budgets and austerity measures. They also agreed to penalties if a country spends too much money.
This so-called "fiscal compact" will create a permanent bailout fund for European Union (EU) nations in 2012. The compact also directs $267 billion to the International Monetary Fund to be parceled out to ailing European economies.
But the compact suffers from a major problem... It relies too heavily on the individual countries to solve their own problems. And it doesn't address current debt, which is already too much for the EU countries to manage. Take Italy, for example, which must refinance 192 billion euros this year, followed by 168 billion euros next year, and another 100 billion in 2013. But Italy's running an annual deficit of 3.9% of GDP. The country's public debt is 1.7 trillion euros – seven times larger than Greece's public debt. As Porter wrote in his September 2011 issue of Stansberry's Investment Advisory…
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The steep economic declines that doomed Greece to certain bankruptcy haven't hit Italy yet. But we are certain they will as credit becomes harder to get in Italy. The fact is, Italy has been in a recession almost since the day it joined the euro. Its economy has grown by a total of 0.54% over the last 10 years. What has grown the whole time? Government debt, which now exceeds 120% of GDP. Nobody ever repays debts of this magnitude in sound money – and the Italians will certainly be no exception. |
The fiscal compact will never work. The problem, as Porter alluded to above, is credit. We've seen how the eurozone nations act independently – their ability to borrow under the euro umbrella is what caused this mess in the first place. And without massive European Central Bank (ECB) intervention, the problem of credit still looms. And the ECB indicated last week that it would not continue buying European bonds to suppress yields.
Who knew?... The 67-year-old "Bond King," Bill Gross, tweets.
The manager of the world's largest bond fund at PIMCO used the social networking website Twitter to express his skepticism over how it's released some new "plan" seemingly every week and nothing ever works... and his view that investors should limit their risk.
On Friday, Gross posted this message on PIMCO's Twitter account… "Oh what a tangled web the #EU has weaved. Never ending story, hard to trust. Risk off."
The market took the hint... Gold and silver both sold off nearly 2%. The euro hit $1.327 (still off its 2011 lows of $1.29). The yield on 10-year Italian debt increased nearly 20 basis points (1/100th of a percent) to almost 6.7%. Italy sold $9.3 billion in one-year bills today. And the spread between Italian debt and German bonds increased to 4.5 percentage points, up from 4.21 percentage points on December 9.
One investor isn't afraid of a European default... On Friday, billionaire investor George Soros purchased $2 billion of European bonds from failed MF Global. Under former CEO Jon Corzine, MF Global increased its exposure to European debt to $6.3 billion between late 2010 and its bankruptcy. The firm sold $1.5 billion of that debt trying to stay liquid. After bankruptcy, the remaining $4.8 billion went to KPMG to liquidate. According to the Wall Street Journal, numerous large investors passed on the debt. Soros bought at below-market prices.
Jim Chanos, founder of the short-selling hedge fund Kynikos Associates, appeared on CNBC last week to update his "short China" thesis. In the interview, Chanos reiterated that 70% of China's economy is construction. Only 5% of the economy is net exports. In other words, what's going on in Europe doesn't matter nearly as much as what's happening on home soil.
"[China] has a real estate bubble on their hands," Chanos told CNBC. And recently, a developer missed a $200 million-$300 million payment to another developer – the first hiccup. "You're gonna see more of these surprises," Chanos said.
Earlier this year, Porter and I hosted about a dozen subscribers at the beachfront community in Rancho Santana, Nicaragua owned by Porter's business partner, Bill Bonner. It was a wonderful event... We stayed at the finest hotel in the beautiful, colonial city of Granada, the oldest city in Central America. At Rancho Santana, we enjoyed the ocean vistas and fresh-rolled cigars from Porter's favorite maker in the country. And at the end of the trip, almost everyone bought property.
Keep in mind, S&A doesn't receive any money hosting these trips. We simply think Rancho Santana is a wonderful community... And we think property there could double in the near future. More on that in a minute...
Our June trip to Nicaragua was oversubscribed, and we promised to let you know when we were hosting another. Well, I'm returning to Rancho Santana on January 18-22. And we still have space for a few of you to join. (We gave first dibs on this trip to folks who previously expressed an interest.)
Here is what Porter wrote when we returned from our last trip…
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I hadn't visited [Rancho Santana] for two or three years, and the progress they've made recently is stunning. |
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There are dozens of new luxury condos... at least a dozen new homes... a huge new clubhouse... and a new beach club. Several young families now live there full time. They've even started a community elementary school. |
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If you've never been there, you should see it for yourself. Or if you haven't been recently, you should go back – you'll be amazed. |
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Also, investors should note... there's a new development right next door, known as Gaucalito. The richest man in Nicaragua, Carlos Pellas, recently sold his bank for $1 billion (or maybe $2 billion) and is investing a huge sum – at least $100 million – in building the best resort in Central America. It will have a championship golf course, a luxury hotel, luxury homes, and Nicaragua's first real resort marina. |
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Many such developments have been promised over the last decade, without coming to fruition. But I stood on Gaucalito's new golf course last week. It's real. Once this resort opens in late 2012, the prices for land up and down the coast will go up. |
If you'd like to join me in Nicaragua, please contact my friend and our point of contact at Rancho Santana, Marc Brown. You can e-mail him at marcb@ranchosantana.com. He will share the full details of our trip. Please only contact Marc if you're seriously considering property in the area. There is limited space, so we'd like to reserve it for serious, potential investors.
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New 52-week highs (as of 12/9/11): Cross Timber Royalty Trust (CRT), McDonald's (MCD).
Is gold a partisan issue? Should gold investors be voting Republican… or Democrat? Find out below. And send feedback to feedback@stansberryresearch.com.
"Loved your Digest [Friday] and the dark humor on taking your Mom's Iowa farmland after having her declared senile!
"That 74 acres going for $20K an acre was front-page news today in today's Des Moines Register. I learned at Rotary this morning from a local banker that the 74 acres upon being sold was then cash-rented out for $800/acre! That's incredible in itself since cash rents have been in the range of $300-400, representing a huge increase in the past few years after ethanol took off.
"It's definitely a bubble just waiting to burst, but with so many problems with typical financial assets, Iowa farm land remains golden... until further notice.
"Happy Holidays to the Stansberry Alliance Gang!” Paid-up subscriber Jeff Courter
"Dear Mr Porter Stansberry, I am an 82 yr. old retired MD who has adopted your recommendations. My problem is that my son is my stockbroker who is with Merrill Lynch. I have always adopted his advice until now when I instructed him to sell 50% of my stock and buy gold ETFs.
"What I wish to ask is if the Republicans come to power in 2012 and take austerity measures, will that significantly change the situation and will the 'gold bubble burst' and will I have time to sell my gold stocks? I hope I have described this correctly." – Paid-up subscriber B.J. Blumenthal
Goldsmith comment: No government, Republican or Democrat, can solve our current fiscal problem without gold going much higher.
Remember, the federal debt totals $15 trillion. This is an unimaginable amount of money. Even if our politicians could agree on dramatic cuts to the federal budget... it would take generations to pay it off with "austerity" alone.
And it's impossible to believe the politicians who control our government – Republican and Democrat alike – have the integrity and guts to deal with our debt in a serious way. It's far more likely that we'll continue to pretend our debts don't exist... creating more and more dollars (through actions like "quantitative easing")... for as long as our creditors will let us.
And that is very bullish for gold and silver...
"I just wanted to write in and say thank you to Dan Ferris for recommending Altria several years ago. Nothing more, nothing less, just a thank you for putting Altria in my portfolio. It is the most profitable stock I have ever owned. I am up 105% with dividends included, from Jan. 2009. Thanks Dan." – Paid-up subscriber Mike K.
Goldsmith comment: We're happy for your success, Mike. More important, we're glad you appreciate the power of buying dominating businesses that continually raise their dividends... It truly is the safest route to wealth over the long term. The problem is, most investors don't have the patience to sit and wait (even for a few years, as you did).
Anyone curious about how compounding dividends with the world's best companies will grow your wealth should view 12% Letter and Extreme Value editor Dan Ferris' latest presentation, called "Wal-tirement." You can do so here...
Regards,
Sean Goldsmith
New York, New York
December 12, 2011