Goldsmith note: Porter is attending the Bank Credit Analyst (BCA) conference in London this week. We begin today's Digest with his notes from the meeting...
* "Japan is the world's largest nursing home, run by the mob..." said Ed Yardeni this morning at the BCA Research London Conference. It was one of the better lines of the day, which was headlined by Lord Chris Patton, the last colonial master of Hong Kong. The day's other best speaker was Steve King, the chief economist of HSBC. BCA serves a very institutional client base. I didn't see any hedge-fund managers, but there were lots of insurance companies and pension funds present.
* The most striking impression I got from the meeting was how much faith remains in governments. For example, Steve King – who is obviously a very smart and well-educated man and who, as the head economist of HSBC, has access to every piece of economic data available – said of the ongoing sovereign debt crisis: "Monetization will be politically impossible because of the baby boomers..." Uh? Monetization is already fully underway. The Fed has already printed and spent $1.75 billion, including the purchase of $30 billion in very 'dodgy' Bear Stearns mortgage assets. The European Central bank has likewise spent billions on the PIIGS' sovereign debt in an effort to prevent a run on these assets and an eventual default.
* None of the speakers, which included the former chairman of BCA, stated the obvious: The PIIGS governments have racked up $2 trillion in debt. It cannot be repaid or refinanced. No one mentioned the U.S. owes its creditors (at least) $14 trillion, which, outside of the Fed's printing presses, cannot be financed or repaid. None of the speakers recommended buying gold or silver. Instead, they all seemed convinced tax increases and government austerity programs would save the day. For example, one of the speakers actually said the dollar was a better currency than the euro because it would be easier to raise taxes in the U.S. – we don't have a value-added tax... at least not yet.
* What these guys don't understand, despite their prestigious jobs and educational pedigrees, is that economies of all types – whether free or planned – only generate around 20% of GDP in tax revenue. You cannot raise taxes beyond this level because people will begin to avoid taxes or simply refuse to work beyond what's required to survive. In the United States this year, government spending will total more than 40% of our GDP. There is no way to pay for this level of government, except through the monetization of debt. And that, my friends, is why gold is a lot smarter than the men at this conference. (For a great article on the subject, click here.)
* Yardeni had one more really good line though... He's begun to call the U.S. Federal Reserve "Feddie" in reference to the fact that it will be on the hook for the estimated $1 trillion in losses at Fannie and Freddie.
* One personal note... When I checked into the Dorchester hotel yesterday afternoon with my wife and my son, Traveler, the staff said they were very sorry but my room wasn't ready. They upgraded us... into the penthouse suite, which is owned by the Sultan of Brunei. It's two stories, maybe 3,000 square feet. It has a 360-degree view of London. It sounds nice, I know... but you should see this place.... It's horrible. I've never seen an uglier apartment. Everything is covered in gold paint and purple fabric. Apparently, there was a contest to see who could design the ugliest apartment in the world... and the Sultan's designer won.
"You don't want a job at my company. There's no future in it."
I had lunch this weekend with a mortgage derivatives executive from one of our favorite government-sponsored enterprises (GSEs). This guy was at ground zero of the mortgage crisis. He worked for the department at the company responsible for pushing trillions of dollars of crappy mortgages through our system. He was giving job advice to someone at our table looking to change careers.
At his request, I can't share more of our conversation. But he did say things are improving at the firm on the surface. His company recently issued billions of dollars in new debt at LIBOR – the low rate banks pay to borrow from each other. The auction was oversubscribed. But he said the party's over when the government removes its unlimited loss guarantee in 2012.
On the topic of GSEs... In the February 1, 2010 Digest, we predicted the total losses for Fannie and Freddie could reach $1 trillion:
For example, nobody really knows how much more money Fannie and Freddie will require. (My bet is $500 billion each – or $1 trillion.)
The government is doing a great job ensuring our prediction comes true. Fannie and Freddie have essentially become backdoor bailouts for Wall Street. Banks are selling mortgages that can't be modified or refinanced to Fannie and Freddie. And the GSEs are buying because the government has agreed to cover the firms' losses through 2012. The government says this program is an effort to prevent foreclosures. It's really just a ploy to save Wall Street's balance sheets.
Fannie and Freddie have already used $145 billion in taxpayer funds. The Congressional Budget Office predicts they will need $389 billion in government money through 2019. Considering every government budget projection falls way short of reality, we can assume the number will be much larger. Sean Egan, of Egan-Jones Ratings, agrees losses could hit $1 trillion. Fannie and Freddie now have some $5.5 trillion of mortgage exposure (53% of the U.S. market). Less than a 20% decline in their book proves us right.
The world's biggest BP bear, Matthew Simmons, had an interesting change of heart. Simmons, an energy investment banker, made headlines last week after he announced BP wouldn't survive through the summer. Shares of the oil giant plunged from nearly $40 a share to $29.20. Since the rig sank, 34 billion shares have changed hands (a sevenfold volume increase over last year).
The knife jugglers (including our friend Whitney Tilson) are picking up BP shares while they're down some 50% from their pre-spill highs. What other big buyers are responsible for the huge trading volume? Matt Simmons' firm, Simmons & Co, for one...
Just two days after Simmons' CNBC appearance, his firm upgraded BP from "neutral" to "outperform." Simmons & Co gave BP a $52 price target – 63% above today's prices. The report says bankruptcy is "unlikely" and notes the "kitchen sink of headlines thrown at BP" have desensitized shares to more bad news. Simmons' headline-dominating prediction certainly contributed to that kitchen sink. Just another example of the high moral fortitude on the Street.
New highs: Akamai (AKAM), Hilltop Holdings Preferreds (HTH-A), San Juan Basin (SJT), Sm Energy (SM).
More support for Porter's boo... And more inflation/deflation debate. Weigh in here: feedback@stansberryresearch.com.
"Is it rude to boo government hacks? Absolutely not! Only when you no longer value freedom and truth could it be considered rude to boo a government hack. The sleepwalking or zombie nature of most people in our society today has given our government oppressors the fearless confidence to continue to ride heard over us. Thank God there are still some people out there with the courage to call it like it really is rather than just take the comfortable and cowardly way out and pretend we are happy with the trend toward government induced slavery! Freedom and liberty will both vanish when men of conviction refuse to speak out. Your behavior makes me proud to be a paid up subscriber. Thank you for kicking against the pricks." – Paid-up subscriber Travis Ogle
"No it's not rude. Better to expose them in public for twisting the facts and providing misinformation. Keep up the good work both at providing investment advice and at attempting to keeping the government honest." – Paid-up subscriber Larry
"Just reading your rebuttal to the Prechter interview, and although I tend to agree with you on the inflation side of things I will plead the 5th and keep my mouth shut. I believe thats the better choice than to open it and expose my own ignorance of the subject. Inflation is not too difficult to understand, but deflation somehow always catches me up. Still, what I am really writing about is your criticism of the Elliot Wave Principles. I understand that they dont exactly jive with your methods of analysis, but they are an excellent method of looking at a chart. In some ways I would say that they are like a guiding principle, not an end all, but an excellent way of interpreting chart action, of determining where we are in a trend, and of spotting important tops and bottoms. In reality, I would be completely comfortable trading any major index, large liquid ETF, or major currency pair, without any knowledge of what it was or why it was moving the way it was. Simply following the flux and flow of the waves and trends. Not that I would catch every move, or want to catch every move, but as with all pattern recognition, when a reliable pattern presents itself in a low risk trading opportunity, it is worth the risk." – Paid-up subscriber Ken Long
Porter comment: Elliot Wave, like astrology, religion, and many other forms of mythology, is designed to capture your imagination by assigning relevance to randomness – a skill that was critical to the evolution of our species.
Regards,
Porter Stansberry and Sean Goldsmith
London, U.K. and Baltimore, Maryland
June 14, 2010