Updating 'the only trend that matters'... TIPS go negative... Asian markets slammed in 2011... Spain is doomed...
Editor's note: We hope you enjoyed our holiday Digest series last week, where we republished some of our most popular material from 2011. We're back to a regular publishing schedule starting today. Happy New Year.
In 2008, Porter started writing extensively about the mounting U.S. government debts, inflation, and the subsequent rise in gold prices. He also coined the phrase the "End of America" to describe the scenario…
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The huge inflation underway right now will be what I call "The End of America." I don't mean an end to our political union – I mean an end to the special role America has played in the global economy since World War II. The coming great inflation will destroy America's economic leadership. It will lead – eventually – to the return of settling international obligations in gold instead of paper dollars. And this will happen much faster than anyone expects. By the time Obama leaves office, you will not be able to exchange dollars for any sound currency in the world without permission from the U.S. government. The price of gold will be well over $2,500 per ounce. Most importantly, commodities will no longer be priced in dollars either, but instead in the currencies of the leading producer. Americans haven't experienced anything like this since the Great Depression. – Stansberry's Investment Advisory, December 2008 |
We've covered the theme for the past three years. So it's fitting for our first Digest of 2012 to review "the only trend that matters for the next decade" – shorting the long bond against gold. As you can see from the five-year chart below, gold has crushed U.S. Treasurys, measured using the iShares 20+ Year Treasury Bond (TLT)...
Starting in July, gold rallied from around $1,450 an ounce to $1,900 an ounce in just three months. The spike was unsustainable. And as fears escalated, the hot money fled gold for Treasurys.
We warned this trade would be volatile. And we're not surprised to see "the trend" take a breather... No trend goes uninterrupted forever (though gold did close its 11th-straight year for a gain last year)...
Starting in September, fears of a European collapse caused Treasurys to rally and gold to plunge. Treasurys bested gold by more than 2,400 basis points (a basis point is 1/100 of a percent) last year.
The U.S. dollar is still the world's reserve currency. As such, investors treat it as the ultimate safe-haven asset.
The benchmark, 10-year Treasury ended 2011 yielding less than 2% for the first time since at least 1977. It gained 17% for the year. The 30-year Treasury bond was one of the best investments of 2011. (Of course, the Federal Reserve has been buying this debt nonstop to push down long-term interest rates.) The long bond returned 35% in 2011. Gold returned 8%.
The market is paying too much for perceived safety today. Last month, the U.S. Treasury sold five-year Treasury Inflation-Protected Securities (TIPS) for a record-low yield of negative 0.877%.
Our long-term outlook hasn't changed. Given the Treasury market's recent strength and our belief we'll soon see another multitrillion-dollar bailout to save Europe, our conviction for "the trend" is only strengthened…
The S&P 500 ended 2011 up 0.4%. But global equity markets lost $6.3 trillion in value. Global stock market capitalization fell 12.1% to $45.7 trillion. And while the euro ended the year as the worst-performing currency, the FTSE 100 (the 100 largest companies on the London Stock Exchange) fell only 5.5%.
Asian markets took it on the chin with Japan's Nikkei index falling 17.3%, Hong Kong's Hang Seng down 20%, and the Shanghai Composite falling 22% (much to China bear Jim Chanos' delight).
The most important trend we're watching this year is the continued deterioration in Europe. The continent's problems are just beginning... Even German chancellor Angela Merkel admitted "next year will no doubt be more difficult than 2011."
Last week, Spain announced its budget deficit would increase to 8% of GDP, rather than the expected 6% of GDP. (The Spanish government says this number could be revised upward again... a near certainty in our opinion.) And in what could be the understatement of the year, European Commission Vice President Olli Rehn said he "regret[s] the sizable fiscal slippage."
Along with the increased budget deficit came new austerity measures... Spain announced the second-largest tax increase in its history (top earners will pay 55%) and the largest public spending cut, 8.9 trillion euros. And Spanish Prime Minister Mariano Rajoy said these measures are only "the beginning of the beginning."
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New 52-week highs (as of 12/30/11): Fairfax Financial Holdings (FFH-U.TO), Nuveen Premier Insured Municipal Income Fund (NIF).
How did your portfolios perform in 2011? We'd love to hear... feedback@stansberryresearch.com.
"I have been an admirer of yours for some time, and this editorial emphasizes why…
"Thank you for having the guts to say it without the emotional hype and hyperbole to which we are so used, even in the financial world.
"My DH and I sold everything and retired to the Middle of Nowhere, Nebraska, 3 years ago because we saw what was coming. We raise our own food and are steadily becoming more and more self-sufficient, in an area that is losing, not gaining, population. We did this because we did not have the financial resources to stay in an area where prices were climbing, jobs were going away, and the dependence on government was becoming endemic. We too believe in America, but we simply could not afford to 'kick against the pricks' any more.
"You are absolutely right. Anyone who says otherwise is either in denial or has a fiscal reason for doing so.
"I have sent your editorial to all of my friends and family. I hope they take it to heart." – Paid-up subscriber Bea Jones
Goldsmith comment: Thanks, Bea… Porter's most recent issue – the Corruption of America – has received a tremendous response. And we feel the ideas in it are so important, we've encouraged all readers to pass it along… a copyright violation we never condone otherwise. If you haven't read it already, you can find the full piece here.
"I really enjoy your continuing discussions regarding the renewable energy fraud being perpetrated on citizens of the United States – be they stock holders, customers or in most cases both.
"I retired in June of 2011 from the energy generation business after more than 41 years of experience in the United States, Europe, and Asia. I was fortunate to experience the entire process from design, funding, construction, operation, and decommissioning for coal, nuclear, natural gas, hydro-electric, and wind-based generation. I was spared having to deal with solar and wood-fired facilities.
"Your analysis on what is going on is spot on. Current 'C's' – the CEOs and CFOs of the suppliers and the generation companies – are riding a wave of euphoria based on financial results that are in the long run unsustainable. These results are being achieved at the sacrifice of the customer, whose rates have risen at twice the rate of inflation across the United States. Data available from the Energy Information Agency (EIA) show that while inflation from 2000 through 2009 inclusive rose at a rate of approximately 24% the average delivered cost of electrical energy rose 48% across the US.
"This is some of the 'structural change' that talking heads touted when trying to understand what was or is wrong with our economy in 2009 and 2010.
"These investments are driven by regulation. Like users getting cocaine from dealers, the manufacturers and generators take these mandates to install wind and solar – regardless of cost – as they get hefty returns on their investments. It is what their owners charge them to do. And as long as the give a ways in the form of rates finance the party it will continue.
"However, history proves that this will all soon end. Similar actions were seen in the nuclear build out in the late '70s. Utility CEOs and CFOs poured billions into nuclear plants that took too long to build and ran costs to the customers too high. Ultimately the customers rebelled and the nuclear option was lost to the United States for 3 decades. It remains to be seen if it can recover from the threat of high costs to achieve the much waited for renaissance.
"Sometime in the near future similar cost pressures will assault CEOs and CFOs of generation companies. Whether they are the same persons achieving success today – at the expense of elevated customer rates is rather a matter of timing and chance.
"Finally – it should be noted that data available from EPA sites across the country show continuing improvements in air quality without renewables." – Anonymous
"Just a quick note to let you know how much I enjoy the new radio podcast with Porter. It is quite entertaining and informative and your guests have been first rate (even alex jones in spite of his rambling). But I hope Porter misspoke when he said he was fishing for DOLPHIN off the bimini coast?
"Regarding your comments on dysfunctional leadership in poor neighborhoods, I highly recommend watching 'The Wire.' Even though it is a pure fiction show, it is so well researched and nuanced in dissecting all layers of society, that it is better than any documentary I've ever seen. And it shows west baltimore, where porter apparently used to live and run." – Paid-up subscriber Rudolf Martin
Goldsmith comment: First off, Rudolf, Porter was fishing for dolphin fish, not dolphin. And there's no need for us to watch The Wire... We're living it.
Finally, thanks for listening in to Stansberry Radio… The discussions have been informative and outrageous. (What would you expect with Porter at the helm?) And this week, Porter welcomes former presidential candidate and "flat-tax" advocate Steve Forbes to the program. I'd urge any subscriber who hasn't checked it out yet to listen to the show for free by clicking here. And to make sure you don't miss future episodes, please subscribe to the show on iTunes by visiting www.StansberryRadio.com.
Good investing,
Sean Goldsmith
New York, New York
January 2, 2012