What Bush 'brung' us

What Bush 'brung' us... Who owns Amerika... Bailing out GM, Ford, and Chrysler (again)... What the fence is really for... Blame the short sellers... Heebner launches a hedge fund... Why we like short sellers... The benefits of a DUI...

The numbers are in on the Bush years. And as my friend and business partner Bill Bonner likes to say, "They got what they deserved, good and hard..."

The so-called conservatives elected George Bush president because he promised to spend less than the liberals who opposed him. Bush promised a humble and restrained federal government. He said he would refrain from foreign adventures and "nation building." Ha, ha, ha...

According to the latest figures, the Bush administration spent more money (as a percentage of GDP) than any U.S. government since World War II. As for being restrained and humble, well, he wiretapped Americans without warrants, built secret CIA prisons around the world, suspended habeas corpus, and tortured prisoners – not to mention he repeatedly denied all of these activities to the American people.

But there's a war, right? Yes, that's what they call it. We're waging a war against a military tactic – terrorism. How do you defeat a tactic? They've never really explained that. But it hardly matters. The big increases to government have nothing to do with terrorism. No, what's bankrupting our country are things like "community development," spending for which has doubled since 2001. We've seen Congress pass a record farm-aid bill amid the biggest bull market in commodity prices in 30 years. And what could be more absurd than the current infatuation with tax "rebates"? Nothing is being rebated – certainly not taxes. The government has already spent the money, and the checks frequently end up in the hands of people who don't even pay taxes!

Where will this trend of ever-bigger government – delivered equally by both parties – lead us? Thanks to the $500 billion (our estimate) bailout of Fannie Mae and Freddie Mac, the government now owns more than half of the houses in the country. It will very shortly assume control (via a $50 billion "loan") of the manufacture of automobiles, one of the largest industries in America.

Both the Republicans and the Democrats are eager to 'loan' GM, Ford, and Chrysler $50 billion. Ford's entire market capitalization (the sum price of all of its stock outstanding) is only $10 billion. GM's is only $6 billion. And while Chrysler isn't publicly traded, the value of the business isn't more than GM. Thus this "loan" is actually the biggest bailout yet, a sum of money more than 200% larger than the entire value of these businesses.

With all of this government "help," Americans should be doing great, shouldn't they? Ha, ha, ha... Under President Bush, the only group of Americans who saw their after-tax, real wages increase were people with professional degrees – essentially the unionized white-collar workers: doctors, dentists, and lawyers.

In the parlance of Animal Farm, these pigs are more equal than others. Their professional associations have co-opted the government, allowing them to use force to control who is allowed to practice medicine or give legal advice. They're essentially a form of government control. Think I'm overstating my case? Ask the poor guy who just got 25 years in prison for selling an herbal remedy for "male enhancement." Do I think his pill really works? Beats me. But I certainly don't need the government to protect me from the evils of over-marketed herbal remedies.

So... where does it all lead? Our society seems to be in the midst of a political free-for-all, where each interest group demands more and more from a pie that's getting smaller. By the time the fighting is over, there won't be much left. Welcome to Amerika, comrades.

The bigger government gets, the less freedoms you will enjoy and the lower your standard of living will fall. That's why Congress passed new legislation (in the middle of the night, in June) making it impossible for wealthy citizens to leave the country with their assets, which is exactly how the Soviet Union managed to keep its citizens in bondage. Maybe that wall we're building along the Mexican border serves a more lucrative purpose than keeping the poor Mexicans out. Perhaps some day in the future Americans won't believe you can live well at the expense of your neighbor. But they certainly believe it now. And that's trouble.

Blame it all on the short sellers... Of course, they're the reason Bear Stearns failed, MBIA tanked, and Lehman Brothers is crumbling. The SEC even made it nearly impossible to short sell certain Wall Street firms in addition to Fannie and Freddie. Now Steve Jobs is saying hedge funds spread rumors of his ill health to profit from their short positions.

On the other hand, we are grateful to short sellers and wish there were more of them. You should, too. Without short sellers, we probably wouldn't have gotten the opportunity to buy MBIA below $10 – a very profitable situation for us so far.

Ken Heebner, manager of the wildly successful CGM Focus Fund, already proved he's king of the mutual-fund world. He outperformed every other U.S. fund over the past 10 years, returning 24% a year. But he's tired of the paltry mutual-fund compensation – collecting about 1% on assets under management. Heebner announced he's seeking up to $5 billion to start his first hedge fund. In addition to earning more money – hedge funds get a cut of assets under management and performance – a hedge fund would grant Heebner more freedom to buy and sell all kinds of assets. We believe few managers are worth what hedge funds cost and would caution against giving almost anyone your money under these terms. But Heebner might just be worth it.

Yesterday, Dan predicted regional banks are the next shoe to drop... and Warren Buffett agrees. Buffett's holding company, Berkshire Hathaway, told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the FDIC. The subsidiary, Kansas Bankers Surety Co., will notify around 1,500 banks in 30 states that it will no longer offer its "bank deposit guaranty bonds" program. Berkshire wouldn't comment on Buffett's involvement in the decision. His involvement is "strictly rumor," according to a senior vice president at KBS.

Standard & Poor's will remove Fannie Mae and Freddie Mac from the S&P 500 after market close today. The minimum market cap to be included in the index is $5 billion. As of yesterday's close, Freddie's market cap was $614 million and Fannie's was $1.04 billion. S&P will replace the government-sponsored enterprises with software company Salesforce.com and industrial supplies maker Fastenal.

New highs: none.

More fitness tips in the mailbag... though we're not sure we want to take today's. Send your e-mail to: feedback@stansberryresearch.com.

"Well, I finally know what to do with my employer/employee 401K. I took your advice and ordered Alexander Green's book: Gone Fishin'. Simple and straight forward. Easy read. The information in this book alone was worth my subscription to S&A. Thanks for your help." – Paid-up subscriber Rick Russell

Porter comment: It's a straightforward, no-nonsense, practical guide to realistic long-term investing. It will not make you rich overnight – but it gives you a great shot at becoming wealthy over time. I am setting up a trust for my son this year (he turns one tomorrow), and I'll manage the assets of the trust according to Green's Gone Fishin' strategy. I recommend the book to all investors. Click here, to get 45% off the cover price.

"I got a 2nd DUI five years ago. The great state of Michigan, of course, separated me from my license for 6 months. Best thing that ever happened to me. I parked my car and bought a bike. At the time, I weighed 280 lbs. I work 8 miles away as a Plant Operator for a chemical company so I ride 8 miles to work, perform my very physical job for 12.5 hours (6 p.m. to 6:30 a.m.), then ride 8 miles home. I do this four days on, 4 days off year around IN MICHIGAN. On days that there's too much snow on the road shoulder, I walk 8 miles, work my shift and, in the morning, walk 8 miles home. (BTW, this adds 4 hours to my commute time on top of a 12+ hour shift.) On my 4 days on, work and commuting amounts to approximately 17 hours out of every 24 hour period. Anyway, I now weigh 205 solid pounds and, thanks to the state, have NO car payment, insurance payment, no maintenance, no license fees and could care less how much a gallon of gas costs..." – Paid-up subscriber Gary Gibson

"I guess I'm one of the rare EV readers who took both pieces of advice. I bought WMT at 48.25 and shorted LEH at 41.49. Interestingly, I covered half my LEH position after the close at 8.06 (interesting because that seemed to be the implied recommendation in the Digest). I admit, though, that I took a smaller than usual position in WMT and sold half since then. Thanks for the good recommendations, Dan!" – Paid-up subscriber Bob Brown

Porter comment: The first rule of successful investing is "don't lose money." The second rule is "let your winners run." It's hard to find an investment as attractive as Wal-Mart was late last year when Dan was pounding the table on it. (It was Dan's top pick for 2008 at our Alliance meeting last fall.) I hope those who bought it then will hold on to it.

Regards,

Porter Stansberry

Baltimore, Maryland

September 10, 2008

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