What I'm afraid of...
What I'm afraid of... Why it doesn't matter all that much... How reckonings are overcome...
Editor's note: The stock market (and our office) is closed in observance of Presidents' Day. We will resume our regular publishing schedule on Tuesday.
A number of subscribers have been asking the same great question lately – one worthy of a much more thorough than usual response.
I'm paraphrasing here for brevity, but the questions were all essentially asking why on Earth, as someone who is "as bearish as I've ever been in my career," am I still recommending buying stocks? Why would I be recommending leveraging into some ideas using puts (selling them) and calls (buying them)? The questions sound something like this...
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You'll recall that it's my goal here, in the Friday Digest, to give you the information I would want if our roles were reversed. That probably has never been more difficult than it is today because of this question. So let me answer in two parts...
First, I believe you ought to be incredibly cautious with your financial affairs right now. All around the developed, so-called Western economies, debt has grown exponentially over the past several decades. There's no sense in just reporting all of the facts again. You know the numbers by now. America's federal debt has doubled in seven years. The Japanese government's debt equals more than 200% of the country's gross domestic product (GDP). Half a dozen countries in the European Union are on the verge of default.
But it's not just politicians who have used debt to acquire power and benefits far beyond the earnings power of their tax base. Private companies have done the same, all over the world. General Electric – for years, one of the biggest and most prestigious U.S. corporations – is now the world's 10th-largest "sovereign" borrower. Incredibly, General Electric owes creditors more money (around $365 billion in debt) than Greece does (around $360 billion in debt).
All over the world, in ways that can't easily be modeled or understood, debt has warped and altered the world's economy. Think about how much the cost of housing, college, our government, stocks, bonds, etc. have been inflated by both debt and "elastic" supplies of money.
Just one example: The "Black List" we publish in my Investment Advisory now includes more than 30 names. That means more than 30 U.S. stocks carry a market capitalization of more than $10 billion and are priced at more than 10 times annual sales. Few companies in history proved worthy of this kind of insane valuation. Keep in mind, at market bottoms, we find fewer than five companies valued like this. At market tops, we normally find more than 10. I cannot ever recall seeing more than 25 before.
Eventually, this will be a catastrophe for many investors. The same insane kinds of valuations are also found across the markets I've mentioned above. Junk bonds, for example, were yielding less than 5% not long ago. Bankrupt governments are paying less than 2% annually for their bonds, but buying nearly all of the supply (or more than all of the supply) with newly printed money.
You don't have to be a prophet to realize that these kinds of economic arrangements can't possibly last... or to know that when they collapse (as they must), the consequences will be wildly varied and wholly unpredictable. One thing is certain, though: For people who are in debt, the consequences will be most severe.
Now, if I believe these facts to be true... if I believe that we are near the end of a massive, decades-long debt "super-cycle"... why on Earth would I buy securities or recommend others do the same?
The answer is simple: I don't have a crystal ball.
No one can know exactly when the world's opinion will change about the safety and the utility of a paper-backed global currency system. Prudent men must continue to use the means available to them to acquire wealth and to manage their wealth, while always keeping an eye on the horizon.
I began my career in investment research in 1996. Every year I've been in this business, there have been compelling, sincere, valid reasons to believe that a global financial crisis was imminent. In 1996, the big fear was that Japan, facing financial ruin, would be forced to sell its U.S. Treasury bonds, sparking a worldwide rout in financial assets. Author Tom Clancy even wrote a book about it happening. But the opposite occurred: The Chinese economy began to boom. China began to buy our Treasury bonds, and the dollar rallied for each of the next five years.
Of course, over the last 20 years, I've seen many reckonings, too. By keeping an eye on the horizon, I was able to help a lot of people avoid the worst of the damage. In 2008 and 2009, we were on top of the problems in the investment banks. Extreme Value editor Dan Ferris successfully shorted Lehman Brothers. In my Investment Advisory, we shorted Fannie and Freddie and warned in June 2008 that they would soon go to zero. We predicted in 2007 that GM would, too.
Rarely, if ever, will you find my Investment Advisory model portfolio without any attractive "short sell" recommendations... positions designed to provide some insurance against a crash or a developing crisis.
Most important, though, is my advice to hold at least 10% of your liquid assets in gold bullion and to keep these coins or bars somewhere safe outside of the banking system.
Personally, I prefer self-storage in reliable foreign countries. No one knows how much gold I own. And no one ever will. This gives me plenty of confidence about the future. It allows me to continue to trade, invest in my business, and sleep well at night.
Gold is real money. It's a universally accepted financial asset that is no one else's matching liability. It is the ultimate solution to a world gone mad for debt.
The strategies I recommend might appear risky to some. And in a few cases, I would agree. For example, the kind of stocks David Lashmet is recommending in Stansberry Venture will fare poorly in a bear market. They are extremely high "beta" companies, meaning they will move more than the S&P 500... both up and down.
But out of his last three recommendations, two are closing in on a double, up 93% and 86%. Selling half of these positions now would allow you to recoup almost all of your risk. This is counterintuitive... and would be dangerous advice to follow in my case... but David is a genius. I firmly believe you have a lot more to risk by not following his work.
Likewise, if you watch my trading carefully in Stansberry Alpha, you'll see that we always keep an eye on the horizon. We're deliberately using puts and calls in a way that lowers our risk, while still providing the possibility of huge returns on margin. The same is also true of Dr. David Eifrig's low-risk trading in Retirement Trader.
Steve Sjuggerud's True Wealth Systems advisory takes positions that are both long and short the market and that are highly correlated with successful historic patterns... but not with the stock market as a whole.
My point is, while some of the tools we're using to generate profits may appear at first glance to be incompatible with genuine concerns about the stability of the world's financial system... they aren't.
That leads me to my final point. The one thing I'm most certain will occur over the next decade is inflation. Every major economy in the world is "driving" its political policies and its economic policies with a printing press. The consequences will be dire for the purchasing power of these currencies. Maybe not today. Maybe not tomorrow. But one day soon, there will be hell to pay. For investors who are frozen by fear and indecision... for investors who do not make any attempts to grow their capital base... the consequences of this looming catastrophe will be the most severe.
For myself, my family, and the clients of my Investment Advisory, I offer the same prescription: Do what you can to safely grow your wealth. Invest in the high-quality, most capital-efficient companies so that in time, their dividends can sustain you. Acquire "trophy" assets when you can do so at low prices. The coming inflation will make these assets far more valuable than you can imagine right now.
Be cautious and do your best to stay out of debt. Hedge yourself with gold. Prepare for a day when you may not have a job. Prepare for a day where there will be a breakdown of the social order lasting for weeks or months. Do these things not because they're likely tomorrow, but because they are nearly inevitable eventually.
If you have the means, move some of your wealth into other countries. Acquire things like farms and timber that can provide for your family even in a barter-based economy. Make sure you have a store of medicine, ammunition, and weapons. Do this not because you're afraid, but because you're confident in your ability to take care of yourself.
One place I would recommend for moving money offshore is Bill Bonner's Rancho Santana development in Nicaragua. I have a beachfront lot there. It's a beautiful property. It's well-funded. And the area is getting more and more press every day. The secret is not out yet... but it will be soon.
Also, the richest man in Nicaragua built his legacy project – a development called Guacalito – just miles from Rancho Santana. It's the area you want to be in Nicaragua.
They just put the finishing touches on The Inn at Rancho Santana, a 16-room hotel. It has already made Travel + Leisure's Best New Hotels list. To give you an idea of the quality, check out the photo of one of the new rooms in the Inn:
If you haven't already visited "The Ranch," as we call it, you should soon. We're hosting a weekend for Stansberry Research subscribers there from April 15 to April 19. If you'd like to come look at potential investments in the area, please contact their director of sales, Marc Brown, at marcb@ranchosantana.com.
New 52-week highs (as of 2/12/15): Apple (AAPL), Automatic Data Processing (ADP), American Financial Group (AFG), Brookfield Asset Management (BAM), Brookfield Property Partners (BPY), CME Group (CME), Cisco (CSCO), CVS Health (CVS), Esperion Therapeutics (ESPR), WisdomTree Europe Hedged Equity Fund (HEDJ), iShares U.S. Home Construction Fund (ITB), Altria (MO), PowerShares Buyback Achievers Fund (PKW), Union Pacific (UNP), and Walgreens (WBA).
In today's mailbag, Porter responds to a subscriber whose house runs on solar power... and debates the merits of "green" energy. This topic always seems to rile folks up, so we're curious if you agree with Porter or think his argument is misguided. Let us know at feedback@stansberryresearch.com.
"I read the back-and-forth about Costa Rica going 100% renewable by 2021 and, correct me if I'm wrong, but Porter himself said they're already 85% hydro and geothermal. Hello! So they're already 85% renewable. Not impossible for them to be 100% renewable by 2021.
"As far as solar... I have solar panels on my house in Denver. The price of panels has been cut in half in the last few years, while the output from the same size panel went from 175 watts, to 200, to 235, to 250, etc. Meanwhile, they now have these dandy little gadgets called microinverters, allowing each panel to operate on its own, instead of the bulky, loud singe inverter of past systems. Essentially, the panels in a grid are now in parallel instead of in a series and are no longer limited by the weakest member of the array.
"All of the above has increased the efficiency of panels by several percent while simultaneously lowering their cost significantly. More improvements are going to be coming every year. It's a dumb argument to make that solar sucks or is unable to perform, etc. etc. While these stupid attitudes are going on, improvements continue to happen anyway. Slow at first, but they are building momentum. With Xcel energy as our Public Service Company in Colorado, I haven't had an electric bill since they were installed. Xcel cuts me a check every month based on the number of Kilowatt Hours I have produced (like you're a mini power plant, called Renewable Energy Credits, or REC's), and they also helped pay for the system (about 20%).
"I also got a 30% credit for the cost of the system by the Feds on my taxes. So I paid for half the system. During the day, it's producing more energy than I can use, running my meter backwards and helping to power the grid, which lowers Xcel's costs during peak hours, and requires them to use less coal, allowing them to meet certain renewable guidelines in Colorado. Also known as a win-win scenario. And that's the reality of the situation." – Paid-up subscriber Erik Stark
Porter comment: I'm grateful that Erik wrote this note. He's making a reasonable claim: That his excellent result with solar power is the "reality" of the situation. Erik pays no electric bills. He gets a check every month from his power company. And he only had to pay for half of his system. The electric company paid for 20%, and taxpayers covered the other 30%.
I have no doubt Erik is telling the truth... Nor would I argue that he has done anything here that's not apparently in his best interest. Most rational people would agree with the choices he has made. I would not. And that requires a bit of explanation...
First, you have to recognize a few principles of physics and astronomy, factors that will not and cannot change. The main problem with solar power is that the Earth rotates on its axis approximately every 24 hours. Therefore, solar systems can only operate (without expensive battery back-up) during the day. Power grids, however, must function continuously and must have constant amounts of current.
The other substantial problem with solar panels is that they make little power at ambient temperature of more than 90 degrees Fahrenheit. A much less discussed problem that's actually substantial is that they get dirty and unless they're constantly cleaned, their utility decreases. Both of these limitations are expressions of the Second Law of Thermodynamics.
I've written about the physics of photovoltaic (PV) solar cells extensively before, but the simple way to understand this is that sunlight is a diffuse source of energy. It will never be an efficient source of power for "work." I put the word "work" in quotes here because I mean the scientific meaning of the word – useful energy measured in British thermal units (Btus). Technology cannot cure this inefficiency. It's a factor of the Second Law of Thermodynamics.
Think of it this way: Using water to generate electricity works great when rain is collected and used to convert gravity into electricity via hydroelectric dams. But what would happen if you just tried using rainfall to power those turbines? Large-scale solar arrays (mirrors) that focus solar energy are much more efficient, but they require massive capital investment (like a power plant) and can only be built in hot, arid climates.
Knowing the physics behind PV solar power, I'm 100% certain (and any knowledgeable and honest scientist would agree) the idea that you could power your community from home-based solar panels is absurd. Not impossible, just absurd. Let me explain...
Of course, you could build such a system. And if you spend enough money, you could make it work, as Erik's results prove. But it would be incredibly expensive. It would cause the cost of electricity on the system to soar because all of the elements of the grid would also still be needed. There's not nearly enough solar power available to power the grid (and there will never be). And it is inherently unreliable. Remember night time? Remember what happens to PV productivity on hot days? The requirements of a power grid – always on – mean that PV solar power is a poor choice.
If you're not fond of reading Reviews of Modern Physics, you can get a real-world sense of the physical limitation of PV solar power by simply watching the catastrophe that's unfolding in Germany. Germany decided to mandate that renewable energy make up 40% of its base load power supply by 2025. The country has virtually no hydroelectric power (which is by far the best and most efficient renewable source). Thus, the country decided to make massive – truly massive – investments in wind turbines and solar panels. The German government estimates this build-out of wind and solar energy sources will cost $1 trillion.
How will it raise that capital? That's the interesting thing. If you're a solar fan, please pay close attention to this part. It will enlighten you to the real reason solar panels are being built and installed...
Germany decided to finance the build-out by guaranteeing the revenues that wind power and solar power will generate. In other words, the power company doesn't have to worry about whether actual power customers find these sources useful or competitive. It simply must buy whatever energy those sources can generate. And the price the power company must pay is outrageous: On the spot market for electricity in Germany, a kilowatt-hour of electricity costs 0.032 euros. But the average guaranteed price under the subsidies for wind and solar power is 0.17 euros – more than five times more.
Does that make any sense? Shouldn't power companies try to serve their customers as best they can by providing power at the lowest possible price? If solar and wind power were truly useful economically, would a government have to guarantee the price of that power at such a huge mark-up? Another way of asking this question is to simply ask yourself: If PV solar cells are really generating the electricity that my power grid demands, why wouldn't my electrical company pay the entire cost of my system? Why did the taxpayers have to chip in 30%? Why did Erik have to pay 50%?
The simple answer is that it doesn't work. Not even close. So why is solar power still being installed everywhere? Because solar power is a wonderful thing for politicians. Politicians get to stand up in front of the zombies who vote and claim they're saving the world, while making power cheaper. Erik certainly would believe them. His power is indeed cheaper. Heck, he gets a check every month.
But of course, there's no such thing as a free lunch. In Germany – as in the U.S. – these high costs are passed along to other ratepayers, because the power companies' profit margins are fixed by regulators. The power company is going to get a return on its asset base, no matter how inefficient or expensive the system it owns. In Germany, the renewable energy surcharge levied on power bills is now almost 20% of the entire bill – roughly 25 billion euros annually. That's like a GM bailout every year for the power companies.
And you won't be surprised to learn that the big buyers of German electricity – giant businesses like BASF and SGL – are exempt from paying this surcharge. No one should be surprised to learn that the owners of the "green" power companies are Germany's largest insurance firms and banks. In America, investment legend Warren Buffett has become a major owner of "renewable" power, too. He knows a good deal when he sees one. But is that a good deal for Berkshire Hathaway... or for you?
Any time you're on the other side of the table from Buffett, you are about to get screwed. Think about that the next time you pay your power bill.
Politics is all about diffused costs and concentrated benefits. Germans (like Americans) don't yet realize that their power bills go up every time a solar panel is installed. PV solar power on the grid is economic suicide. But that doesn't matter in the least to politicians because the general population has no idea how it's getting screwed over. Hell, they all believe they're going to get free power, just like Erik does.
Ten years ago, the average cost of electricity in Germany was roughly the same as the U.S. Today, it's approaching 150 euros per megawatt hour. That's three times the cost of electricity in the U.S.
Regards,
Porter Stansberry
Baltimore, Maryland
February 13, 2015
