I've spent this week trying to figure out what will happen as the U.S. continues to default on its debts. And make no mistake, the U.S. is defaulting.
By that I mean it can no longer find any real creditor to finance its obligations, so it is making ends meet by having the Federal Reserve paper over our funding gap, which I estimate is at least $500 billion per year.
I know what will happen in general... Inflation will rise, interest rates will soar, and credit, generally, will be harder to come by. But the big question is whether or not there will be a real run on the dollar.
I estimate our annual foreign borrowing requirements are now around $2 trillion per year. That's the foreign contribution to our annual deficits plus the amount of foreign debt we must roll over each year. China has stopped buying. What happens if we have to paper over the entire $2 trillion? It could happen. In fact... I think it will happen.
And here's the curious part. U.S. Treasury and agency debt makes up about 60% of the world's banking reserves. So... what happens when the world's reserve currency defaults? I don't think anyone knows for certain. But I know a few things are very likely to happen – soaring hard commodity prices, for example. In my latest newsletter, I tell my subscribers how to protect themselves from a full-blown dollar crisis. It's coming. If you'd like to receive my report, which I'll release this week, click here.
Back in my November issue, I explained the secret of the Greenspan-Guidotti rule. It accurately predicts when countries will experience a currency crisis. And it flashed a warning signal about the U.S. in 2009.
One guy I know who understands Greenspan-Guidotti is George Soros. You might not like his politics, but no one in history has made more money trading currencies. He put on his biggest trade in years last December – just after I wrote my analysis of the Greenspan-Guidotti rule and U.S. finances. What did Soros buy? More than $600 million of gold. He knows what's going to happen. If you don't understand the Greenspan-Guidotti rule, you really ought to read my newsletter. This one idea alone is worth more than the price of admission.
David Tepper and Bruce Berkowitz weren't the only fund managers to buy shares of Citigroup last quarter. It turns out more than 120 hedge funds bought stock in the bank, adding a net 1.2 billion shares. Fund purchases outnumbered sales by a ratio of more than 10 to 1. And you'll recognize the names of the three biggest buyers...
John Paulson bought over 200 million shares, bringing his Citi holdings to 506.7 million shares. Eric Mindich's Eton Park Capital Management bought 138 million shares, making it the fund's largest holding. And George Soros reported a 94.7 million-share stake worth $313.4 million. Hedge funds are buying Citi because government-regulated banks make a killing during periods of inflation – especially when the government is manipulating interest rates in their favor.
The government has already proven it will pump as much money as needed into the bank. And it doesn't want the public embarrassment of losing money on its investment.
Our friend Chris Weber, probably the best investor we've ever met, says there are only two ways to get rich in the stock market: You either have to compound your money or be an early investor in a major trend.
Well, we've uncovered what is sure to be one of the major trends of our generation. It's a technology that will literally change the ways we communicate and do business. It's so convenient and cheap, everyone with access to a computer and the Internet will eventually switch over. The U.S. government, more than 100 major corporations, 10,000 small businesses, and even China have already started using this technology. But there's still a TON of room for growth.
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New highs: Keyera Facilities (KEY-UN.TO), Portfolio Recovery Associates (PRAA), Shaw Group (SHAW), Jinshan (JIN.TO), Rex Energy (REXX).
In today's mailbag, someone questions my analysis of GE... and a couple of great responses to yesterday's question: Would you surrender your gold if the government came calling? Send us your answer here: feedback@stansberryresearch.com.
"You stated, 'If you don't have the time to read the annual report, you don't have time to be an investor.' Have I been wasting my money on Oxford Club Chairman's Circle, Taipan Lifetimer, and Stansberry Research assuming that you have done due diligence reading reports and vetting the stock recommendations that I pay you for???" – Paid-up subscriber Rich Shepard
Porter comment: I can't comment on the value of our competitors' products. When it comes to our products, you can definitely trust us to do our homework. But I still think it's important for you to know enough to judge the value of our thinking. After all, it's your money. And how could reading six to eight annual reports each year hurt you?
"You keep saying GE is Bankrupt. You never give any information as to your argument. I have significant dollars in GE. Where is your analysis?" – Paid-up subscriber Dave
Porter comment: Please see the November 2009 issue of my newsletter (Porter Stansberry's Investment Advisory).
"A bullet, then they can have my house to." – Paid-up subscriber A. Pullin
"I'm sorry, but I am so fed up with 'Obamaism' and other forms of Government Piracy that if I had any gold I'd make sure they did not find any of it. I really believe that a form of 'gold confiscation' is quite possible and that a total confiscation of firearms would (naturally) preceed it. I am a very small investor, am past 75 years old, and in all my lifetime have never seen this Republic's Government so totally out of control and so totally out of touch with its citizens. I never miss your email or my S&A reports. God Bless you all, keep up the good work." – Paid-up subscriber Al Behr
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida, and Baltimore, Maryland
February 17, 2010