Why our foreign creditors will lose faith in the U.S... The Federal Reserve doesn't understand... The best ways to preserve your wealth during inflation... Why you should still hold cash in inflationary environments... How to get your free copy of one of the most important books you'll read all year...
Editor's note: In today's Friday Digest, we conclude our exclusive interview with currency expert Jim Rickards...
As we noted last Friday, Jim is a hedge-fund manager and bestselling author. He serves as an advisor to the government for security and financial matters... He even helped negotiate the bankruptcy of fallen hedge fund Long-Term Capital Management in 1998. (The fund was so large and leveraged, regulators feared its collapse posed a systemic risk.)
Jim recently wrote what we think is one of the most important books you'll read this year – The Death of Money. It's so important, we want to give you a free copy. We'll explain how you can get it at the end of today's interview.
Last Friday, Jim explained the difference between inflation and deflation... which scenario he thinks is more likely... and how you can profit in either environment. On Tuesday, he told us how desperate central banks are to create inflation... And he shared some of the tools they could use to do it.
In today's installment, Jim discusses what will happen when creditors lose faith in the U.S. government... And he explains which assets you can buy to protect yourself when it happens. He also shares the ways the government could – but likely won't – save us from this financial catastrophe...
I (Jim Rickards) think there will be a tipping point when our creditors will stop trusting the U.S.
Some people call it the "black swan," when some surprise emerges out of nowhere. Some economists call it the "Minsky moment," named after economist Hyman Minsky, who wrote about and studied abrupt changes in sentiment or market conditions.
I use a complexity theory to understand these dynamics. Complexity theory is a branch of physics. A physicist would call it a "phase transition." A phase transition is a change of the underlying elements from one state to a different state.
Imagine you have a pot of water and you apply heat to it and you keep turning the heat up. You watch the water for a while and nothing happens. But of course, you know the temperature is rising. Suddenly, the surface starts to bubble and erupt, and the next thing you know the water turns into steam. So it's the same H2O molecule that's going from one state (water) to another state (steam). Before that happens, the surface of the water becomes very turbulent, irregular, hard to understand, and hard to model.
That's where the economy is today. By printing more and more money, the Federal Reserve is turning up the heat and trying to create a new condition. What could happen is that we have this phase transition where suddenly, foreign creditors lose confidence in the dollar. Apparently, the central banks will stop at nothing to create inflation. Inflation is a wealth transfer from creditor to debtor.
Foreign investors own a significant portion of all the U.S. Treasury debt. If they believe we're going to inflate the dollar – which represents a wealth transfer from them to us – they may begin to abandon the dollar.
We're seeing signs of this already, by the way. But that could turn into a stampede. It's like a crowded theater. If a couple people want to leave early, that's fine... the exit door will accommodate that. But if everybody tries to run out all at once, you have a jam at the door... and somebody gets trampled. You can go from one to the other very quickly. And we're clearly getting closer to that point.
I don't think the Fed really understands this. It doesn't understand the dynamics I just described. The Fed is using "equilibrium models." But the worlds of finance and global capital markets are not equilibrium systems. They are complex dynamic systems, and they're vulnerable to rapid changes in sentiment.
We're in danger of foreign creditors suddenly and unexpectedly losing confidence in the dollar. That's why investors need to prepare for that today... Start thinking about things to put your wealth into. Get out of dollars and into various hard assets so that when the dollar collapses in value, your wealth will be preserved.
The No. 1 investment to do this is gold. I recommend keeping about 10% of your investable assets in gold. When I say investable assets, I would exclude your home equity and a family business. Whatever is left are your investable assets that you have to put into stocks, bonds, commodities, and other investments.
I have had clients and investors say, "Jim, you're very bullish on gold. So why not put 50% or 100% of my money into gold?" That's not necessary. It's never a good idea to go "all in" on any investment idea, no matter how good you think it is. Beyond that, if gold performs the way I expect, it's going to go up so much that even a 10% allocation will do a very good job of protecting against the losses that might arise in other portions of your portfolio.
I recommend physical gold. There are some ways to invest in gold stocks or ETFs, what I call paper gold. But I don't recommend those, because they're vulnerable to counter-party risk, meaning if things really go badly very quickly, you may find that those counter-parties will suspend redemptions or freeze the account. Or they may just stop trading. They won't steal your money. They'll send you a check. But then you'll miss out and you may not be able to get physical gold.
I also recommend land in good locations with development potential... but not necessarily land with buildings on it. The reason is that land will do very well in inflation. Its value will go up. But land can also do well in deflation.
As we discussed in last Friday's Digest, inflation and deflation are both threats today. In deflation, the value of the land may go down, but your development costs will go down even faster. The land can be developed, and the cost of development – things like steel, wood, glass, architect fees, labor, cement, and other things you need to build a structure – would go down faster. You could develop it cheaply, then capture the gains once inflation kicks back in and prices start to go up again.
In terms of stocks, I look at alternative funds like hedge funds. Hedge funds work well in theory but not in practice, because a lot of hedge-fund managers can't actually perform the way they claim. The number of managers who consistently generate impressive risk-adjusted returns is small. But there are some out there, and I would look at some seasoned managers' global macro hedge funds.
Another investment class I like is fine art. A lot of people say, "Well, that sounds good, but I don't have $100 million to invest in a Picasso, so I'm kind of out of that market." But there are some very well-managed funds out there that will take investors' money and pool it so investors can invest a couple hundred thousand dollars or more.
You can put $1 million or $2 million into it. Even if you want to invest $200,000, the door is open and the manager will take that money, pool it, and go out and buy millions of dollars of art and sell it. You would then realize your share of those gains.
That's a little more like private equity. Those funds only last for five years in some cases. They're not liquid. You don't want to go into them with money that you think you might need on short notice. But if you have a five-year investment horizon, that's a good way to preserve wealth.
I also recommend holding onto some cash. That might sound funny, because I'm talking about the collapse of confidence in the dollar. Why on Earth would you want cash? The answer is that inflation isn't the only danger. Deflation could come along. And cash does very well in deflation.
The other reason is that it gives you a lot of options. You might not want to hold your cash forever. But by having it in the short term, you can get more information about which asset classes look attractive, and you'll be able to invest in those assets very quickly.
Plus, cash reduces volatility in your portfolio. Some things I've mentioned are volatile, gold in particular. I think gold is going to trend a lot higher, but it is volatile in the short term. So having a cash component along with your gold reduces volatility in your overall portfolio.
Putting that all together, a model portfolio might look like gold, land, cash, fine art, and some alternative investments such as hedge funds. If you want to own traditional stocks, look at things where the underlying asset of the company you're buying is a hard asset. Stocks in the energy, transportation, natural resource, water, oil, and natural gas sectors will be attractive because they have underlying assets that are able to stand up to inflation. I think they'll do better than a lot of other stocks.
That portfolio allocation would prepare investors well for this dangerous period we're entering.
We're headed for a major crisis. There are some things we could be doing, but we aren't... and we probably won't. At a high level, there are two aspects to economic policy. One is monetary, which is largely cyclical. If money is a little tight, you cut interest rates, ease the money supply, stimulate some lending and spending, and try to get the gross domestic product to rise.
When inflation picks up, labor markets get tight, and things look like they're booming too much. So you tighten the money supply, raise interest rates, and cool things off a bit. That's the normal credit and business cycle. It's a smooth wave we've seen over and over since the end of World War II. That's how monetary policy can affect the business cycle.
The problems we're experiencing today are not related to liquidity... there's plenty of liquidity in the system. There's no shortage of money. The problem is that nobody wants to spend money, because spending involves borrowing. Nobody wants to borrow, because they're worried about deflation or an uncertain business climate.
Our problems are structural, not cyclical. By that, I mean things like fiscal policy, tax policy, Obamacare, the Keystone Pipeline, the Fair Labor Standards Act, overtime pay, litigation risk, etc. These are things that stand in the way of consumers wanting to spend – or business people wanting to invest – because of the uncertain business climate that comes from our monetary policy.
Structural changes are in the hands of the White House and the Congress, not in the hands of the Federal Reserve. The big picture is that we are in a structural depression that policy makers are trying to address with cyclical monetary solutions. But these solutions aren't working. It's like giving aspirin to a cancer patient. It's not going to work. In the process of printing all this money, we're applying a solution that doesn't work. And that may destroy confidence in the dollar.
We could make structural changes to get the economy to grow. At that point, we wouldn't have to worry about Russia, China, or the rest of the world to an extent. We could get our own economy growing. The U.S. being on a solid growth path could help pull the rest of the world out of the global depression I described.
We could eliminate the capital gains tax and the corporate income tax, lower personal income taxes and go to a flat tax, build a Keystone Pipeline, repeal Obamacare... There are a lot of things that would create a positive business climate and would help to get the economy moving again.
But of course, this is extremely unlikely. Congress and the White House are barely speaking. There's no leadership coming from the White House. Congress is divided between Harry Reid's Democrats and Rand Paul's Republicans. There isn't much common ground. Nobody is talking to each other, and I don't see that changing soon. That's why I expect we'll continue down this dead-end path of printing money, getting no good results, and ultimately, destroying confidence in the dollar itself.
Editor's note: If you haven't already done so, you can claim your free copy of Jim's new book – The Death of Money. We just ask you pay less than $5 to cover shipping and handling costs. Considering today's economic environment, this book is an absolute must-read. Plus, Jim agreed to write a bonus chapter exclusively for S&A subscribers. Get your free copy by clicking here.
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In today's mailbag, more people write in telling us about the big winners in their portfolios. And one subscriber tells us he bought his first electric chair... We're not sure what exactly that means, but we hope you're all being safe out there. Send your comments, criticisms, and concerns to feedback@stansberryresearch.com.
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"All of these were thanks to Dan Ferris in Extreme Value and The 12% Letter. My best trade to date was based on setting up an Alpha trade on Apple when Dan Ferris recommended buying Apple in Extreme Value. I setup the trade in September 2013 with a 15.5% open net credit on margin. I bought back the put when the premium was down to approximately 9% of its original value and the call is still running. I am currently up approximately 270% on the original margin! Thank you Dan for the fantastic recommendation and thank you Porter for the education regarding the Alpha setup. Huge return while taking on less risk! I have not taken any of my profits out... I am letting them compound." – Paid-up subscriber Tom T.
Regards,
Sean Goldsmith
August 15, 2014
P.S. Jim Rickards will present at our upcoming S&A Conference Series event in Nashville on October 18. He's joining former congressman and presidential candidate Ron Paul... in addition to many other brilliant minds.
But before Nashville, we have about 500 attendees joining us in Los Angeles next Saturday for the next event in our S&A Conference Series... We've arranged for some of the brightest folks in technology and finance to speak. The highlight, in my opinion, will be the discussion between Porter and Tesla's Chief Technical Officer and cofounder JB Straubel.
This is one of Straubel's first public speaking appearances... And given Porter's ultra-bearish take on Tesla, it promises to be an entertaining and informative talk.
In L.A., you'll also hear from True Wealth editor Steve Sjuggerud... former head of Morgan Stanley Asia Peter Churchouse... and one of the greatest political satirists of our generation, P.J. O'Rourke. Plus, we'll have Chris Anderson – the cofounder of a cutting-edge technology firm and the former Editor in Chief of Wired magazine. (We're also featuring the second part of Chris' recent interview with Porter in today's Digest Premium.)
We know it's probably too late for you to join us live next week in L.A... But we're offering live streaming access to the events in L.A. and Nashville for one low price. You can learn more by clicking here.
Tech CEO: Why we're seeing a technological renaissance today...
Yesterday, 3D Robotics founder and CEO Chris Anderson discussed the massive potential in drone technology and the barriers holding drones back from commercialization.
In today's Digest Premium, he talks about how multiple brand-new technologies will come together to produce new tools and new industries... And he offers his take on the future of self-driving cars...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Tech CEO: Why we're seeing a technological renaissance today...
Editor's note: Yesterday, 3D Robotics founder and CEO Chris Anderson discussed the massive potential in drone technology and the barriers holding drones back from commercialization.
In today's Digest Premium, he talks about how multiple brand-new technologies will come together to produce new tools and new industries... And he offers his take on the future of self-driving cars...
There are several technologies that make all of today's innovation possible. For us, the big one is smartphones... Not the smartphones themselves, but all of the components in the smartphones.
Moore's Law – the exponential technological growth of circuits – has never moved faster than it's moving in our pockets right now. Progress in sensors, GPS cameras, wireless batteries... all that stuff is becoming available for just pennies, because of the Apples and Googles of the world, and because of the economies of scale.
The reason robotics is seeing such a renaissance right now is the stuff that used to be really complicated and expensive – like gyroscopes, accelerometers, magnetometers, things like that – are now essentially free. They're in your phone. You can buy them at RadioShack. They're easy to use.
I think 2007 was the first year that it became apparent that there was a revolution in those sensors. That's when Nintendo released the Wii, and everyone realized, "Hey, you can move the controller around and it will move the cursor on the screen."
That was one of the big ones for us in terms of enabling technology. We're able to go beyond the desktop computer and use mobile phones, upload things to the "cloud," and use wearable computers (like smart watches and Google Glass). Those are all simplifying the experience so that it seems less intimidating. They try to fit into people's lives more fluidly.
As for Google's self-driving cars... The good news is that right now, autonomous cars are largely not going to replace human workers. Instead, they will make us safer on the roads.
We shouldn't text and drive. Well, we should be texting. We just shouldn't be driving while we do it. We're good at texting.
– Chris Anderson
Editor's note: Chris is speaking at S&A's Los Angeles Investment Conference on Saturday, August 23. He'll share his vision of the future in technology... And he will demonstrate one of the newest and most popular consumer technologies on stage.
Also presenting in L.A. are some of S&A's top analysts... master speculator Doug Casey... investment guru and author Mebane Faber... political commentator and author P.J. O'Rourke... and Silicon Valley entrepreneur and venture capitalist Kamal Ravikant. To secure your ticket, click here.
Tech CEO: Why we're seeing a technological renaissance today...
Yesterday, 3D Robotics founder and CEO Chris Anderson discussed the massive potential in drone technology and the barriers holding drones back from commercialization.
In today's Digest Premium, he talks about how multiple brand-new technologies will come together to produce new tools and new industries... And he offers his take on the future of self-driving cars...
To continue reading, scroll down or click here.