Got an e-mail this morning from a top trader on Wall Street. It didn't take long for my comments on GE to get passed around. They ended up on one of the wire services:
09:21 GE General Electric: Hearing Stansberry out with very bearish comments on GE (16.08) Stock trading at $16.08, flat with the close.
Over the last 10 years, our work has ended up on the wire services dozens of times. But in the past, they'd only label our work as being from "a newsletter" – as if our research didn't warrant being named. I don't know why they suddenly learned to spell my name. But it makes me nervous. Everyone I know who ever got famous in this business went bankrupt shortly after.
Here's a deal that just landed on my desk... A big land-banking investment group bought a large condo building in southern Florida. The building is 85% sold, but 45 new units are still for sale. Another 30 or so of the units that were sold are now in foreclosure, so selling the remaining 45 new units is nearly impossible right now.
But the investment group doesn't want to hang on to the 45 units. It bought the condo because it includes a 10-acre adjacent site that's permitted for another tower. It's the land they want to hold. That means, it needs to dump the 45 units as soon as possible. It's asking $60 per square foot, which is about 25% of the current market price. According to the most respected real estate analyst in the region, this is the single best condo deal he has seen all year. An investor putting up $5 million for the 45 units should earn 7%-8% a year before selling these units for around $250 per square foot in three to five years. The deal is so good, in fact, this analyst isn't going to broker the deal like he normally would. He is keeping it for himself... which is why he called me this morning.
These kinds of deals are what I've been waiting to see. More of them are coming, too. Lots of folks are going to make lots and lots of money on the rebound in the Florida condo market. So who is the guy who called me this morning? How do you get on his list? I'll tell you his name in a few weeks. He is speaking at our annual Alliance Conference, taking place next month on Kiawah Island, South Carolina.
Doc Eifrig came over this weekend for my wife's porcini mushroom risotto and a bottle of wine from my cellar: a 2001 Casanova di Neri Brunello di Montalcino Tenuta Nuova. This was the Wine Spectator's wine of the year in 2006. (Luckily, my dealer in Montalcino insisted that I buy a case about six weeks before that issue of Wine Spectator hit the newsstand... saving me about $150 per bottle.)
Doc brought a bottle of 2001 Plumpjack – a fine cabernet from Napa. Both bottles were incredible... but the Brunello may have been the finest I've ever had. Doc conceded. Now, having trounced Doc with wine, it is time to trounce him with economics...
Doc, as you may know, writes our Retirement Millionaire newsletter. He is not only a medical doctor, he is a talented investor, having spent a decade on Wall Street's most elite prop trading desks, including Goldman Sachs and Chase Bank. Although we are best friends and have enormous respect for each other's abilities... we have a sincere and significant difference of opinion when it comes to the question of inflation/deflation. Says Doc in a recent e-mail update to his subscribers:
I keep reading about how inflation is the great looming threat... and yet all the signs I see keep pointing to deflation. Yesterday, Colorado lowered its minimum wage from $7.28 to $7.25. It had to because the state links its minimum wage to a cost-of-living index (it's one of 10 states that do this), which is falling. It's the first drop in wages since Colorado passed the law in 1938.
The state law actually would set the minimum wage at $7.24, but the state mandate can't be lower than the federal minimum wage. The federal minimum is $7.25, so Colorado had to stop there – whatever good that extra penny does for the average folk. Regardless, it's a clear sign of deflation. Worse, employer labor costs won't even be any less this year compared with 2008. Recall the federal minimum of $7.25 reflects an increase from $6.50 that Congress approved this summer.
Doc is making a classic and basic blunder. He is assuming one set of prices – or even one index of prices – is evidence of inflation or deflation. But inflation isn't found in rising or falling prices. (In fact, price indexes are one of the most basic lies of central banking.) Inflation is found in one and only one place: The supply of money.
Our central bank has created something around $11 trillion in new money and credit since the crisis began last fall. That's about 10 times more money and credit than existed last year. About $1 trillion of this new money was created directly, through asset purchases that are now labeled "quantitative easing." The rest – the overwhelming majority – was issued as guarantees: for instance, the Fed's backing of GE's $500 billion debt. By either measure – either the $1 trillion quantitative easing or the $10 trillion in guarantees – this is still the largest inflation of money and credit the world has ever seen. No one can say for certain what the long-term consequences of this enormous inflation will be.
Is it possible that, in the short term, a dollar crisis could result in circumstances that seem deflationary? Absolutely. I remember in 2002, when Argentina suffered its worst currency crisis the banks all closed for months. All of the U.S. dollar deposits citizens had in the banks were "converted" into pesos – at the new 4-to-1 exchange rate, down from parity with the U.S. dollar. The government simply stole 75% of its citizens' bank accounts overnight. As a result of this theft and the banks being closed, no one had any money. Friends of mine, who had cash, were able to buy luxury apartments – the finest in the city – for pennies on the dollar.
So that's a deflationary crisis, right? Prices fell, didn't they? Well... yes... and no. Prices for electricity, fuel, food, etc. soared. Prices for mortgaged property plummeted for about six months. At the end of the crisis, the average Argentine had lost three quarters of his purchasing power. And prices, on average, had tripled.
Is it possible that, in the short term, the U.S. economy could suffer a collapse because of a complete lack of confidence in the U.S. dollar? Yes, that's certainly a possibility. However, given the nearly $2 trillion fiscal deficit and the unprecedented efforts of the Fed to keep the banks open and operating, I doubt it. The feds don't have to close the banks to steal 75% of your savings. They can simply print as much money as they need to keep the banks solvent. And that's what they're doing.
When you're trying to figure out what's more likely in the future – inflation or deflation – ask yourself these few questions: 1) Would I willingly choose to be a creditor to the federal government, considering its soaring deficits, its $12 trillion in debt, its current economic policies, its endless entitlement programs, and the miniscule interest rates it pays on its debts? 2) Why is the largest creditor to the United States (China) going on an all-out commodity-based spending spree, all over the world? 3) Why, during two decades of soaring productivity and giant technological advances, has the purchasing power of the U.S. dollar continued to fall at an accelerating rate?
My friends, for the deflationist camp to be right, the U.S. dollar would have to have a sustained increase in purchasing power... something that hasn't ever happened since the creation of the Federal Reserve. To believe in deflation is to believe the government is here to help... paper money works... Santa Claus is real. Good luck with that view, Doc. Don't bet the farm.
What do I think you should do? As I've said for many years: You ought to own a lot of gold and silver bullion. But frankly, if you haven't bought any by now, I doubt you ever will.
In the last issue of my newsletter, I pointed out the best opportunities to buy stocks have probably passed. (Keep in mind, last November I was practically begging my readers to buy stocks... saying, "This is it – this is the moment I've been waiting for my entire career. The investments you make right now will become the best investments of your entire life...")
One way to know is by looking at the spread between corporate bonds and U.S. Treasury bonds. At one point, high-yield bonds were paying 22% more annually than Treasury bonds – a record "spread." Now, some bonds are actually paying less than stocks. Barron's Michael Santoli said this weekend: "The outsized excitement for corporate debt over equities is by now familiar. Eleven dollars in net inflows have gone to bond mutual funds for every net dollar into equity funds over the past three months, says Strategas Group. The securities of telecom companies AT&T (T), Verizon (VZ) and CenturyTel (CTL) illustrate this: Their stock-dividend yields are between 6.4% and 8.3% – higher than their bond yields by one to three percentage points."
New highs: Vanguard Inflation Protected Securities (VIPSX), Morgan Stanley Emerging Markets (EDD), Coca-Cola (KO), Enterprise Partners (EPD), Philip Morris (PM), Silvercorp Metals (SVM).
In the mailbag... we asked about the most valuable business lessons you've learned along the way. Some very good answers... Send yours: feedback@stansberryresearch.com.
"My most valuable business lesson, learned the hard way: When contemplating a business partnership (LP, GP, LLC, Sub-S Corp), investigate the potential partners thoroughly. Listen to them about their background, experience, other deals they have done, etc. Then, meet with their former partners. Ask hard questions. Do not be eager to put your money in. Take the time and effort to do the due diligence right. Learn as much as you can. Hire an investigator if you are not willing to do the hard work yourself (my laziness). You will do fewer deals, and properly so." – Paid-up subscriber Richard
Porter comment: Reminds me of what a wise friend told me a long time ago... At the beginning of a deal, the limited partners have all the money and the general partner has all the experience. But by the time the deal is finished, those positions will be reversed.
"It took me some time, but I eventually came to realize that if you are the lowest-priced seller of a particular line of goods, it is very difficult to grow the company with profits... Clients that are constantly whittling the price down tend to place a low value on the goods and services we provide, and tend to act in a disrespectful manner. I came to realize that the clients that pay the highest price also tend to spend the most money and surprisingly, are the happiest with us as their supplier... I figured out that by raising the price 10%, I could grow the bottom line by 30%... This makes our company much more inclined to weather downturns like the current crisis. Our company is much stronger for it. Raising prices: a very simple solution to a) increase profit and reduce debt, b) keep clients happier and more respectful of our service, and c) become rock solid as we convert those profits into sustainable reserves we can draw upon if (ever) necessary." – Paid-up subscriber N. Thompson
Porter comment: We're learning this lesson the hard way, right now. If you can't afford to pay $99 a year for investment advice, chances are you're not going to be a very valuable client.
"I bought an apartment building in 1989, for me it was a huge purchase and I put several homes up for collateral to get the deal through. In addition to managing my rentals I was working a full time job for the Post Office. The apartment building had two burner stoves for cooking and no oven. As prospective renters came to look at the apartments they commented how they wish it had an oven, many left without renting. It took me a couple years to figure out that if I converted a just a couple apartments to having a traditional stove/oven maybe it would be more desirable. Sure enough, things started to turn around, I quit my full time job and started remodeling all units. Bottom line is, this was a very simple fix and one my possible customers told me about and they didn't even charge me. So the simple task of listening to what customers want can be important and could possibly be the best and easiest money you ever make." – Paid-up subscriber Bob Greene
Porter comment: Exactly. That's why I read all of the feedback e-mails we get personally. And why I have them routed to my global Blackberry, too. No matter where I am or what I'm doing, I'm following our customers' needs, minute by minute. It's my single greatest advantage as a publisher.
Regards,
Porter Stansberry
Baltimore, Maryland
October 19, 2009