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Weekend Edition

The Best of The S&A Digest
Saturday, September 1, 2007

Venezuela seems poised to achieve a truly remarkable feat: a currency collapse in the midst of an oil boom. After doubling government spending, Chavez imposed price controls on meat, sugar, eggs, milk, and other basic products. You'll never guess what happened... Now shortages abound, and a black market for U.S. dollars is thriving (at a much worse exchange rate).
 
The poor, who elected Chavez, are taking the brunt of the fallout. They can't get their money out of Venezuela, and they can't afford black market prices. Like Bill Bonner says – People usually get what they deserve... good and hard. Here's my favorite part: To solve the problems, Chavez is knocking three zeros off the paper bills and calling the new currency the "strong bolivar." It's like watching someone put on a lifejacket backwards. Sure, they'll float... but face down.
 
While it's easy to point the finger at Venezuela, you could accurately ask the same kinds of questions about America's finances (minus the price controls). In the midst of a 25-year economic boom, the amount of private, corporate, and government debt has soared, and the government has continued to grow faster than the private sector. I can't help but wonder how much longer it will be before it's our presidente talking about a new currency? It will happen.
 
Historically, periods of currency inflation and debt creation have been linked to increases in gambling. As if on cue, the $2.4 billion Venetian Macao – the world's largest casino – opened this week. The hotel's slot machines, baccarat tables, and other games of chance cover more than three times the area of the largest Las Vegas casino. How profitable could such a sprawling resort be? Well, when the Sands Macao – the first American-owned casino in Macao – opened its doors three years ago, the first-year profits exceeded the total costs of the project. What's even more impressive, the new Venetian is one of 14 massive hotel projects underway.
 
Steve Sjuggerud came up with the best way to play this boom in his Sjuggerud Confidential.
 
Top hedge-fund managers' average take home pay was $657 million last year, according to the liberal, it's-not-fair-so-take-their-money bean counters at United for a Fair Economy. Few words in the English language are more frightening to me than "fair." I know what it really means... It would be far more honest for those bean counters to call their lobbying group "United for More of Your Property."
 
Fred Schwed had it right in 1940, when he wrote the classic book about how Wall Street really works: Where Are the Customers' Yachts?
 
The story never changes: It is a much better business to sell investments than to make investments. And that's not really surprising. The shocking thing about Fred's book and the latest excesses of private equity/hedge funds is that so many otherwise reasonable people leapt at the chance to pay 2% of their assets and 20% of their profits to managers, some of whom did nothing more than buy a single stock. It's a form of madness... that's very lucrative and highly entertaining. But there's certainly nothing about it that's unfair.
 
Buffett on the move... Extreme Value pick Berkshire Hathaway bought 10.1 million shares of railroad operator BNSF (BNI) since Thursday, bringing its total stake to 14.8%.
 
My working hypothesis is ARM resets, tougher lending policies, higher mortgage rates, and an environment that's generally more credit restrictive will finally push the U.S. consumer over the cliff and the U.S. economy will follow.
 
Joe Consumer has held the economy together for a long time and through some incredible excess. Everyone who has predicted his demise has been wrong, wrong, wrong. We'll be watching credit-card default rates. Our bet: Once Joe Consumer can't refinance his house anymore, he'll soon have trouble paying off his card. That's when we'll know he's really in trouble.
 
One of my personal goals this year was to find one great business that I should be able to own for at least 30 years. I am building a retirement portfolio, one stock at a time, as part of my financial planning process. (I'll be diversified, over time, as I build the portfolio.) I plan on putting about 10% of my income into one stock a year for the next 20 years. I hope to be able to live comfortably from the dividends on these stocks 30 years from now.
 
It's fascinating to me how your perspective changes when you severely limit your opportunities to invest. Yes, I've missed out on some good trades this year. But I've also avoided doing lots of stupid things with my money, things I might have done if I wasn't looking and waiting for the perfect long-term investment. I've avoided paying lots of taxes. And... perhaps best of all... I've avoided wasting lots of time.
Regards,
 
Porter Stansberry




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