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Weekend Edition

Where you want your money when the chaos hits
Saturday, April 30, 2011

In today's essay, we again court disaster by returning to a very sore subject – the state of our government's finances and the risks we face as our "End of America" scenario unfortunately unfolds with scary precision...
 
Just as the massive inflation that began in the spring of 2009 begins to drive up consumer prices, a Justice Department task force is formed to investigate the rapidly rising price of gasoline – a favorite whipping boy of the political class.
 
Says the Associated Press: "The Justice Department will try to 'root out' cases of fraud or manipulation in oil markets." The timing is perfect. The government, like a lazy hound dog, knows when to show up at the kitchen door. It's feeding time, gents.
 
But do you think the Justice Department will announce a thorough investigation into the activities of the Federal Reserve? Nope. Do you think they will bother to explain to the American people how the Federal government used all its powers and trillions of dollars in new money to save Wall Street's biggest banks, to bail out highly leveraged insurance companies, and to prop up our country's automakers? No, no, and no.
 
Do you think anyone will explain how, by creating trillions in new money and credit, the government gave commodity speculators a risk-free one-way bet – practically forcing them to build up massive speculative positions? Absolutely not.
 
Instead, the boys (and girls) at Justice will round up the usual suspects – small-time oil traders and market makers. It's all their fault, don't you know?
 
You have far better things to do with your time than parse the comments of our august chairman of the Federal Reserve Board, Ben Bernanke. As such, you might not recall that last summer, on August 27, at a private meeting of central bankers in Jackson Hole, Wyoming, he announced the Federal Reserve would resume buying U.S. Treasury bonds in large amounts – amounts equal to roughly 70% of all U.S. Treasury issuance. This has allowed the Federal government to fund nearly all its deficit spending and the growing costs of financing its enormous debts, with its own paper currency.
 
In not so many words, our Federal Reserve chairman was telling our creditors: Go pound sand. We will never pay you back in sound money, you stupid, pitiful fools...
 
The following table makes the point...
 
Total return since
August 27, 2010
Global Asset
140.4%
Silver
92.5%
Blackstone – Wall Street Casino
75.1%
Corn
56.9%
Las Vegas Sands – Nevada Casino
39.0%
Crude Oil
38.2%
Russell 2000 Index (Broad Stock Market)
36.3%
CRB Commodities Index
35.8%
Coal
35.1%
Soybeans
31.8%
Nasdaq
30.1%
Copper
27.2%
S&P 500 (Large-Caps)
25.2%
Dow Jones Average (Large-Caps)
21.1%
Gold
18.3%
Financial Sector SPDR Fund (Big Banks)
13.9%
Annaly Capital Management
5.6%
Producer Price Index
2.3%
Consumer Price Index
-2.2%
Investment Grade Corporate Bond Fund
-2.6%
10-Year U.S. Treasury Bond Total Return
-10.6%
U.S. Dollar Index
Within 10 percentage points of the change in crude oil, you'll find almost all commodities (the CRB index), almost all stocks, almost all U.S. energy (coal), almost all food (soybeans), and the world's most ubiquitous industrial metal: copper.
 
"Why not order the Justice Department to investigate these markets, too?" we ask (with sarcasm intended). By the way, you may wonder about our inclusion of the world's largest casinos in a table clearly intended to show the impact of our dishonest and decrepit monetary policies. Casinos typically boom during periods of rapid inflation, as money becomes impossible to save and speculating (gambling) becomes widely embraced by the general public. That's a little-understood fact... and it may become very important to investors as this hyperinflation becomes more and more intense.
 
Hyperinflation...? Yes, that's right. It's underway already, and it's going to get worse and worse.
 
Look at the table above. What has done the best since the Fed turned on the money spigot? The one form of sound money most sensitive to a monetary crisis – silver. As early as May 2006, I explained to my subscribers why silver would boom – because of the silver ratio – as the dollar collapsed. That's exactly what's happening today.
 
Meanwhile... look at the bottom of the table. There lies the world's legacy fiat paper reserve currency – the U.S. dollar. As I've explained time and time again in my various reports on the "End of America," the current inflation spells the end of the U.S. dollar standard around the world. That's not a prediction anymore: It is happening right now, as you read this.
 
This table is clear and scary enough... but then there are the President's comments last week about these matters, which, to me, were simply surreal. In reference to the soaring price of gasoline, OBAMA! told a group of supporters in Reno, Nevada: "We are going to make sure that no one is taking advantage of the American people for their own short-term gain."
 
I'm assuming this line was delivered with a straight face... and to a cheering crowd.
 
But... maybe not. Did anyone in the crowd understand the irony of the President's position? OBAMA! just explained the essence of capitalism – the factor that makes it work – but used it to define criminal activity. Even a 10th-grade economics student understands capitalism works because, through the miracle of free exchange, private vices (short-term gains) are converted into public virtues – goods and services people want.
 
It's surreal to watch the President of the United States say things like this... things that could have been lifted from the speeches of Hugo Chavez.
 
A confession, dear subscribers. I've worked hard on my newsletters for 15 years. I've taken financial risks to build this business, while giving up dozens of other lucrative opportunities. But... I realize now, after listening to the President, selling newsletters "takes advantage" of the American people (and about 100 other types of nationalities who subscribe from around the world) for my own short-term gain. I feel ashamed.
 
So, I have a special request for the President... I am willing to give up my post and to renounce my "greed." My entire staff is willing to do the same. But before we leave our work, we need the President to help us find a few dozen folks who have our skills and work ethic, but are happy to work for free. Somewhere out there, we know, Mr. President, there are people noble enough to toil endlessly at jobs – like customer service, research, sales, marketing, general manager, designer, I.T., etc. – for nothing in return and no hope of building any personal wealth... lest they "take advantage of the American people."
 
We hope you'll help us find them, Mr. President, because our current path of seeking one short-term gain after another has simply left us exhausted.
 
What will we do next...? The new thing in America: We're going to live at the expense of our neighbors. For the first time in modern history, the government is paying out more money, in cash, to citizens, than it is taking in taxes. We spent $2.3 trillion on direct benefits to taxpayers last year, while the government's total income was only $2.2 trillion. Roughly 60% of all Americans now receive some significant financial benefit from the government. Meanwhile, less than 50% of all people pay any federal income taxes. And roughly 10% of all taxpayers foot virtually all the significant income taxes levied.
 
Some of you, gentle readers, must think this is the way things ought to be. When polled, 75% of Americans say Medicare shouldn't be cut under any conditions. And roughly 75% say raising taxes on the rich is the best way to solve the budget crisis.
 
I don't agree with these sentiments. I don't think it's appropriate or Constitutional to charge one citizen a different rate of tax than another. We all ought to be equal under the law, regardless of our income.
 
Likewise, I don't believe the government ought to be involved in paying for medicine. Why not? When is the last time in history a government did a good job distributing a highly complex, incredibly expensive good or service that had an essentially endless demand? The track record isn't promising.
 
But you should feel free to completely ignore my opinions on these matters because they're completely irrelevant. The fact is, these policies – the politicians' efforts to narrow the tax base while greatly expanding the role of the government in our society – are bankrupting us. By printing money to pay for these expenses, we will cause the complete collapse of our currency – as the table above ought to make clear to anyone paying attention.
 
Forget everything else you know about the budget problems and focus on these facts...
 
It doesn't matter that you've paid into Social Security and Medicare. That's like investors arguing Bernie Madoff owes them money. It may very well be true – but it's totally irrelevant. Likewise, it doesn't matter that "income inequality" is supposedly at a new high. It's not, but why argue? It doesn't matter – taxes won't solve that problem.
 
What does matter...? Consider this: Even if you collected 100% of the income of all the people who make more than $250,000 a year, the U.S. government would have still run a deficit last year. Even if you doubled the entire amount of income taxes collected, the Federal government would have run a deficit last year. There is no way to balance our budget, no way to prevent the literal bankruptcy of our country and the runaway hyperinflation that would result, unless we dramatically cut the government's budget. We have no choice, as you'll see.
 
The U.S. government has never succeeded in collecting more than about 20% of GDP in taxes. Yes, that's true. The higher the marginal rates of income taxes (the more you ask the rich to pay), the more inefficient the tax system will become and the greater the burden on GDP growth, which is the main driver of all tax revenue. There is no free lunch. To collect 20% of GDP in taxes isn't easy. It will require a broad-based, flatter income tax or something akin to it. Collecting more than 20% of GDP has, so far, been impossible. I wouldn't plan on it.
 
Our GDP is roughly $14 trillion today. So no matter how you organize the tax base, you end up with $2.8 trillion to spend. And you can't spend that much, because you've got interest payments and (gasp!) debt repayments to make.
 
Yes, that's right, America: You borrowed all this money, and our creditors actually expect to be repaid. Interest payments and principal reductions of our debt will have to come first and should total around $500 billion each year. If interest rates go up, we'll have to spend more than this. Sorry. That's the price we have to pay if we expect to maintain control of our economy and not allow our children to end up as house-boys and maids in Shanghai. That leaves us with roughly $2 trillion to spend.
 
Here are our current expenses: Medicare and Social Security are now spending $1.5 trillion and, if left alone, will quickly grow to far more than the entire tax base. The military spends over $700 billion (that we know of) each year. Domestic social programs (food stamps, Department of Education, etc.) cost $500 billion. Federal pensions cost more than $200 billion a year. So... we've got $2 trillion to spend... but our bills are running to $3 trillion per year, and they're scheduled to increase, substantially.
 
Thus, we will have to cut at least $1 trillion from the budget – immediately – and be prepared to continue cutting on discretionary spending and the military for at least the next decade. That will mean cutting about one out of every three dollars the government spends today. Unless we balance this budget, there's no longer any doubt our currency will be destroyed, our savings lost, and the assets of our country stripped by foreign creditors.
 
So... what's more important to you? The lies you've been promised, or trying your best to restore this country to its founding principles? That's what we've got to decide.
 
These facts, by the way, are common knowledge to all the planning people in Washington. So... what are the politicians doing? They're condemning capitalism by complaining about "short-term gains." They're investigating the free exchange of oil contracts and calling oil traders "criminals." Oh... that's right... they also spent months trying to cut $60 billion from the budget – about six cents on the dollar of the cuts required to balance our budget. Those "cuts," by the way, were actually just smoke and mirrors budget moves that won't reduce the actual amount of spending by a penny, nor even reduce our deficit.
 
Here's my question... and I mean this sincerely... how bad do things have to get in this country before the average voter wakes up and realizes that he can't actually live at the expense of his neighbor? How long will it take before it dawns on regular people that, like it or not, the rich can't pay for the entire burden of government? And what will happen when the average person who believed the lies he's been told by his government realizes there's no way any of those false promises can be delivered...?
 
Unfortunately... my bet is that things in this country are going to have to get a lot worse before our leaders in Washington – on both sides of the aisle – do anything that even remotely resembles actual leadership. So the next time you're thinking about selling your silver or cashing in your gold, just go back over these numbers above and ask yourself, how long will it be before Congress decides to gut the budget and begins to actually repay our creditors?
 
Oh... one more thing to consider. Last week, we saw S&P threaten to downgrade the sovereign credit of the U.S., something completely unthinkable to the world's financial system just three years ago. We saw the University of Texas take possession of nearly $1 billion of gold, a trend I believe could cause a run on the world's bullion banks (like JPMorgan) and a panic unlike anything we've seen since the Great Depression. We've recently witnessed the world's largest bond investor (PIMCO) begin to actively short the U.S. Treasury market – an unprecedented situation in the history of the United States. And we're only a few weeks away now from the end of the Fed's so-called "QE2" debt-monetization binge.
 
No one knows what will happen to the Treasury market or interest rates when the Fed steps away from the market bidding. And yet... despite all these things... the Volatility Index (the "VIX"), which tracks "fear" in the markets, recently broke down to new lows, showing total complacency in the equity markets.
 
I have a simple prediction to make: A year from now, we'll be talking about how eerily calm the markets were before the end of QE2... and all the chaos that's happened since.
 
When the chaos hits, you'll want to be invested in high-quality equities with pricing power and healthy dividends. There are two main reasons this group of stocks will protect you during inflation. First, these companies can raise prices to counter inflation. Second, they can raise their dividends faster than inflation.
 
In The 12% Letter, editor Dan Ferris is dedicated to finding these very companies. In his portfolio, he has one company that is growing its dividend 23% a year (enough to double your income every three and a half years). Another is growing its dividend 12.3% a year (enough to double your income in six years). Yet another has grown its dividend 11.6% over the last 10 years.
 
Building a portfolio of these relentless dividend growers will ensure you a super-safe cash flow that beats inflation. In addition to buying these dividend growers, Dan has five income secrets he's put together, called Black Market Income... These secrets include collecting income overnight and a trade he developed that takes direct advantage of the Fed's manipulation of bond yields (and allows you to collect double-digit income). To learn more about Black Market Income, click here...
 
Regards,
 
Porter Stansberry




This Week's Winners
S&P 500 Symbol Change
Citrix Systems CTXS +11.8%
Norfolk Southern NSC +11.5%
Xilinx XLNX +10.0%

Countries Symbol Change
Italy EWI +5.3%
Spain EWP +5.1%
Germany EWG +4.6%

Sectors Symbol Change
Airlines FAA +5.4%
Transportation IYT +4.0%
Health Care IYH +3.2%

Commodities Change
Silver +5.8%
RBOB Gas +3.6%
Natural Gas +2.5%
S&P 500 Symbol Change
Citrix Systems CTXS +11.8%
Norfolk Southern NSC +11.5%
Xilinx XLNX +10.0%

Countries Symbol Change
Italy EWI +5.3%
Spain EWP +5.1%
Germany EWG +4.6%

Sectors Symbol Change
Airlines FAA +5.4%
Transportation IYT +4.0%
Health Care IYH +3.2%

Commodities Change
Silver +6.2%
RBOB Gas +3.6%
Corn +2.7%

Date Range:4/21/2011 to 4/28/2011
This Week's Losers
S&P 500 Symbol Change
Broadcom BRCM -14.6%
Lexmark Int'l LXK -13.4%
Akamai Technologies AKAM -12.6%

Countries Symbol Change
China FXI -2.5%
Brazil EWZ -2.2%
Russia RSX -1.4%

Sectors Symbol Change
Gold Mining GDX -2.2%
Agribusiness MOO -0.7%
Oil Services PXJ -0.5%

Commodities Change
Crude Oil -31.3%
Cotton -9.0%
Wheat -7.1%
S&P 500 Symbol Change
Broadcom BRCM -14.6%
Akamai Technologies AKAM -12.6%
Cbre Group Inc A CBG -10.7%

Countries Symbol Change
China FXI -2.5%
Brazil EWZ -2.2%
Russia RSX -1.4%

Sectors Symbol Change
Gold Mining GDX -2.2%
Agribusiness MOO -0.7%
Oil Services PXJ -0.5%

Commodities Change
Cotton -9.0%
Wheat -7.1%
Lead -5.2%

Date Range:4/21/2011 to 4/28/2011
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