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Weekend Edition

Porter Stansberry: This is why stocks are headed lower this year
Saturday, February 8, 2014

 There's simply no doubt in my mind that stocks are going to head down this year. Let's review why I believe stocks are heading into a bear market and update you on some new ideas I have about what will drive stocks lower.
 
First... please allow me to quote extensively from my June 2013 Investment Advisory:
 
The 2009-2013 bull market in financial assets (stocks and bonds) and real estate was created by the reckless policies of central banks around the world. These banks have been creating immense new amounts of fiat, paper money and using these funds to buy trillions of dollars' worth of financial assets. This is a paper pyramid of wealth. It will soon crumble.
 
In addition to this gross monetary stimulus, nearly all of the world's major Western economies continue to run mountainous fiscal deficits. Governments of all types are spending huge sums they cannot finance with current tax revenues. These policies – monetary and fiscal stimulus – are supposed to "jump start" the world's economy.
 
That's not possible. It cannot happen. We know this for two simple, well-proven reasons.
 
First, nearly all of the financial assets that central banks have been buying were obligations of bankrupt governments and government-sponsored institutions. Buying the debts of countries like the U.S., Spain, Greece, Japan, and the U.K. cannot produce any lasting wealth or prosperity. In every case, the entities being supported have long since passed the point of being legitimately financeable. The central banks are printing up huge sums of money, greatly devaluing their currencies, and throwing these funds down a rat hole.
 
Second, the fiscal stimulus – the government spending in excess of tax revenue – is being directed toward nonproductive uses by politicians seeking greater power and authority. It doesn't reflect the markets responding to a legitimate economic demand. So it's impossible for it to increase the productivity or the wealth of any country. This is the central lesson of the 20th century: Massive government spending does not lead to prosperity. It leads to war.

I didn't know then – and I still don't know – exactly how these massive financial imbalances will get resolved. But we're seeing a huge surprise...
 
 Emerging markets boomed throughout the 1990s and the 2000s. The massive expansion of the U.S. current account deficit – the imbalance of trade and finance between America and the rest of the world – fueled these markets.
 
In short, we Americans flooded the world with money. It was all funded by debt, of course. Most of these outflows resulted from America's massive oil needs. The result was a global, inflationary boom. Emerging markets that exported petroleum, like Brazil and Indonesia, felt the boom most of all.
 
 The financial markets are nothing if not ironic and paradoxical. The U.S. spent the last 20 years desperately trying to bankrupt itself and pushing trillions of dollars into the world economy. Then, rather than paying back any of this money, it began to print trillions more to finance $1 trillion annual deficits in the wake of the 2008-2009 global financial crisis.
 
Doing so was unbelievably risky. If our current account deficits continued growing, it would have led to a massive global run on the dollar. That was the heart of my End of America thesis.
 
 But lo and behold... a crisis of a completely different sort is emerging. Despite running massive fiscal deficits, America has begun to export colossal amounts of energy. We've moved from exporting less than 1 million barrels per day of various types of refined crude and gas products to shipping out nearly 4 million barrels per day. We're now exporting more energy on a net basis than we're importing. That hasn't been true since 1949.
 
 
 That has had a profound impact on our current account deficit, which is racing back to zero...
 
 
 This reduction in dollar outflows from the U.S. has hit emerging markets hard. It's reducing liquidity, especially in places like Russia, Brazil, and Indonesia that rely on petrodollars.
 
But it's a global phenomenon, too, as many of the world's sovereign debt markets are mostly denominated in U.S. dollars (like Turkey). When these bonds were being issued in the mid-2000s, no one could imagine a world where the U.S. wouldn't continue to be a source of global liquidity. No one could imagine that the U.S. would begin to be a net exporter of energy – the world's most important commodity.
 
 The result of these financial stresses is impossible to guess. But... I'll repeat what I warned about last June. The world's economy isn't in a "normal" state. It has been blown about by credit bubbles in almost every major world economy.
 
The prices of many kinds of securities (stocks, bonds, credit default swaps, commodity futures, etc.) have been warped in a way that makes them very susceptible to massive swings. Margin debt was, until recently, at an all-time high for U.S. stocks, for example. Despite these real risks, stock prices have rarely been higher in the U.S. That's a dangerous combination.
 
 However, I still think some stocks can outperform over the long term... No surprise, they're tied to the massive oil-and-gas boom currently underway in the United States.
 
We've been covering the shale boom for years in my Investment Advisory newsletter... I doubt any other research firm has produced so much quality information on the phenomenon (or started its coverage as early).
 
Because of that, we've already made huge profits for our readers in the sector...
 
In my Investment Advisory, subscribers are up 48% on liquefied natural gas (LNG) exporter Dominion Resources. We made 113% on energy infrastructure firm Chicago Bridge & Iron. We're up 94% on propane exporter Targa Resources... There are plenty more big gains, but you get the picture.
 
In my next issue (due out Friday), we're recommending another company poised to profit from the boom...
 
 Next month, the U.S. government will open up the deep water off Florida's coast for drilling... It's auctioning the rights to drill a specific site. The oil majors are watering at the mouth to win this auction... The area holds an immense amount of oil... So much, estimates can't do the deposits justice.
 
 We can't know which firm will win the auction or who will drill successful wells. But... we've found a company that supplies the infrastructure to these deep-water drillers.
 
Plus, this company is cheap... And the folks who control this company (one of the richest families in the world) are famous for treating shareholders well.
 
We're not releasing the story for a few days, but to make sure you're the first to hear about this company... you can sign up for a risk-free subscription to Stansberry's Investment Advisory... If you decide within the first four months of your subscription that the newsletter is not for you, call us for a 100% refund. To learn more about subscribing to my newsletter, click here.
 
Regards,
 
Porter Stansberry




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