The Madness of Barack Obama: Why Free Money Is Destroying America
By Porter Stansberry
Thursday, March 12, 2009
Last week, I wrote one of the most important reports in my 12 years as an investment analyst. It explains the terrible consequences of Washington D.C.'s interference in the capital markets right now.
And as common sense as my analysis was, it infuriated a lot of people. It's sad so many brainwashed citizens believe government is the solution to all of life's problems. But for those who take a moment to think about it, knowing what's going on will make you a fortune, rather than bankrupt you...
You see, good intentions – along with her handmaidens, hypocrisy and envy – are the most rightfully despised of all human characteristics. Liars are, usually, interesting. Fools can be quite entertaining. A greedy man might make you rich, even if only by chance or mistake. But the do-gooder is always a bore and sometimes a tyrant.
Unfortunately, we have had one of history's all-time do-gooders foisted upon us, like an obese man trying to ride an unwilling horse.
The president is determined to "save" the housing market by paying for private citizens' mortgage debts and forcing creditors to shave principal from fully collateralized loans.
Nowhere in history will you ever discover a market whose efficiency was improved by the government interference. Likewise, history is bereft of even a single example where government control of the capital markets led to prosperity. As my friend Rick Rule likes to say, the government's track record is "unblemished by success."
And yet Barack Obama seems eager to pour an unrivaled amount of resources into his good intentions. Never mind the idea that unilaterally abridging mortgage contracts violates the essence of capitalism, common law, and decades of tradition in the United States. Not even bankruptcy judges have been allowed to abridge mortgage contracts. And never mind the truly astronomical expense of paying for one in nine homeowners' obligations! (We had better hope renters don't organize...)
We, in the land of the free and the home of the world's reserve currency, with the world's largest and most powerful capital markets, have decided to finance our entire economy through a process that could accurately be called "Stalinist." To each according to his needs, from each according to his means. It's a do-gooder's dream gone mad. And this federalized giant of good intentions is about to destroy what's left of our economy, as Obama throws what little credit remains in the United States into the endless black hole of the real estate market.
Let me explain...
Right now, the Federal Home Loan Bank will lend money to community banks for 10 years for around 200 basis points (2%) less than you can earn holding a matching duration Fannie Mae or Freddie Mac note. Thus, smart entrepreneurs are now borrowing money from Obama and then lending it back to him, risk free, all while earning 2% on the spread. (This, by the way, is almost exactly what mortgage REIT Annaly does.) Considering where interest rates are and the low cost of acquiring FDIC insurance, it's hard to imagine why anyone would buy any other credit.
The government's interference in the capital markets has warped both the pricing and the availability of credit. In short, very little credit is available that isn't backed by the government – and none at a reasonable price. Rather than jump-starting the capital markets, the government's involvement has created an enormous impediment to a real recovery. And I can show you the real-world consequences of these actions.
In the December 2008 issue of my investment advisory, I highlighted a dozen companies whose highly leveraged balance sheets left them at the mercy of the capital markets. In every case, the firm's debt exceeded the value of its equity. And in most cases, the interest obligations of these firms would overwhelm their operating income in anything but a robust economic environment. As I explained in December, without additional credit at low interest rates, these firms are heading toward a bankruptcy filing in 2009 or 2010.
In tomorrow's issue, I'm going to show you what has happened to these credit-dependent companies in the last three months. With the feds making it criminally negligent for financiers to buy anything but government-backed paper, you can guess the results... and you'll realize what's going on in this country right now is absolute madness.
Good investing,
Porter Stansberry |
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HOW TO TRACK THE "HIGH COST" OIL RALLY
"Great, guys. Oil is 'breaking out.' So what's the best way to play it?" asks a long-time reader.
Our take? If you want to speculate on a crude oil rally, own something with some leverage. You see, in a rising market for a commodity like oil, you don't make extraordinary gains with the most efficient producers. You make extraordinary gains with the least efficient producers. It sounds crazy... but think about it like this:
Let's say oil is at $40 per barrel. We have two oil producers, ABC and XYZ.
ABC's production costs are $10 per barrel... so it makes $30 of profit on every barrel it sells. XYZ's production costs are $30 per barrel... so it makes $10 of profit on every barrel. If oil rises to $70, ABC's profit rises to $60 per barrel... an increase of 100%. Poor old inefficient XYZ, however, sees its profit per barrel increase 300% to $40 per barrel! XYZ stock will rise much more than ABC to reflect the profit explosion.
Let's track this "own the high-cost guys" theory with the poster child of the Canadian oil sands, Suncor Energy (SU). SU can't stick a straw in the ground and watch oil shoot to the sky. It has to dig up square miles of muck to extract the oil. It's a costly business. And it's close to a "breakout" like we're seeing in copper and crude oil...
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Gold could surge to $2,500 a troy ounce in the next five years because the prospects of either deflation or inflation were "becoming more extreme", UBS said on Tuesday. The Swiss bank told investors to overweight gold in their portfolios.
The Swiss bank's warning is the most radical among mainstream institutions and comes as some hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.
"The current environment is one which can best be characterised as having a 'low margin of error' for central bankers, with the prospects for deflation or inflation becoming more extreme," said Daniel Brebner, analyst at UBS in London.
– Financial Times
The Fed's fiat money merely provides the fuel for inflation.
The real engine, where $1 is multiplied many times over, is the banking system... and it's broken. The Fed's balance sheet has expanded dramatically since September, but the banks' balance sheets are still contracting as mortgages and other loans continue to go bad. That reduces lending capacity – money-creation capacity.
Perhaps the hardest thing for you to believe is that all this credit destruction is good... but it is. Less borrowing means more saving. Economic growth requires saving, not borrowing and spending. Savings is the horse. Borrowing, spending, and higher tax revenues are all in the cart.
If you put the cart before the horse, you won't get very far. If you put the horse in front, you can go anywhere you want.
– Dan Ferris
S&A Digest
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