What I'm afraid of… Why it doesn't matter all that much… How reckonings are overcome…
A number of subscribers have been asking the same great question lately – one worthy of a much more thorough than usual response.
I'm paraphrasing here for brevity, but the questions were all essentially asking why on Earth, as someone who is "as bearish as I've ever been in my career," am I still recommending buying stocks? Why would I be recommending leveraging into some ideas using puts (selling them) and calls (buying them)? The questions sound something like this…
Porter, you've published about a lot of terrifying things that are going on in the world right now, but you're continuing to recommend stocks and you're even continuing to leverage into some ideas using options. How do you square your macro fears with your current investment strategy?
You'll recall that it's my goal here, in the Friday Digest, to give you the information I would want if our roles were reversed. That probably has never been more difficult than it is today because of this question. So let me answer in two parts…
First, I believe you ought to be incredibly cautious with your financial affairs right now. All around the developed, so-called Western economies, debt has grown exponentially over the past several decades. There's no sense in just reporting all of the facts again. You know the numbers by now. America's federal debt has doubled in seven years. The Japanese government's debt equals more than 200% of the country's gross domestic product (GDP). Half a dozen countries in the European Union are on the verge of default.
But it's not just politicians who have used debt to acquire power and benefits far beyond the earnings power of their tax base. Private companies have done the same, all over the world. General Electric – for years, one of the biggest and most prestigious U.S. corporations – is now the world's 10th-largest "sovereign" borrower. Incredibly, General Electric owes creditors more money (around $365 billion in debt) than Greece does (around $360 billion in debt).
All over the world, in ways that can't easily be modeled or understood, debt has warped and altered the world's economy. Think about how much the cost of housing, college, our government, stocks, bonds, etc. have been inflated by both debt and "elastic" supplies of money.
Just one example: The "Black List" we publish in my Investment Advisory now includes more than 30 names. That means more than 30 U.S. stocks carry a market capitalization of more than $10 billion and are priced at more than 10 times annual sales. Few companies in history proved worthy of this kind of insane valuation. Keep in mind, at market bottoms, we find fewer than five companies valued like this. At market tops, we normally find more than 10. I cannot ever recall seeing more than 25 before.
Eventually, this will be a catastrophe for many investors. The same insane kinds of valuations are also found across the markets I've mentioned above. Junk bonds, for example, were yielding less than 5% not long ago. Bankrupt governments are paying less than 2% annually for their bonds, but buying nearly all of the supply (or more than all of the supply) with newly printed money.
You don't have to be a prophet to realize that these kinds of economic arrangements can't possibly last… or to know that when they collapse (as they must), the consequences will be wildly varied and wholly unpredictable. One thing is certain, though: For people who are in debt, the consequences will be most severe.
Now, if I believe these facts to be true… if I believe that we are near the end of a massive, decades-long debt "super-cycle"… why on Earth would I buy securities or recommend others do the same?
The answer is simple: I don't have a crystal ball.
No one can know exactly when the world's opinion will change about the safety and the utility of a paper-backed global currency system. Prudent men must continue to use the means available to them to acquire wealth and to manage their wealth, while always keeping an eye on the horizon.
I began my career in investment research in 1996. Every year I've been in this business, there have been compelling, sincere, valid reasons to believe that a global financial crisis was imminent. In 1996, the big fear was that Japan, facing financial ruin, would be forced to sell its U.S. Treasury bonds, sparking a worldwide rout in financial assets. Author Tom Clancy even wrote a book about it happening. But the opposite occurred: The Chinese economy began to boom. China began to buy our Treasury bonds, and the dollar rallied for each of the next five years.
Of course, over the last 20 years, I've seen many reckonings, too. By keeping an eye on the horizon, I was able to help a lot of people avoid the worst of the damage. In 2008 and 2009, we were on top of the problems in the investment banks. Extreme Value editor Dan Ferris successfully shorted Lehman Brothers. In my Investment Advisory, we shorted Fannie and Freddie and warned in June 2008 that they would soon go to zero. We predicted in 2007 that GM would, too.
Rarely, if ever, will you find my Investment Advisory model portfolio without any attractive "short sell" recommendations… positions designed to provide some insurance against a crash or a developing crisis.
Most important, though, is my advice to hold at least 10% of your liquid assets in gold bullion and to keep these coins or bars somewhere safe outside of the banking system.
Personally, I prefer self-storage in reliable foreign countries. No one knows how much gold I own. And no one ever will. This gives me plenty of confidence about the future. It allows me to continue to trade, invest in my business, and sleep well at night.
Gold is real money. It's a universally accepted financial asset that is no one else's matching liability. It is the ultimate solution to a world gone mad for debt.
The strategies I recommend might appear risky to some. And in a few cases, I would agree. For example, the kind of stocks David Lashmet is recommending in Stansberry Venture will fare poorly in a bear market. They are extremely high "beta" companies, meaning they will move more than the S&P 500… both up and down.
But out of his last three recommendations, two are closing in on a double, up 93% and 86%. Selling half of these positions now would allow you to recoup almost all of your risk. This is counterintuitive… and would be dangerous advice to follow in my case… but David is a genius. I firmly believe you have a lot more to risk by not following his work.
