Most Of The Following Is From Various Paid And Free Sources.
| It's impossible to know the government's real liabilities right now, thanks to all of the off-balance sheet items and quasi-governmental insurance groups. But you can make a rough estimate… |
Let's say $20 trillion for the on-balance sheet spending. Another roughly $50 trillion is coming for unfunded 'entitlement' programs, and probably another $10 trillion for all of the various guarantees to PBGC, FDIC, and Fannie/Freddie. That gets us to something around $80 trillion by 2019— and my estimate is likely too conservative by a large percentage because it assumes tax revenues can grow substantially.
There are roughly 100 million families in America. How many families do you know can afford to add another $80,000 in debt to their balance sheets? That's how much money we'll owe, per family, by 2019— and that's just for the federal government's debt. That doesn't include state or local governments, and it doesn't include any personal or corporate debt.
This is going to be a huge problem because no one will want to pay the money back— ever. And it can't be financed forever [[by 2019, the interest on the debt will certainly exceed our total present budget— and then some: normxxx]]. The poor will blame the rich. The rich will leave and take their wealth offshore. And absolute chaos will follow. The dollar will be completely destroyed.
Now I know you're thinking, "I've heard all of this before. But the end of the world somehow doesn't happen. We'll find a way out." Not this time [[Barring a miracle; the way out before has always to go further into debt, but the limit has been reached, we are now absorbing most of the savings of most of the people in the world. What's left is inflation… but not immediately.: normxxx]]. You can tax the rich to pay for current spending. You can even tax them very heavily. But when the rich look out decades and see nothing but increasing taxes, debts, and government control of their businesses and assets— they will leave.
The battle between the rich and the government has already begun. I'm sure you've noticed the global crackdown on private, offshore banking in places like Switzerland and Liechtenstein. But you probably don't know about the Heroes Act of 2008. On June 17, 2008, then-President Bush signed the bill into law. The main purpose of the bill was to provide benefits and more financial flexibility for military families.
But also stuck in the bill was new legislation requiring full estate taxes to be paid on the worldwide assets of any citizen voluntarily giving up U.S. citizenship. In other words, you can leave the country if you want, but you can only take about half of your assets with you. These are the same kind of emigration laws the old Soviet Union used in order to prevent its citizens from fleeing during the Cold War.
(You can read a review of the new law here.)
Keep in mind, no other major country in the world taxes global earnings, and no other country in the world has anything like these punitive expatriation taxes. The 'land of the free' has become the only land that both taxes its citizens anywhere in the world they decide to live and 'refuses' to let them leave— without their pelf. What would our founding fathers think of these laws? Incredible.
I have no doubt the restrictions will continue to get more and more aggressive and punative. The government must try to maintain the illusion it can pay its debts and that the dollar is not being destroyed. The only way to do this is to begin to restrict the flow of dollars. As more and more people try to get out of the dollar, the government will be forced to forbid the free exchange of dollars into other currencies— and perhaps even to forbid/restrict the purchase of gold bullion.
This will happen. I guarantee it. And it will likely happen within the next several administrations; maybe even this one. That's why it's critical for you to take precautions now, while you still can. I can tell you what happens to countries that go bankrupt. I've been to Argentina. I'm familiar with the history of Mexico and Great Britain.
We'll see the same things here, shortly: inflation, huge tax increases, capital flight and, eventually, capital controls. It will probably take decades for Americans to realize socialism doesn't work, as it did in Great Britain. But that clarity might not happen during my lifetime. And I don't want my assets to be stuck inside a banana republic in the midst of a huge socialist experiment. I'm graveyard serious: If you do not take precautions and prepare yourself and your family for the inevitable collapse of our currency, you will suffer incredibly over the next decade.
The first thing you should do, if you haven't yet, is to buy gold bullion. It's easy: You just call a few coin dealers, find out who offers the lowest premium on bullion, and wire them the money. Once you have the coins, they're easy to hide, easy to store, and easy to transport. There's no law (yet) saying you can't take bullion out of the country. If things start moving that way, you should have enough time to get the bullion out before the law passes. If not well you can clip your coins easily and use the gold to pay for whatever you might need.
As an indication of what's coming and of the critical role gold will play in the future, look at what's happened with the gold-mining stocks since last fall. Since OBAMA! was elected, the Market Vectors Gold Miners ETF (NYSE: GDX) has rallied— moving up about 70%— and decoupling from the S&P 500. I also believe you should immediately buy gold stocks. In fact, I'm convinced you'll never have a chance to buy gold stocks this cheaply again gold stocks have never been cheaper compared to the price of gold itself.
This is an amazing, once-in-a-lifetime opportunity. I truly hope you'll capitalize on it. The second thing you should do is move as large a percentage of your financial assets as possible out of the country. Unfortunately, I don't know enough about this yet to offer any good advice. I'm working on it. And the third thing you ought to do is to build a stimulus package for yourself.
I realize it's paradoxical. But the coming crisis will make lots of people rich. It's not hard to generate a paper fortune in a huge inflation. All you have to do is own the most important economic assets: energy, communication, and transportation. Yes, keeping the profits from these assets away from the government might be difficult. But in the early stages of this crisis, the value of these impossible-to-replace assets will soar. So the thing to do right now is buy the assets you know the government has to have for the economy to function. These assets will remain in private hands, and their values will increase the most.
You should already own the best communications company in the world— Verizon (NYSE: VZ). I've been recommending Verizon (NYSE: VZ) for more than three years and telling my readers, "If you don't own Verizon, you shouldn't be allowed to call yourself an investor". I believe Verizon has one of the most valuable assets in the United States, a $40 billion fiber to the home network that will dominate the flow of data in this country for at least the next 50 years. The stock has held up well, despite the huge losses in stocks in our reecent fiasco. And it has paid a very safe and steady dividend (it is now yielding ~6%).
If, for some reason, you never got around to buying Verizon, you should do so immediately. And if you've owned it for years, it's time to double the size of your position.
What To Own In Energy
Nuclear power plants (eg, EXC) and Calpine's fleet of natural gas power plants will become even more valuable thanks to OBAMA!'s "cap and trade" tax on carbon emissions. The idea behind cap and trade is to set a limit on total carbon emissions and divide up who is allowed to emit carbon dioxide by selling permits. The law hasn't passed yet, but it seems inevitable given the Democratic majority in Congress and given OBAMA!'s campaign promises. The whole plan is really just a tax on coal.
Coal is America's largest energy resource and the fuel behind more than half of the electricity we generate. Taxing coal is the same as taxing the entire output of our economy. Cap and trade will generate close to $1 trillion in new revenue for the government. But it will make our manufacturing base even less competitive.
It will be the single largest tax increase in history— and most people don't know anything about it because it's not called a "tax" and it's being pitched as good for the environment. People don't understand we can't move away from coal— it's economically impossible. So this won't actually reduce any emissions— it will merely be a huge new tax because it will significantly increase the cost of electricity.
We've already seen a huge move in Calpine (up over 100% from the March '09 lows), which has the most to gain. Exelon, which I upgraded to my No. 1 recommendation last month, made a hard bottom in March '09 and has rallied to $46, where it seems to be holding. I believe Exelon will rebound to more than $60. If you haven't bought it yet, it's time to buy.
[[But note: Exelon is highly speculative since any nuclear plant accident anywhere in the world is likely to put 'finis' to nuclear power re-emergence.: normxxx]]
While electricity is critical to our economy, oil is the most valuable energy resource globally. But I am bearish on natural gas. We've discovered huge new reservoirs of natural gas, which are much cheaper and easier to drill than oil reserves. Proven reserves of natural gas grew by 12% in 2007 and 3% in 2008— the tenth straight year our proven gas reserves has increased. (The data isn't available yet for 2009 but it's certain that reserves grew again, despite the fact that it's been selling for well below the cost of recovery for the last several years— and several proucers are on the verge of bankruptcy.)
Over the last ten years, our proven natural gas reserves have increased by over 50%— the steepest gain since the period ending in 1953. It is hard to exaggerate how massive the gains in proven natural gas resources have been over the last few years. Just consider these numbers from just one of the new sources, the Barnett Shale.
In 1999, proven reserves in the Barnett Shale region totaled 2.4 trillion cubic feet. They now total 17.4 trillion cubic feet. And that's small potatoes compared to the Marcellus Shale in Pennsylvania. In 2002, estimates of the Marcellus gas reserve were around 1 trillion cubic feet. Now it's believed there are 500 trillion cubic feet of gas in this one shale formation.
Even if only 10% of this gas is produced, that would increase our total current reserves by 20%…. By 2008, the U.S. was producing 26 trillion cubic feet of natural gas per year, the most in the recorded 72-year history of natural gas production. So much for peak oil.
Oil, on the other hand, is another story. We've made some nice profits buying oil-drilling firm Patterson UTI-Energy (Nasdaq: PTEN) and selling a covered call. It looks like our 30% covered call premium will be a "lock". In fact, I wouldn't be surprised to see Patterson move higher fast enough for us to close the position early.
Now, for the first time ever, I want to own an integrated oil company in our portfolio. You might recall during the big inflation of the 1970s, oil was the top-performing asset. It did better than gold (No. 2). Imagine how big the gains might be, in dollar terms, if the world's major oil-producing nations begin to price oil in something other than U.S. dollars?
Look at price of oil measured in gold. What you see is how far oil has really fallen during this economic crisis. As OBAMA!'s stimulus spending kicks in and as many of the world's governments crank up the printing press, there's no doubt in my mind that the price of oil, as measured in dollars, is going to soar. But… as this chart shows… even if that doesn't happen, oil is cheap right now— about as cheap as it ever gets. That's the time to buy oil.
The cheapest major oil company stock right now is ConocoPhillips (NYSE: COP).
ConocoPhillips is trading for about three times cash earnings and at a significant discount to its real book value. (The current book value badly undervalues its 20% stake in Lukoil.) I believe the company could easily afford to buy back all of its shares at the current price— which makes ConocoPhillips a safe stock. If you add up the value of all of Conoco's shares and all of its net debt, you come up with an enterprise value of roughly $85 billion.
If you wanted to own the entire company, that's what you'd have to pay today. If you went out and borrowed the money, you'd have to pay maybe 10% a year interest on those bonds. So for Conoco to afford to buy itself, it would need to be able to pay about $8.5 billion per year in interest, plus have some money left over to save for principal payments. The company made $22 billion last year in cash. This is a very profitable company, selling for a very cheap price.
But even more importantly for our purposes, it owns a basket of energy assets that are unique in North America— including several assets that are simply irreplaceable. Most notable are its 28% ownership stake of the Trans-Alaska Pipeline and its 70% interest in the Kenai (Alaska) liquefied natural gas facility, which ships natural gas to Japan. Conoco is also the second-largest oil refiner in the United States and, as you may know, we haven't built a new refinery in the U.S. since 1976. These are great assets to own during inflation— they're irreplaceable.
We don't require much more analysis here because so much of the company's intrinsic value is determined by oil prices. The stock has gotten this cheap because most investors believe we face a long period of economic contraction. They haven't studied OBAMA!'s budget. A huge wave of spending is coming, and all of it will drive demand for power— electricity and gasoline. That's why three out of the five stocks in our stimulus package are energy-related.
Don't Forget Transportation
I know the rail stocks have been killed. But now is the time to buy them. [[Take a tip from Warren Buffet.: normxxx]]
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Inflation Hedging: How To Protect Your Portfolio
By David Fessler | 31 May 2009
Right now, the markets are caring about one thing: inflation. And they’re starting to get a little edgy. They need inflation hedging. Why? The U.S. Treasury is printing money and dumping it into the financial system at historically unprecedented rates, in an effort to stimulate the economy. Chances are good that the Fed won’t know when to stop the printing presses. Continuing to print money only exacerbates the potential inflation problem and deepens the hole.
And it’s quite a hole.
Jessica Hoversen, Fixed Income Analyst at MF Global, had this to say on CNBC: "The ratio of U.S. budget deficit to [gross domestic product] GDP is at the highest level since World War II". The government thought process goes something like, "If some stimulation is good, more will be even better". And most politicians, who are always looking ahead to the next election, won’t want to risk their futures by cutting off ANY economic aid prematurely.
It goes on and on. The real problem though, is that all of this economic over-stimulation sets us up for inflation. It’s something every investor should guard against in his or her portfolio. And it’s why we’ve got the best four investments for you to hedge against inflation’s impact.
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The Tried and True Inflation Hedge— Gold
Silver
Gold
These days, many think of gold as a great investment for its safety and growth. And solely based on the amount of direct-mail advertisements I get from gold bugs, you’d think it was the only investment worth keeping. But in fact, it really is an effective inflation hedge against a declining U.S. Dollar and an inflationary economy. [[And it holds up better than most investments even in a recession/depression— as recent events have proved— though you can get (temporarily) killed if you invest in just the mining stocks.: normxxx]] It’s why every investor should have some exposure to gold in his or her portfolio. As part of our Asset Allocation Model, we recommend 5%. [[I would recommend at least 10%— split evenly between mines and the bullion/ETFs. But try to accumulate it over time on its frequent pullbacks. For the immediate future, inflation is not likely to be a threat— but sovereign debt default seems to be. In any case, even the CBs are once again accumulating gold!: normxxx]]
For all its benefits, there are currently two problems with the physical metal: It’s in great demand— and therefore hard to get— and purchasing it requires a stiff premium— in some cases, 10% or more— when and if you do find bullion or coins to invest in. A much easier way is to pick up a few shares of SPDR Gold Trust ETF (NYSE:GLD), which seeks to replicate the price performance of gold bullion. Shares of GLD trade at the ratio of 10 shares to one ounce of gold. This investment trust holds the physical metal for investors in vaults: You can see what those gold vaults looks like. [[But remember, when the s--t hits the fan, 'paper gold' may not be nearly as safe as the real thing!: normxxx]]
HSBC Bank (HBC) serves as the custodian of the trust’s physical gold, and recently had to move it to a larger vault to accommodate growing investment.
A Stand-Alone Inflation Hedge— Inflation-Adjusted Treasuries
Our next inflation hedge is inflation-adjusted Treasuries (TIPS). These investment bonds stand alone in the investment world, as they’re the only investment guaranteed to beat inflation. [[Well, almost, if you believe in the 'official' government figures of inflation. For an independent view, check here. : normxxx]]Essentially, they are Treasury bonds that hedge against inflation— the bondholder gets an interest payment twice a year, just like a standard Treasury note. But the catch here— and it’s a good one— is that the bond principal increases each year by the amount of the consumer price index (CPI). And so does the amount paid in interest, which is exempt from state and local (but not federal) taxes.
While the bonds themselves can be purchased directly from the U.S. Government or any broker, the easiest way to participate in them is through the iShares Barclays TIPS Bond Fund (AMEX:TIP). This fund seeks to duplicate the return of the Barclays Capital U.S. Treasury Inflation Protected (TIP) Securities Index. And while regular Treasuries have lost 3.9% (including interest payments) this year, TIPS have returned 3.6%. That’s a full 7.6% better return than Treasuries with the same amount of safety.
Hedging Against Inflation With Energy Stocks
Our third hedge against inflation is energy stocks because energy figures into the cost of just about everything. And since oil and natural gas are priced in dollars, an inflationary cycle tends to raise the price of energy and energy-related stocks. Of course, even without inflation, the long-term trend for energy prices is one way: up. Inflation will just add fuel to an already burning fire (pun intended).
Rather than looking at individual energy stocks, however, consider a shotgun approach in the form of an energy exchange traded fund or ETF. One we like for its low fees and solid performance is the Vanguard Energy ETF (NYSE:VDE), which seeks to replicate the performance of the Morgan Stanley U.S. Investable Market Energy Index. It’s up over 29% since its March low.
Made up of a diverse group of large, medium and small cap companies in the energy sector it provides wide ranging coverage of the sector. In addition, it includes companies such as drillers, equipment providers, exploration, refining marketing and production and transport of oil and gas products. As I find energy and infrastructure some of the most interesting opportunities in the markets today, investing in energy companies allows us to easily align our hottest investing ideas alongside inflation protection.
A Final Inflation-Protection Hedge- Commodities
Our final inflation-protection hedge is in commodities like wheat, cattle, fertilizer, and base metals— all usually rise during inflationary periods. [[But extraordinarily vbolatile!: normxxx]] Until recently, profiting from commodities involved commodities futures trading, something that most people know little about. But now investors can leave the fancy and complex futures trading to the experts, and reap the benefits as commodities rise.
The Pimco Commodity RealReturn Strategy Fund [MUTF: PCRDX] invests in both leveraged and unleveraged commodity-linked index notes to match the return of the commodity futures markets. The fund also uses other fixed-income instruments like treasuries and preferred stocks to increase returns and lower the volatility that is commonly associated with investments in commodities.
Well, there you have it: four great ways to protect your portfolio against the coming inflation wave. In the coming weeks and months we’ll bring you additional ideas in these areas. Regardless of how you do it, in the current environment, investors need to keep their eyes focused on inflation. And as the global economic engine shifts into higher gears it will likely become an even more significant factor.
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