Cruxellaneous

Porter Stansberry: How to earn a safe 17% a year on your cash

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By Porter Stansberry in the S&A Digest:

How would you like to earn 17% a year for the next two years on an investment that's 100% guaranteed by the federal government of the United States? To pull off this trade, all you have to do is understand one simple concept. And it's something you should understand anyway, because it's the foundation of paper-money economics.

How many of your friends and neighbors are struggling to find a safe place for their money right now? All of them. How many people need a very safe way to earn 17% a year - enough money to pay for most (if not all) of their living expenses? All of them. So how can you get in on this deal?

All you have to know is one little secret about how the banking system works. That's it. The situation is open to everyone who understands how to play it. You can literally earn more in dividend yields alone over the next two years - in an investment that's 100% backed by the federal government - than most other people will make with all of their investment returns combined.

What's the secret? I can sum it up for you right here: The government needs banks to lend more money and it can make them do it. If you know the right way to play the system, you can have the government's printing presses running right into your pocket.

How is this possible? The whole trade is a play on central banking. I don't want to waste your time with more economics than you need to know... but you need to understand the main difference between paper-money systems (like the one we have) and gold-reserve systems, like the kind we had prior to 1913.

Here's the bottom line: In paper-money systems, the value of bank reserves is set by central bankers. So when the central bank wants to make lending more profitable, it can simply lower the cost of borrowing reserves. This allows banks to lend more money and to make more money doing so. In a gold system, the cost of reserves (bullion) is set by the free market. That makes it much more difficult for governments to manipulate the economy. What does this have to do with earning 17% safely? Let me explain...

Right now, America's central bankers have set the cost of bank reserves at an all-time low. They want to make it easy for banks to create more money through lending. And they want to make lending as profitable as possible, so the banks can recoup their housing-bubble losses. As a result, the profit margin on lending money is at its widest point since 2003. Banks' lending margins have rarely (if ever) been wider, thanks to the central bank's manipulation of short-term interest rates. Now is the time to buy banks. But which banks should you buy?

How about a bank that doesn't take any principal risk (it only makes loans that are 100% guaranteed by the federal government), that doesn't pay any corporate taxes (it's a REIT), and that pays out essentially all of its earnings in dividends. The current yield is more than 17% annually.

The bank I'm talking about is called Annaly (NLY). Annaly is a specialized kind of bank - a "virtual bank." It doesn't have branches or take deposits. Instead, it simply pays other banks to borrow money over relatively short periods of time. On average, Annaly is funding its capital base using loans that expire in two years' time. Annaly then takes this money and buys mortgage notes (which offer 100% principal protection from Fannie Mae or Freddie Mac).

In this way, Annaly is borrowing over the short term (two-years) to lend for the longer term (mortgage notes). Thus, Annaly is a pure play on the yield curve - the difference between the price of money borrowed for the short term versus money borrowed for the long term. And the yield curve has rarely been steeper than it is right now, meaning Annaly is making record-setting amounts of money. Thanks to its corporate structure (it is a tax-advantaged REIT), Annaly is required to distribute 90% of its profits directly to its shareholders.

As long as the Fed continues to manipulate the economy by holding interest rates at absurdly low levels, Annaly is going to produce enormous dividends for its shareholders. You can see the company's current results for yourself, here.

One word of caution... The trick to keeping the profits you'll earn in Annaly over the next two years is knowing when to sell the stock. There's a simple formula we've used successfully over previous banking cycles that will get you out of the stock in plenty of time. We will definitely be selling at some point in the next 24 to 36 months - after we've collected another 50% or so in dividend income.

Crux Note: You can get all the details about this safe income strategy with a subscription to Porter Stansberry's Investment Advisory. To learn more, click here.

More from Porter Stansberry:

The bankruptcy of the United States is now certain

Stansberry: Detroit's socialist nightmare is America's future

Porter Stansberry: The high-return/low-risk vehicle investors should place most of their money in

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