Porter Stansberry: A “100-year storm” is approaching
From Porter Stansberry in The Stansberry Digest:
In today’s Friday Digest, I’d like to make a simple but crucial point. I doubt you’ve ever seen this topic analyzed in this way before… And I believe having this information could change your life.
As longtime subscribers know, I personally write the Friday Digest. When I sit down to write to you, I always do so with one thought in mind: If our roles were reversed… if you were the investment analyst and I was the subscriber… what would I most want to know right now?
This week, I want you to understand something you probably have never thought about before in your life. Right now, a 100-year storm is hitting the world’s currency markets. This storm has already wiped out the savings of millions of people. It’s going to get worse – a lot worse. And most Americans have no idea how much they are in jeopardy.
The Russian ruble has fallen more than 50% over the last year against the U.S. dollar. That’s the biggest and sharpest decline in Russia’s currency since its treasury defaulted on its sovereign debt back in 1998. This move leaves millions of people in Russia with a far lower standard of living. Their bank accounts are now worth half as much (in terms of purchasing power), and these people are trying to survive on wages that have been effectively cut in half…
“That’s Russia,” you might say. “Who cares? What does that have to do with us?” Well, all around the world, currencies are collapsing. Here’s a picture of what’s happening with the Canadian dollar…
Here’s what’s happening with the Australian dollar…
Here’s the Japanese yen – the currency that backs the world’s second-richest economy…
And here’s the euro – the currency in the world’s biggest economic area…
So, why do governments always debase their currencies? It doesn’t make sense… at first. After all, debasing your currency robs people of their savings and takes away the value of their wages.
Yes, debasing the currency wipes out most citizens. But it can also enrich certain special interest groups. For example, with the ruble, think about what happens to a company like Russian natural gas company Gazprom (which Russian President Vladimir Putin is rumored to own through various proxies). Gazprom sells natural gas to foreign markets – priced in dollars and euros. Meanwhile, almost all of its expenses (and much of its debt) are priced in rubles. Companies in these situations – exporters – can create vast amounts of wealth almost overnight, assuming they’re positioned correctly.
The most important reason governments always debase their currency: It allows debt to be repaid cheaply. Governments always want to spend far more than they can raise through taxes. Sooner or later, these debts must be paid off. And the No. 1 way governments chose to pay down their debts is simply by printing money to do it.
Likewise, using paper money – which is constantly expanding – allows governments to “socialize” financial risks, while allowing certain favored groups (like banks) to reap windfall gains. For example, by guaranteeing depositors’ savings, the FDIC allows banks to use massive amounts of leverage. There’s no way any major U.S. bank would have survived 2008-2009 if the federal government hadn’t guaranteed the money depositors held in U.S. banks. And the only way the FDIC could make good on its promise to pay is with a printing press.
This gives the government massive amounts of power. It allows the government to tax you (by debasing the currency) without you even knowing it’s happening.
Here’s what you have to understand… All of the world’s most powerful countries are broke. The European Union has government debts that are roughly equal to its entire gross domestic product (GDP)… likewise, in the U.S. In Japan, government debts are a massive 225% of GDP. These countries have no choice but to debase their currencies.
And so… that’s how I know the big falls these currencies have taken around the world are actually warning shots… even though in the short term they make the U.S. dollar seem like it’s getting more valuable. Our currency will certainly follow them down. It must.
Most Americans have no idea how much debt has been added by the federal government since 2008. Our national debt has doubled in only seven years. These debts are in a complete “runaway” mode. They will only increase at a faster and faster pace. Sooner or later, the government will print truly insane amounts of money just to finance these debts. It’s inevitable.
Consider the following chart. Over the last 10 years, the price of gold has increased, in U.S. dollar terms, by more than 200%. In yen, gold has risen more (by almost 250%), likewise in euros. Even in the supposedly reliable Swiss franc, gold prices have increased by 134%.
What most people don’t understand is that the real value of gold hasn’t changed at all. Gold is an economic constant. For thousands of years, an ounce of gold has purchased the equivalent of a fine men’s suit. It still does.
Gold’s real value doesn’t change because all of the gold that has ever been mined is still in existence. Additional mining barely increases to the total supply of gold. That’s what makes gold such a unique form of money: Its value never changes.
What’s changing is the value of these paper currencies. They’re being massively debased. And the stunning falls of the currencies I mention above are warning shots. Our dollar will soon follow. For paper money, the race to zero has begun.
Sooner or later, this entire system will collapse. (I don’t know when. No one does.) Paper-money schemes have a perfect historical record: None has ever lasted. Eventually, the economic dislocations caused by volatile currency values become so bad that the entire system collapses.
Consider if you were a multinational company trying to invest in one of the countries whose currency has collapsed in the last year. Sure, you can hedge your currency risk (at some expense) for a few years. But major capital investments are designed to last for decades. How can you hedge the risk of a currency collapse over a decade? You can’t. So you don’t invest.
Now consider the poor suckers who are financing these governments’ debts. Your investment in Russian bonds just fell 50% in a few months. You won’t make that mistake again. Borrowing costs will soar for countries that debase their currency again and again and again.
The fascinating thing to me is that while Americans know this happens in other countries all the time, few realize that not only will it happen here – it already is happening. When you hear on the news that the dollar went “up,” they’re comparing it with other major currencies.
What nobody mentions is that the entire paper currency system is collapsing upon itself, losing value every day. Over the past decade, the world’s major currencies have lost their purchasing power (measured against gold) at an incredible pace of 12%-15% every year. As the race to the bottom heats up, these rates will continue to increase.
For holders of paper money, a huge reckoning is coming. It will be like nothing they’ve ever experienced or even imagined. Let me tell you one firsthand story of what it’s like…
I’ve traveled to Argentina for many years. My good friend Doug Casey loves the country and its people. (See his retirement bolt-hole destination at www.lec.com.ar.) Back in the 1990s, Argentina’s government promised to stop devaluing its currency. It had a long track record of massive defaults and devaluations. Most wealthy Argentines kept all of their money in Uruguay and denominated in Swiss francs.
But year after year, the Argentine government kept its word. Its central bank kept a U.S. dollar in the bank for every single peso in circulation. This kept the peso at parity with the U.S. dollar. Even during the 1998 Russian default crisis, when interest rates on peso deposits went well over 10% annually, the Argentine central bank maintained parity.
These attractive interest rates eventually drew in many local depositors. And it was far cheaper to borrow U.S. dollars than to borrow pesos (because the interest rates were high on peso deposits). So many Argentines borrowed for mortgages in U.S. dollars. And for several years, everything seemed fine… But of course, Argentina’s government didn’t cut spending. Its debts mounted.
Finally, in 2001, it became impossible for the government to finance its debts. They had grown far too large. And you know what happened next: First, the government closed its banks. It turned off the ATMs. There was no way to get your money. Then, it devalued the peso by about 75%. And then the government decreed that all local dollar deposits would be converted into pesos.
Millions of people had their savings stolen from them. Worse, people who had borrowed in U.S. dollars had no way of generating enough income (earned in pesos) to repay their loans. Housing prices collapsed.
Between 2002 and 2007, I went to Argentina with Doug Casey, Bill Bonner, Steve Sjuggerud, and others a half dozen times. I traveled extensively in Patagonia and Salta province (Northwest Argentina) looking at huge estancias, beautiful vineyards, and immense mansions. They were all for sale – for pennies on the dollar – because their formerly wealthy owners had been wiped out. Many of the people we met on these journeys – our guides, translators, drivers, etc. – had been successful, upper-middle-class people. The devaluation destroyed their lives.
These experiences have burned into my mind a tremendous fear of government-managed currencies. No matter what our politicians say, no matter what they promise… you cannot afford to believe them. You cannot afford to keep your wealth in U.S. dollars. You cannot. You will get wiped out. And this collapse is coming – a lot sooner than most people think. It is already happening.
What should you do? First and foremost, do what you can to limit the amount of currency you own and avoid all investments (like bonds) where your income is a fixed amount, denominated in dollars. Instead, opt for owning gold (for safety), real estate (for income), and certain kinds of stocks (for growth).
With gold, I prefer to buy simple, plain bullion coins. I also like to buy Saint Gaudens rare coins when I can get them for small premiums over melt value.
In real estate, I’ve bought low-cost rental apartments in good markets – not sexy stuff, but real estate that provides me with a great yield. I bought a farm two years ago using capital I borrowed for 30 years at a low fixed rate. I didn’t need to borrow the money, but I wanted to because I don’t believe the dollar will be worth much in 10 years, much less 30. I’m buying a timber property this month. Timber, especially if you can manage it yourself, can be very lucrative, providing both growth and income.
The kind of stocks you should buy are companies that have no trouble raising prices, whose assets are intangible. That’s not the approach most investors would expect.
Most people, expecting inflation, would argue that you should buy a gold mine. I disagree strongly. Gold mines are terrible businesses. What the operators are doing is selling off their balance sheet to produce profits. Meanwhile, they have to go out and buy another mine to grow production. Inflation will make that extremely costly. The net result for the mine’s owners will not prove to be attractive.
Instead, you want to find a business that doesn’t require capital additions to grow. My recommendation of candy maker Hershey is a great example. Sure, Hershey’s raw material costs will increase. But Hershey will be able to increase prices to more than make up for that problem. And, its most valuable asset – its brand – doesn’t require capital additions. The vast majority of my wealth is invested in companies (including my own) that have this advantage.
Finally, I’d recommend owning 5%-10% of your equity portfolio in companies that own high-quality gold deposits or royalty rights on those deposits. Note that I didn’t say a mine. I said deposits. Gold in the ground is a great thing to own, if you can buy it cheaply, provided you have the ability to ignore the volatility. Just remember: The price of gold isn’t changing. It’s the dollar’s value that’s changing. And it’s going to collapse at some point in the near future. It’s a lock.
Nobody in the world is better at finding these companies than our friend John Doody. His proprietary method for valuing these types of gold companies has vastly outperformed any other type of gold investing we know of. John personally invests this way… and has made more than $10 million doing so. I can’t recommend his services highly enough.
If you invest in gold stocks – or if you’ve ever considered investing in gold stocks – John’s Gold Stock Analyst advisory is a must-read. For a limited time, John has agreed to offer Stansberry Research subscribers a 50% discount. Click here to get all the details (without sitting through a long promotional video).