Article Image

Twelve Days of Christmas Digest series

Written by Subject: Economy - Economics USA
Goldsmith comment: The Digest crew is taking a break for the holidays, but we couldn't leave you empty-handed... So we're bringing back the Twelve Days of Christmas Digest series. Normally, when we run our holiday series, we "re-heat" old Digests. This year, we're doing something special. We've conducted three exclusive interviews to discuss three important investment perspectives. The interviews are with Porter Stansberry, David Eifrig, and Matt Badiali.

We'll begin the series with Porter Stansberry discussing his End of America theme. We've asked Porter what problems America faces today, exactly what you can do to protect yourself, and what he would do to fix these problems. Plus, Porter reveals a never-before-heard prediction involving a freedom U.S. citizens will lose in the next two years.

Before we get to the interview, if you haven't already seen Porter's End of America video, on which this interview is based, you can watch it here...

Sean Goldsmith: Okay. So, Porter, you recently made the video, The End of America, and it's been getting huge media coverage. I know you just recently did a radio interview where it was broadcast to millions of people. So what spurred you to make this video?

Porter Stansberry: I've been working on these ideas pretty consistently since 2005 because I believe the growth of the debt in the U.S. economy were unsustainable and that it eventually was going to have very serious consequences for the American people. It was time to make the video because a lot of that debt which had been private is getting placed into government hands. So the public is bailing out a bunch of people who made bad choices when it came to debt, and the result will be a tremendous crisis in the value of our currency because the Federal Reserve and the Treasury have taken on more debts than they can possibly afford.

SG: So the government already isn't your biggest fan, and now you're saying it's bankrupt. Are you expecting any backlash for this?

PS: Certainly the government does not approve, in many cases, of the things we write, because we don't toe the line when it comes to the bailouts and companies like General Electric that have basically become the for-profit wing of the Obama administration. So I'm used to that kind of criticism and pressure from the government, and I expect that the bull's eye on me will get larger with the success of this video that I've produced.

SG: It's good you're at least getting the message out. So I know a lot of your work started years ago when you started looking at Fannie Mae, Freddie Mac, and GM and you noticed that these companies were in a lot of financial trouble. So how did you know that these companies were going to fail?

PS: Let's talk about another company just to introduce a new name. I think people are very familiar with my work on General Motors and Fannie and Freddie. But I'll point out to you a different thing I was following, which was in Las Vegas – the rise of MGM.

I can't remember whether it was in 2005 or 2006, but I went to Zurich with Steve Sjuggerud, and we were looking into supplying large amounts of bullion to our readers. We wanted to buy older European sovereign coins, and Europe was supposedly where we could find them.

So we were talking to the banks about buying these 100-year-old coins, and at the time, they were actually trading for less than melt because people thought they had no real value, so it was a good time to be in Zurich. And I happened to run into one of the guys who built the Mandalay Bay. He was a Las Vegas developer. The Mandalay Bay, as I'm sure you know, is a huge hotel complex at the end of the Strip, and it has a Four Seasons Hotel – it was a very, very big project.

He had just sold it to MGM for $8 billion, and he was in Zurich buying gold. I thought to myself, "Huh. That's pretty interesting." When a guy who's spent his life building Vegas cashes out and buys gold bullion in Zurich, that's a sign of something important going on in the economy, so I started looking into the deal where he had sold Mandalay Bay to MGM.

It turns that MGM bought Mandalay Bay at a price equivalent to $2 million per hotel room. So you start doing the math on this, and you're trying to figure out how could it possibly be profitable to buy a hotel for $2 million per hotel room.

SG: Seems rich.

PS: And, of course, as we know now, it was way too rich. It couldn't even be financed. The whole thing has fallen apart, and now MGM is selling itself off piece by piece to help repay these terrible debts. Treasure Island was sold about a year ago to another well-known Vegas entrepreneur, and the price of the sale was about $50,000 per hotel room. I don't think it takes a rocket scientist to realize companies that do things like buy hotel rooms for $2 million a piece and then sell them five years later for $50,000 a piece are not going to be good investments.

SG: Sure. So there was definitely an "Aha" moment with MGM. You met this Vegas guy in Zurich and you saw the moves he was making. Were there other "Aha" moments for your other big calls?

PS: Oh, there have been dozens of these moments. There's been madness all around. I know some people very well who haven't made a mortgage payment since January 2007, and they're still in their homes. The process of following these bad debts started when I saw people in businesses making decisions with their capital that didn't make any sense, that couldn't possibly be profitable.

I saw one deal, for example, back in the mid-2000s, where a developer was selling land on the Galapagos Islands. The Galapagos Islands are in the middle of the Pacific Ocean, about an eight-hour flight away from Ecuador. So Ecuador is about 10 hours from anywhere, and then Galapagos is another basically 10 hours from there. So this is pretty much the definition of the middle of nowhere.

Now keep in mind, it's also an ecological preserve. So you're not going to be allowed to build anything or dig a well or anything like that. And the developer was selling lots on Galapagos for $50,000 an acre. Unfortunately – I'm not making it up – that was a true real estate deal I saw happening at the time. I also saw people who had been dirt-poor farmers in Panama and had sold their 1,200-acre ranches for millions and millions of dollars, and I knew that none of these deals could possibly pay off.

So I started following the debt trail: Where's the money coming from? Who's creating it? And I found where all the money was going, and all the money was going basically into the investment banks and into Fannie Mae and Freddie Mac, and that made them ripe to fail. The problem now is that all those bad debts have been passed along to the balance sheet of the U.S. Treasury or the balance sheet of the Federal Reserve. They have not been repaid, they have not gone away, and now all those problems have become a critical cancer on the U.S. government itself.

SG: So you say the banks' bad debts have moved to the Treasury. Can you briefly explain how that process works? How the money actually moved?

PS: In many cases, it was simply a purchase. So for example, the Federal Reserve bought up all of Bear Stearns' bad mortgages. It's in a holding company called Maiden Lane, and you'll find it on the Fed's balance sheet. It's still there. Meanwhile, we know those mortgages that the Fed paid $1 for are now probably worth $0.10 to $0.15, so the Fed has an asset on its books that's stated at book value that's really worth almost nothing, and they're making up the difference by inflation, by printing a lot more money.

Likewise with the banks: They have, in some cases, given the banks large amounts of money, but the more diabolical thing they've done is they've structured the yield curve so that it's impossible for the banks not to make a fortune. They've done that by artificially holding interest rates very low on the short end of the curve, so banks can get money almost for free. Meanwhile, by printing more and more money, long-term rates keep going higher and higher and higher. All the banks have to do is borrow money from the Fed and pay almost nothing, and buy long-term assets like Treasury bonds that are yielding 3% and 4%, and they make the spread. So they get guaranteed, free money.

Of course, as everyone should know, money, to have any value, has to come from legitimate savings, and this printing and manufacturing of money isn't creating any real value in the economy at all. In fact, it's robbing all of us by the effects of inflation.

Goldsmith comment: Make sure to read tomorrow's Digest, in which Porter explains exactly what quantitative easing is, how it will affect our economy, and when the money-printing will stop. He also answers the question, "Is it too late for the U.S. to fix its problems." And again, click here to view Porter's End of America video.


Sean Goldsmith
Baltimore, MD
December 20, 2010 

Join us on our Social Networks:


Share this page with your friends on your favorite social network: