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Editor's note: Today, we continue our week-long series on how to protect the power of your savings from inflation. It's one of the biggest concerns for Americans. So far, we've shown you three simple, practical ideas for safeguarding your wealth. You can read them here, here, and here. This next installment is a must-read... One of the Best Trades of the Next Two YearsBy
Thursday, October 25, 2012
The stage is set for a global financial reset...
The central bankers in the U.S. and Europe plan to use inflation to wipe away their bad debts. That is their only hope.
They believe they'll be able to control inflation... that it won't end up getting out of control and destroying the monetary system they've built.
I believe they'll be proven wrong... eventually. But in the meantime, we have a nearly risk-free way to make huge gains in bank stocks.
My thesis is simple.
Despite the ongoing financial problems in Europe, both the European Central Bank and the U.S. Federal Reserve have the ability (thanks to the printing press) to stop any run on the banks.
Their previous actions ("quantitative easing") have committed them to an inflationary policy to save the banks and continue the monetary system as it exists today. And that means the world's largest banks will keep getting bailed out via continuous manipulation of the money supply.
That's what happened in the U.S. in the fall of 2008 and 2009. And that's what has happened in Europe, starting in December 2011. These policies will cause the value of many assets to rise substantially. Inflation is the salve that heals all financial wounds.
Consider Miami Beach, where I was living last winter...
I bought a waterfront property there in February 2011 for around $400 per square foot. Those properties are now selling for more than $1,000 per square foot. I've already received one unsolicited offer for the property. That's one small example.
Rising housing prices in Miami (one of the worst-hit areas of the mortgage crisis) will flow through to the balance sheets of these banks. It will take another 18-24 months... but it will happen. And as the bad debts turn into performing loans and the value of the collateral rises... some of the huge write-offs that were taken in 2008 and 2009 will be reversed.
Let's say rising prices lift the average value of Bank of America's assets by 10% over three years. That would increase the bank's equity by $200 billion. That's a huge increase for a stock with a $100 billion market cap.
The coming inflation will also cause banks' net interest margin to widen. That's what determines how much cash flow and earnings they generate. It's the difference between what they pay to borrow money and what they collect by lending it. As long-term rates rise because of inflation, banks' profitability should increase substantially because the Federal Reserve (and the European Central Bank) have fixed short-term interest rates near zero.
These two factors – rising asset prices and increasing net interest margin – should cause the share prices of many banks to double (at least) over the next 12 months. And because right now many banks are trading for less than book value, you can capture profits without taking on much risk.
Now believe me... I know what the reaction to this idea will be... Most of my readers will never buy these banks – or any others. Some of you will even stop reading because I've suggested what is, in your eyes, heresy.
How could I recommend buying banks when I've been warning of a collapse in the faith of the U.S. dollar... and just last year, was telling people to short banks?
I recommended shorting European banks last July when the European financial crisis threatened to boil over because the European Central Bank (ECB) resisted bailing out the banks as the Fed did here in 2008-2009. I reversed course and covered the short later that year. Then, following the huge ECB bailout of December 21, I changed my global view on stocks...
If the ECB is going to paper over the giant losses these banks face holding sovereign debt that's likely to default, shareholders face little risk and a much greater likelihood that inflation will propel asset values and earnings. Combined with the actions of the U.S. Federal Reserve (which is underwriting much of the ECB actions via swaps), this sets the stage for a global financial reset.
Please understand this... I am not in favor of these policies.
The inflationary path we are on will wipe out the middle class. Central-bank-created inflation enables speculators and Wall Street interests. It provides them with more and better ways to increase their wealth – via things like carry trades, leveraged buyouts, and net interest margin – at the expense of the entire nation.
These central bank policies and the resulting inflation will cause a huge rise in income inequality as real wages decrease and financial profits greatly increase. These policies will ultimately cause a severe breakdown in civil society.
This is how the "End of America" (a loss of confidence in our paper money) will develop. It's happened in dozens of other countries over the last few decades. It is the inevitable result of paper money systems and government-led central banks.
But thanks to these policies, you have a nearly risk-free way to make huge gains in bank stocks.
Good investing,
Porter Stansberry
Further Reading:
So far this week, Porter has shared three more ways to hedge against the "End of America." He sees a period of massive inflation ahead… and expects it to hit most Americans hard. If you want to keep pace with it, you can't miss these essays…
Market NotesBUSINESS IS BOOMING FOR CREDIT-CARD COMPANIES Today's chart notes the solid performance of Capital One. As Brian Hunt says, it's another sign that "things can't be all that bad" with the U.S. economy…
Over the past year, we've shown you the price strength in home improvement chain Home Depot and giant hotel operator Wyndham Worldwide as evidence that the U.S. economy is slowly improving. Now, we're citing the strong price action in one of America's biggest credit-card companies…
Credit cards are a good gauge of how the average U.S. consumer is doing. As long as people are using credit cards and paying bills, credit-card companies do well.
Last week, shares of Capital One surged to a new multiyear high. The stock is now approaching its highest level since before the 2008 financial crisis. Capital One's latest quarterly results showed that consumer purchases rose 9% versus the same period in 2011. More importantly, consumers aren't racking up new debt. Loan levels for Capital One are flat overall. That means people are paying off their credit-card bills before borrowing more.
With credit-card stocks this strong, "things can't be all that bad" in America…
– Larsen Kusick
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