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Editor's note: This week, we're sharing a special three-part series from Stansberry Research founder Porter Stansberry. Porter says we are now approaching what will be the greatest legal transfer of wealth in history. The next two or three years are going to be terrible for most investors. But they can be GREAT for you, as he'll explain over the next three days...
This Will Be the Greatest Legal Transfer of Wealth in HistoryBy
Monday, November 9, 2015
Have you heard of Jet.com? It's a new online "marketplace."
I put marketplace in quotes, because Jet isn't really a marketplace at all. It's a facsimile of a marketplace. It purports to compete with Amazon – offering everything imaginable for sale. But unlike Amazon, Jet doesn't really have much to sell... or really any products at all. What it does have, though, is lower prices than other online retailers.
Currently, Jet lists 4.5 million products for sale on its website. But it owns almost none of them. Instead, Jet copies the products and descriptions of other online retailers. It then offers the same products on its website at a lower price.
When a Jet customer orders a product, a Jet employee goes to the actual online retailer's website and orders the product. It's then shipped to the Jet customer's home.
While Jet is losing money – a lot of money – on every sale, it plans to make up for the losses by dealing in huge volume. No, I'm not kidding. The company's business model is to build a huge client list by taking these losses and then, eventually, turn a profit by charging its users a $50 membership fee. A recent Wall Street Journal test of the website revealed the company lost more than $200 on the sales of 12 items.
Currently, Jet is valued at $600 million by the geniuses at Goldman Sachs, Google Ventures, and Alibaba.
I doubt Jet would be possible were it not for essentially unlimited amounts of nearly free capital it could borrow, courtesy of the world's investment banks. That much seems obvious...
For the past six years, the Federal Reserve (the central bank of the United States) and its major counterparts around the world have conducted an enormous monetary experiment.
As my research team and I have shown our subscribers again and again... not since World War II has the U.S. created so much paper money. Other nations, like Japan, have created even more "monetary stimulus." All around the world, central banks have been creating money out of thin air and buying trillions worth of government bonds and other "safe" forms of fixed-income securities, like mortgages.
This has driven down the cost of capital drastically in all developed economies. Academic and popular economists, like Paul Krugman, have endorsed these massive experiments. Politicians clearly believe in the "medicine" of central banks' massive currency printing and bond buying.
On the other hand, we've been fierce critics of these actions. Call us old-fashioned, but we believe in an older, more conservative "brand" of economics. In our experience, the creation of wealth always begins with the act of saving capital.
Interest rates, in our humble opinion, should be set by actual demand for capital. This demand ought to create interest rates that encourage thrift, economy, and savings. These interest rates would act as a brake on reckless speculation, forcing entrepreneurs and large businesses to consider what new projects are worthwhile.
But... what happens when capital is not created by the crucible of careful saving... and what happens when entrepreneurs pay essentially no cost to gamble? You get farces like Jet.
While the Federal Reserve's policies might spur economic activity, we do not see how lower interest rates necessarily create bona fide economic growth or actual wealth. By messing around with the most important price in all of capitalism (the price of capital itself), the Fed deliberately short-circuited the flow of information between consumers and producers and between borrowers and savers. Change the price system and you'll change behavior, because you're changing the information about incentives that people receive. And that rarely works out in the long run.
The Fed's policies have created several obvious bubbles in the financial markets...
One is in student lending. U.S. students have borrowed $1 trillion for college. Most of these loans were used to purchase vastly overpriced "online" educations of highly dubious value. Consider that in 2000 – just 15 years ago – the largest debt-funded college in the U.S. was New York University, a highly credible, long-standing institution that serves smart and ambitious students. At the time, former and current NYU students had $2.2 billion in student loans outstanding.
Today, the leading debt-funded college in the U.S. is the University of Phoenix, where $36 billion (yes, that number is real) has been lent to current and former students, almost all of whom received an online education.
Eight out of the 10 largest debt-funded universities are online schools. I'd estimate the debts used to fund these educations make up around 80% of all outstanding student loans. These debts will never be repaid. And the default tidal wave is starting right now.
Another bubble is in the oil and gas sector... Nearly all the growth in the U.S. high-yield bond market over the last decade is related to oil and gas exploration and production. Since 2010, more than $500 billion worth of new corporate debt was raised for U.S. onshore oil and gas producers. It's this capital that financed the oil boom – which is responsible for all the net job creation in the U.S. since 2009.
These debts cannot be repaid with oil prices at less than $60. And yet they're all coming due between 2016 and 2020.
As these debts go bad, even major oil companies will see their bonds downgraded and their dividends cut. For the banks, insurance companies, private-equity funds, and pension funds that provided this initial capital, there's a tremendous amount of pain ahead.
However... while the end of these bubbles could be painful for many people. It will be a tremendous opportunity for those who know what's coming and are prepared for it. You can be among them...
Investors who are patient and liquid will have an opportunity to buy exceptional assets at great bargains. Over the next two days, I'm going to show you how to be on the right side of what will be the greatest legal transfer of wealth in history.
Regards,
Porter Stansberry
Further Reading:
Earlier this year, we published a valuable four-part series in which Porter described the three most important concepts of investing that every investor needs to know. You can find all four essays below:
Market NotesNEW HIGHS OF NOTE LAST WEEK
Amazon (AMZN)... online retailer
eBay (EBAY)... online auctions Google (GOOG)... search engine Facebook (FB)... social media Expedia (EXPE)... online travel Southwest Airlines (LUV)... airline Delta Air Lines (DAL)... airline MGM Resorts (MGM)... casinos
AutoZone (AZO)... auto parts Advance Auto Parts (AAP)... auto parts Clorox (CLX)... consumer basics WD-40 Company (WDFC)... all-purpose lubricant Masco (MAS)... home improvement
Home Depot (HD)... home improvement Travelers (TRV)... insurance H&R Block (HRB)... tax-preparation service U.S. Concrete (USCR)... concrete NEW LOWS OF NOTE LAST WEEK
Goldcorp (GG)... gold stock
Kinder Morgan (KMI)... oil pipelines Vale (VALE)... diversified miner
Chipotle Mexican Grill (CMG)... burritos Whole Foods Market (WFM)... luxury grocer Wal-Mart (WMT)... retailer |
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