Here is Porter Stansberry's latest newsletter...
A dire warning… UniCredit nears collapse… European banks can’t access funding… The big risk to money-market funds… One year since we launched our End of America campaign… The big Jim Rogers interview… Yeah, I'm a stooge…
In today's Digest… a warning. I want to make sure you understand exactly how big the risks are from the crisis that's been brewing in Europe for more than two years. You will see some of this material in my newsletter, Stansberry's Investment Advisory. But not everyone who reads the Digest subscribes to my letter. (To get the Digest, you merely have to subscribe to something from S&A Research…) And this information is simply too important not to share…
Here's the gist: Most of Europe's major banks are insolvent. But only in the last week have they lost most of their access to additional funding. Their key source of funding has been U.S. money-market funds. But these funds are bailing out of Europe as quickly as they can. The result is a run on Europe's banks. This crisis is now past the point where the authorities can hope to control the situation. We are now days (not weeks or months) away from the first major bank failures.
As you surely know by now, I have long believed Italy's UniCredit, one of Europe's largest banks, would be the first catastrophic bank failure there. I encourage everyone to access my March 2010 letter, where I explain the history of UniCredit… It will open your eyes to the serious risks we currently face.
Here's the problem with UniCredit. It holds more than 1.2 trillion euro in assets. But it only has 74 billion euros in equity. That includes nearly 24 billion euros in things like goodwill and tax losses – intangible equity that can't be traded or sold… things that are only really equity in the minds of accountants.
When you do the math, you discover that UniCredit is leveraged 24 to 1. That's risky enough. But when you understand what it owns – piles of European sovereign debt that's all going to have to be marked down substantially – you can see the fundamental problem. At 24 to 1, an average loss severity of only 4.1% wipes out the bank.
I'd estimate a fair evaluation of UniCredit's books will show an average loss severity of at least 10%, which implies actual losses of more than 100 billion euros. These are Fannie Mae- and Freddie Mac-sized losses. And Italy, which is already the world's third-largest sovereign borrower, doesn't have the money to bail out the bank.
Now, here's the really bad news… Out of all the major European banks, UniCredit has the highest amount of bonds coming due next year (2012) – 51 billion euros. Currently, its bonds are trading on the market at prices equivalent to four notches below investment-grade and eight notches below its official Moody's A2 rating. This is a very serious problem. The bank cannot operate without an investment grade credit rating. Nor can it possibly refinance the 51 billion euros. Compounding matters, the bank took a 14.3 billion euro loss in the most recent quarter that Bloomberg called "surprising." Surprising to whom?
I believe UniCredit has clearly reached the point where private investors will no longer provide financing. Its bonds are now trading at prices that indicate an eight-notch reduction in credit rating – prices at which the bank cannot hope to operate profitably. To raise desperately needed capital, it has organized a huge equity offering. The problem is, if investors won't buy the bank's bonds, why would they buy its equity, especially when so much of it is probably completely inflated in value?
The problems at UniCredit have already spilled over into the entire European interbank funding market. An unnamed bank executive in Europe told Reuters this week that "the market for unsecured funding with maturities that go beyond two years is literally dead." Given that Europe's banks can't presently fund themselves without government support… you should view the exit of the U.S. money-market funds as a run on Europe's banks. This crisis is very much underway.
Even with these facts in the market, most people – U.S. investors in particular – don't seem to understand this coming crisis will be much, much worse than the Lehman Brothers failure. We're not talking about the failure of a single bank – though it seems more and more likely that a single bank (UniCredit) will be first – we're talking about the failure of an entire system, the largest system of credit and banking on Earth.
You need to understand that these problems and Europe's inability to deal with these losses will have a huge impact on the world's economy and the U.S. financial system. Europe's banking system holds 55 billion euros in assets. That's the same size as the total debt (public, private, corporate) in the entire U.S. economy. Europe's banking system is four times larger than the U.S. banking system. And it is stuffed to the brim with sovereign debts that will never be repaid. This isn't a crisis… It's a catastrophe.
The main way these problems will spread to the U.S. is through money-market funds. As of September, 37% of the $1.5 trillion in U.S. money-market funds was invested in European bank bonds and CDs. Even though that's down from 51.5% in May, it still leaves more than $500 billion of U.S. assets in Europe's banks. The Federal Reserve cannot allow U.S. money-market funds to lose $500 billion. It cannot allow Europe's entire economy to collapse. Whatever the other risks – inflation, a panic out of euros and dollars – anything will be tolerated except a complete collapse.
Despite two years of study… I can't say when these problems will come to a head. But I do know how – painfully. Thus, all I can advise you to do is to be incredibly cautious. Wait for the volatility that's coming. I am 100% certain you will have vastly better opportunities to buy great assets and great businesses in the next several weeks or months.
My other core recommendation is for you to own plenty of gold (and silver) bullion. I've explained many times why this is so important, and I won't beat that dead horse again here… but consider this: Total central bank gold purchases in the third quarter more than doubled over the same period last year. This is the world fleeing to gold. This is the death of the U.S. dollar as the world's reserve currency. It's happening right now. And that means it will get more and more expensive for you to move out of the dollar. Don't wait.
Finally… a personal note. It was about this time last year I decided to go public with my warnings about the U.S. dollar's imminent demise and the risks our economy faced because of the unsustainable sovereign debts piling up in Western democracies. And about a year ago, I began to warn the public that large-scale civil unrest would happen – not just in Europe, but in America, too. Since that time, we've seen massive public protests in nearly every major U.S. city – and it will continue to get worse.
And about a year ago, I began to warn the public that the world would flee to gold and the dollar would lose its privilege. Since that time, central bank buying of gold has soared… And America's major creditors have issued warning after warning about the debasement of our currency. It was about a year ago that I began explaining – on TV, on the radio, and across the Internet – that our debts cannot be financed legitimately and the Fed would attempt to paper over our obligations. Since that time, we've seen the second round of quantitative easing (QE2) and now operation "twist."
I went public with these warnings – even agreeing to be on television for the first time in my career – because I believe these problems will destroy our currency and threaten our way of life. But I wish I had never done any of it…
You can't imagine how saying these things in the public has impacted my life. The personal attacks brought against me and the threats made against me and my family were truly unbelievable. The experience has made me completely rethink the way I live my life… the way I conduct my business… and even my willingness to remain an American citizen.
But one thing makes it all worth it. It's a pretty simple thing, too: I know I'm right. It won't be me or my family standing in the back of a huge line at the coin shop, after gold has tripled and there's no way to buy anything you need without it. Don't let your family end up in that position, either.
My staff is determined to build a radio show. They seem to think you'd enjoy hearing my voice – and thus getting a full dose of my cynicism and sarcasm. We tried to partner with Clear Channel, which offered to get us on XM radio and a bunch of local stations around the country, but it didn't work out. As you might guess… it's not easy for me to fit into the corporate mold.
So we're going to try doing it our way and see what happens. We're launching a weekly, roughly hour-long show Tuesday, November 22. We'll send you a reminder, and you can visit
www.stansberryradio.com to check it out.
We're proud to announce our first guest is Jim Rogers – one of the real living legends of finance. I've known Jim for more than a decade, and I'm grateful to get this time with him. I've also got a few questions to ask him that I know no else would dare ask. That's going to be our shtick.
I've got no patience for softball questions and pandering radio show hosts. You can count on me to take it to these folks, just like I take it to everyone else in the Digest. Future victims… er… guests… include Lew Rockwell, Rick Rule, Eric Sprott, Steve Forbes, and Marc Faber. Yes, you've probably heard these people before… But I promise, you've never heard them like this… you won't want to miss the fun.
New 52-week highs (as of 11/17/2011): None.
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That's not because we don't care about customer service – we do care. In fact, I'm certain I've spent more money, more time, and more training on our customer service staff than anyone else in our industry. We have more than 20 customer service representatives who work in our Baltimore headquarters. They all speak perfect English, and they are all college-educated.
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Now… with that out of the way… if you'd like to send me a note regarding our editorial content, please send it here: feedback@stansberryresearch.com. Please understand that while I promise to read everything you send, I can't and won't reply to your e-mails personally. I do select a number of e-mails to reply to in print. There is a choice example below…
"You are such an ass and stooge of the monied class! Occupy Wall street is all about saving the middle class not you overpaid Financial newsletter writers. You are the non-productive segment of society! Have you ever done an honest day's work in your life? Probably not. I rank you with the bottom feeders-bankers, lawyers, car salesmen, insurance co., etc." – Paid up subscriber "Markus"
Porter comment: Yeah… I'm a stooge. And I've never done any hard work in my life. That's it. That's how I launched my own business at 26 years old, recruited the best people in my industry, partnered with a leading entrepreneur, and then built the biggest business of its kind in the world… by being a stooge. Yep. That's exactly how it happened.
And I'm sure all of our subscribers who built their own companies from scratch did the same. Boy, I get it now. Instead of being a stooge, I really should have sat outside on the sidewalk for two months, screaming and moaning about how life isn't fair. That's far more productive.
