Natural gas collapse... Grantham turns bearish... The last bubble?... Who would ever do business with Goldman Sachs?... Where inflation comes from...

Here's something you don't see very often... The price of natural gas is in freefall and no longer seems tethered to the prices of other energy commodities. At current prices, the ratio between oil and natural gas is 25 to 1. The usual ratio is more like 8 or 10 to 1. We've been bearish for a long time on natural gas. But maybe it's time to buy gas and sell oil.

On March 10 – one day after the S&P 500 bottomed at 676.53 – Jeremy Grantham of Grantham, Mayo, Van Otterloo (GMO) sent a note to investors, titled Reinvesting When Terrified (free registration required), saying stocks were 30% undervalued. He urged investors to have a clear strategy for getting back into the market. Since then, the S&P has soared nearly 52% to more than 1,000 without a drawdown of 10% or more. And according to GMO, the market is now past its fair value of around 880, based on earnings estimates and historical P/E ratios. GMO sees "seven lean years" of a sluggish market ahead...

"The past 12 years have seen two bubbles that were really good for corporate profits," says Ben Inker, GMO's director of asset allocation. "Now things are unlikely to be anywhere near as good as people have gotten used to, because we're not going to have a bubble to help us."

While we greatly respect the bright guys at GMO, we would argue with them about the idea that there's no bubble. In fact, we would argue the bubble we have today – in U.S. government bonds – is not only the biggest bubble of the last 20 years, it's the biggest bubble of all time. Bankrupt countries don't normally pay less than 4% interest on their 10-year fixed-debt obligations. And sooner or later, all of our foreign creditors are going to realize the U.S. dollar isn't immune from inflation and the U.S. government doesn't walk on water. As I outlined on Friday, as the government's money printing creates inflation, the values of commodities, real estate, and stocks will steadily rise.

I believe one sector, in particular, will produce the biggest gains. And I recommended my favorite way to play this trend in my latest issue of PSIA. To learn more about PSIA, and access my most recent recommendation, click here...

As if we needed another reason not to do business with Wall Street firms... Today's top story on the Wall Street Journal website accuses Goldman Sachs of disseminating important trading information to its favored clients before releasing the information to the masses. Hedge-fund giants like SAC Capital and Citadel – who are responsible for several percent of the market's daily trading volume and pay Goldman huge brokerage fees – receive calls from Goldman every week about stocks the firm thinks will rise or fall...

And some of the information is contrary to what Goldman sends other clients. Goldman's proprietary trading desk also uses the privileged information to profit. Days later, Goldman will release its report to the rest of its clients, often after the stock in question has advanced... This, of course, is front-running clients, plain and simple. Goldman spokesman Edward Canaday told the Journal, "We are not in the business of serving thousands of retail customers."

I doubt an investment bank has ever issued a truer statement. These banks aim to first make billions for themselves and then make sure their biggest clients are happy. The little guy is an afterthought. Again, where are the customers' yachts?

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New highs: Annaly (NLY), International Royalty (ROY).

In the mailbag... Where inflation comes from. Send us your questions: feedback@stansberryresearch.com.

"I remain a subscriber because your research and opinions are highly informative, even if to re-enforce an occasional contrary view. Kudos on Porters natural gas and solar calls, for example... As a research service I wish you would help me and other subscribers better understand the workings of the financial system instead of headline hype to make your case. For instance, the Fed hasn't created any net new money since January 09, yet you keep talking about printing presses working overtime...? A little straight talk would help us struggling self-thinkers out tremendously." – Paid-up subscriber Erich Kellner

Porter comment: The Fed has been buying Treasury bonds in order to finance the soaring government deficit. Although it doesn't actually use a printing press to accomplish this "quantitative easing," the effect is exactly the same. The government is spending money – about $1.5 trillion a year – it hasn't raised in taxes. And it's spending about $900 billion more than it has borrowed from investors. While this kind of monetized debt won't cause a serious inflation overnight, it will eventually cause a crisis. Sooner or later, our creditors will tire of being repaid with a printing press.

"You said you liked to know if people agreed with you. I know I agree with most of what you say. I doubt any two of us would agree 100%, but on most of what's important, rest assured that probably most of us do agree with you. You call them like you see them. You don't wear the rose colored glasses that most liberals tend to, and even the conservatives now days seem to think the state of the US government is natural. Our founding fathers would probably be getting nauseous if they only knew what this country has become.

"I've told you before, report it as you see it, and let the chips fall where they do. That's a big reason of why I keep reading. If I wanted mind numbing, IQ killing garbage, I could turn on the evening news. Keep up the good work.

"I do have a question though. I've been looking for more info on those farming co-ops mentioned in a recent digest. The ones where you buy or subscribe in and get a portion of the crops. What Should I be looking for? I seem to be looking wrong lol. I like to research myself to see what I agree with and what I don't." – Paid-up subscriber Kurt

Porter comment: I don't know where my wife found the farm we use... but these co-ops are pretty common in Maryland/Pennsylvania. I'd try asking around at your grocery store's produce section. Just get the name of a few farms and call them and ask.

"My first reaction to seeing the XLF chart was, have you ever stood in front of a tsunami?" – Paid-up subscriber Bill Scheffler

"Porter – I can easily agree with your hypothesis that the unrelenting rise in the market is the early sign of the inevitable inflation being built into the economic pipeline. However, where is the VOLUME in the S&P to prove the entry of all of this cash into the market???? Volume is actually dropping." – Paid-up subscriber Fred Dexter

Porter comment: It's the summertime. And the "run up" I envision will take two or three years, at least. I'm sure we'll have corrections during this time. So you may be quite correct that stocks have gone too far for now.

Regards,

Porter Stansberry and Sean Goldsmith
Baltimore, Maryland
August 24, 2009

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