An understanding of the current economic realities and trends suggest that investing in natural resources (i.e. energy, agriculture and minerals – and especially gold and/or silver) - is virtually guaranteed to be the most investor-friendly sector. Below we outline the economic storm we are about to experience, how best to prepare to withstand the expected hurricane winds, high seas and torrential downpours and which safe haven investment alternatives to invest in to ride out the storm of the century and prosper in the years ahead.
Why Future Economic Realities Will Adversely Affect Our Approach to Investing
a) Increased Volatility:
The period ahead will be marked by much uncertainty and increasing anxiety in terms of economic direction which will lead to dramatic volatility in the financial markets.
b) Lower Asset Prices:
Asset prices generally, but not commodities, are expected to continue to drift lower.
c) Higher Interest Rates:
While interest rates are currently at multi-decade lows, they will not remain there indefinitely. The inevitable rise in interest rates will become the trigger for a variety of new financial and economic crises affecting both governments and the private sector.
d) Bursting Asset Bubbles:
Record low interest rates initiated and imposed by central bank policy have caused several financial bubbles…the technology sector which burst during the 2000/02 period was followed by the residential real estate sector which peaked in 2006/07 in the U.S. Moreover, the market price bottoms for residential and commercial real estate have not yet been reached. Excessively low interest rates led not only to asset bubbles but to easy credit, borrowing and excessive leverage. The consequences are serious disruptions in the broader economy starting with the financial sector and now the government sector with its unprecedented deficits and debt. The unprecedented magnitude of credit, lending, borrowing and leverage has all been the negative hallmarks of the current bubble economy.
e) Continuing Debt Crises:
Financial sector debt, personal debt and sovereign/government debt have become universal realities for which the consequences are still only partially visible. They also continue to grow. Nations experiencing the greatest financial stress are mature advanced economies which include the United States and much of the EU and Euro zone of western Europe and Japan. Excessive borrowing, government deficits, debt and future unfunded liabilities dominate their financial landscape. (See here for one of Bock’s previous articles on Sovereign Debt)
f) Slower GDP Growth:
With the partial exception of a few nations of the developed world whose economies are based on natural resources (Canada, Australia, New Zealand, Denmark, Norway, Sweden and Finland) most other developed nations are incapable of growing and taxing their economies sufficiently to avoid future debt default, dramatic currency devaluation, monetary inflation, debt monetization and price inflation leading to various forms of insolvency. Germany and the Netherlands are likely exceptions and will be among the few survivors which include countries rich in natural resources.
How to Prepare for Such an Investing Environment
1. Pay off debt - get liquid and save.
2. Don’t buy on credit - unless the rate is locked-in for the long term.
3. Don’t “buy and hold” - such advice was common among investment counselors over the past many years – but times have changed.
4. Avoid high fee investments - too much of your equity and profits will evaporate buying investments with heavy purchase and/or sales fees, and particularly ongoing management/administration charges. Consider sector ETF’s (Exchange Traded Funds) as an economical replacement, but which share certain of the advantages of mutual funds and regular market traded stocks.
5. Consider discount online brokers - an economical alternative to full service brokers for the purchase and sale of securities and ETF’s.
6. Don’t make frequent buy and sell transactions - trading and speculating is best left to knowledgeable and experienced professionals.
7. Keep informed - read extensively, ask questions of persons without vested interests in the sale of financial products, and resist the hype of the popular financial media.
Where You Should Invest
1. Consider investing in securities other than fixed income/fixed interest rate investments such as bonds, financial institution CD’s and money market funds. Higher interest rates lie ahead (in fact they are guaranteed!) which will invariably cause the price of one’s current fixed income investments to plummet. Contrary to popular opinion, one can lose equity on government and investment grade corporate bonds in a rising interest rate environment, especially on those bonds with longer dated maturities.
2. Consider investing in securities and other assets denominated in more than one currency. The ramifications of currency devaluation brought about by excessive money printing (i.e. quantitative easing/debt monetization) will otherwise indirectly lead to a reduction in the value of your investments.
3. Consider investing in stocks of companies with a large percentage of their income derived from emerging markets to hedge against currency devaluation as well as from dislocations in the economic and financial markets of your own country.
4. Consider investing in securities and assets denominated in currencies other than the U.S. dollar. It will become increasingly dangerous to one’s financial health in the future to continue to place all one’s investment eggs in the U.S. basket. An exception is to invest in American companies which obtain a majority of their income from business activities in foreign countries and emerging markets (Warren Buffett frequently advocates asset diversification of this kind).
5. Consider investing internationally by making select investments abroad before further restrictive barriers to the movement of your money are erected. Economic crises invariably bring about sudden and previously ignored changes to public policy, such as foreign exchange controls, which can be highly negative for investors.
6. Consider investing in Emerging Markets in order to achieve a more balanced investment portfolio. Countries holding the most potential in the period ahead include the (BRIC) countries of Brazil, Russia, India and China as well as Indonesia, Thailand, Singapore, Taiwan, Malaysia, South Korea, Vietnam, Turkey, Chile, Colombia and Peru for their economic potential and relative political stability.
7. Consider investing in resource based nations of the developed world such as Canada, Australia, New Zealand, Denmark, Norway, Sweden and Finland. The currencies of such financially vibrant nations invariably rise in value when compared to the declining value of currencies of nations in decline.
8. Consider investing innatural resources which are almost guaranteed to be the sector most likely to benefit during the period ahead, especially when the global economy experiences substantial forward traction. The primary resource sectors of Energy, Agriculture and Minerals are and will be the most investor-friendly sectors. (See here for one of Bock’s previous articles on the merits of investing in Commodities)
9. Consider investing in the energy sector which is most likely to pay off handsomely beginning with Oil, along with its ancillary businesses such as transportation/pipelines, oil service companies, etc. Nuclear electric power generation is likely to re-emerge because of its ability to produce large quantities of electricity in an environmentally friendly fashion at prices less than other ‘green’ technologies. Shale sourced natural gas and hard/steel making coal also warrant consideration.
10. Consider investing in the primary agricultural grains of rice, wheat, corn and soybeans along with their processors and distributors, fertilizer manufacturers, seed and chemical suppliers as well as machinery suppliers.
11. Consider investing in minerals, especially base metals, which are absolutely necessary in order to develop massive public infrastructure and products for the rapidly developing world with 6.5 Billion growing population.
12. Consider investing in precious metals. Not only is global population growth continuing unabated, people in emerging markets are rapidly entering the middle class from basic standards of living. Elevated demand for quantity and quality of life’s amenities beyond basic needs will fuel much added demand for basic materials and resources needed for manufacturing in order to satisfy growing middle class needs and wants. Precious metals, especially Gold and Silver, have industrial applications as well as being stores of value/money…especially gold. (See here for one of Bock’s previous articles on Why Gold is Going to $10,000 – by 2012!)
Conclusion
With paper/fiat currencies susceptible to rapid devaluation caused by rampant and out of control ‘money’ creation by their respective governments, ‘tangibles’ of all kinds including natural resources and real estate (after it has reached a reduced equilibrium value from prior bubble levels) are preferred investments in this type of environment.
