Friday, 3 June 2011

4 Moves Every U.S. Investor Should Make

 

Tony Sagami

The jockeying for 2012 votes has already started, and you’re going to hear a lot about raising the debt ceiling as well as reducing the staggering amount of debt that our country is in hock for.

Do you think the U.S. government can eventually pay off its $14-trillion national debt? Ha! Dream on.

Since the 2008 financial crisis, the knuckleheads in Congress and the Federal Reserve Bank have spent and printed trillions of dollars.

Moreover, the Federal Reserve has kept interest rates at essentially zero and spent more than $2 trillion to buy back our own debt through QE1 and QE2.

Our annual deficit is now close to $2 trillion. Our national debt is closing in on $15 trillion. Our country’s unfunded liabilities plus national debt is close to $100 trillion. And our debt-to-GDP ratio is roughly 90%.

Laundry List of Big-Name Skeptics

Does all that sound a wee bit financially insane to you? Hey, a lot of smart investment professionals think so too.

  • Legendary Wall Street investor Stanley Druckenmiller called QE2 a fraud: “There is a phony buyer of $19 billion per week of Treasury Bonds.” The phony buyer he refers to is the U.S. government.
  • Outspoken guru Jim Rogers said he plans to short sell U.S. bonds with both hands and thinks you should too: “If any of you have bonds, I would urge you to go home and sell them. If any of you are bond portfolio managers, I would get another job if I were you, I would think about becoming a farmer.”

Hey, my father was a vegetable farmer, and I doubt that anybody on Wall Street could have kept up with him.

  • Lastly, municipal bond expert Meredith Whitney, called “one of the 50 most powerful women in business” by Fortune magazine, sees the United States in financial ruin with 50 to 100 cities defaulting on their debt in the next year.

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The Chinese Think We Are Nuts Too

A Chinese ratings agency said QE2 is “an obvious trend of depreciating the U.S. dollar” and “entirely encroaches on the interests of the creditors.”

Our own data from the Treasury Department shows that China, for the fifth straight month, cut its Treasury holdings in March by $9.2 billion to $1.14 trillion. That follows a $600 million dump in February.

Tell Us What You Really Think!

In April, Standard & Poor’s lowered its long-term outlook on U.S. debt from “stable” to “negative,” which prompted Zhang Jianhua, the head of research at the People’s Bank of China, to speculate that concerns that the heavily indebted U.S. government could default on its debt and drive U.S. interest rates higher.

Last month Yu Yongding, an adviser to the Chinese central bank, said China should stop buying Treasuries because the United States could default.

Financial reality is catching up to the United States, and our government’s Ponzi scheme of printing fake money to pay real bills is about to collapse.

What does all this mean to you as an investor?

#1 Minimize the amount of dollar-denominated assets you own. I’m talking about U.S. stocks, U.S. bonds, and U.S. real estate. Most of us can’t do anything about our homes, but we can shift some dollar-denominated financial assets into financial assets of strong, growing economies such as Brazil, Australia, Singapore, India, and China.

I favor China and the following ETFs could do well:

iShares FTSE/Xinhua China 25 Index (FXI): Seeks to track the performance of the FTSE/Xinhua China 25 index. This index consists of the largest 25 Chinese companies listed on the Hong Kong Stock Exchange.

PowerShares Golden Dragon Halter USX China (PGJ): Seeks results that correspond to the returns of the Halter USX China index. This index consists of 103 Chinese companies whose common stock is publicly traded in the United States. The index uses a formula that prevents the largest market-cap companies from becoming too large a component of the index.

Image: theatlantic.com

SPDR S&P China (GXC): Seeks to replicate the total return performance of the S&P/Citigroup BMI China index. This index consists of the largest 342 companies that are publicly traded and domiciled in China.

#2 Dump long-term bonds. A weak dollar and inflation begets higher interest rates. I believe the worst investment you can own over the next few years is long-term bonds. If you own any bonds or bond funds with a maturity longer than five years … dump ‘em!

If you want to profit from rising interest rates and are an aggressive investor, you should consider investing in inverse bonds funds. There are bond funds that make money when interest rates rise, such as Rydex Juno (RYJUX) and ProFunds Rising Rates (RRPIX).

#3 Load up on natural resource assets. The most obvious inflation hedge is gold, but don’t forget about assets such as oil, rare earth metals, poultry, cotton, cement, timber, copper, natural gas, wheat, potash, and even water.

Hard assets are one of the few asset classes that could thrive as the dollar declines and inflation accelerates. Hard assets companies, such as China National Offshore Oil Corporation (NYSE: CEO), Yanzhou Coal (NYSE: YZC), Sino Forest (TRE.TO) and BHP Billiton (NYSE: BHP), are worth taking a look at.

#4 Carry a stash of cash. In February, I instructed my Asia Stock Alert subscribers to reduce equity allocation and build up a safety net of sleep-at-night cash. You should do the same.

My favorite parking place is the Merck Hard Currency fund (MERKX), which invests in the short-term AAA debt of the world’s economies with the strongest economies and monetary policies. This fund is essentially a non-dollar money market fund with very low volatility.

As always, you need to do your homework and decide whether any of the securities I talked about in this column are appropriate for your personal situation and financial goals.

Lastly, since timing is everything when it comes to investing, you should wait for these securities to go on sale before jumping in or wait for my buy signal in Asia Stock Alert.

Best wishes,

Tony

P.S. If you are looking for more specific buy/sell recommendations on my favorite Asian stocks, please consider a subscription to my Asia Stock Alert for only $199 a year. I think it may be the best investment you’ll ever make.

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