The Future Tense web page over the past few years has been focused on taking in global and financial economic news and providing an analysis on how that information would shape the world we will see tomorrow.
I am constantly asked where I would recommend putting money today to prepare for the changes ahead. Since it takes a significant amount of time to explain what I would recommend, I have decided to put it in writing here as a reference.
Before I begin, it is important to remember a few very important points:
1. I am not a financial advisor. You should contact a financial advisor before making any investment decisions.
2. Investment decisions for you and your family should be based on your personal goals and decisions should be suited for those personal financial goals.
3. The topics and investment choices discussed here are based on long term (3 - 5 year) movements in the market. I am not a short term trader or market timer. Violent, short term fluctuations are not only possible, they are likely.
4. I make absolutey no financial gain by readers using the recommended resources provided. These companies should be researched before using their services. I personally utilize some of them and members of my family do as well.
What Should I Invest In Today? (2011)
The topic we focused on entering last year is still the most important as we enter 2011: Inflation vs. Deflation
It would appear on the surface after the magnificent performance of both the stock market and commodities that inflation has won and the discussion is over.
This is far from the case. Prices rising is a symptom of inflation, it is not inflation itself. Inflation is an increase in the total money supply and credit. Deflation is a decrease in the total money supply and credit.
With a sharp contraction in consumer, real estate, business, and commercial loans, plus the coming potential for a contraction in government loans, deflation is still a tremendous headwind ahead of us.
To help understand this concept, imagine there is close to $50 trillion in total debt for our country. (This number is close to accurate) If that debt contracts by $2 trillion, down to $48 trillion, that means there has been a loss of $2 trillion to the total money supply which includes credit.
If Bernanke prints $1 trillion in new dollars, there is still a net loss of $1 trillion, which means we experienced deflation.
This is what is occurring today. The shadow money supply, also known as m3, is contracting faster than the Federal Reserve can create new money.
For this reason I feel that we have one more deflationary shock ahead of us at some point over the next few years, which will correct prices downward and bring strength to the dollar.
At that point, Bernanke will print a final nuclear storm of money to try and stop the deflation from occurring. This will create the final push upward, bringing massive inflation or possible hyperinflation.
My advice to an investor is to prepare for both scenarios utilizing the investment recommendations in each of the inflation or deflation scenarios below.
Please understand that in both scenarios I recommend holding 0% of your wealth in these areas:
1. American Real Estate
2. American Stocks
3. Long term Treasury Bonds
4. Municipal Bonds
5. American Corporate Bonds
Please also understand that 99% of Americans hold 100% of their wealth in these five categories. Also understand that 99% of financial advisors recommend holding 100% of your wealth in these five categories.
Let's begin...............
It would appear on the surface after the magnificent performance of both the stock market and commodities that inflation has won and the discussion is over.
This is far from the case. Prices rising is a symptom of inflation, it is not inflation itself. Inflation is an increase in the total money supply and credit. Deflation is a decrease in the total money supply and credit.
With a sharp contraction in consumer, real estate, business, and commercial loans, plus the coming potential for a contraction in government loans, deflation is still a tremendous headwind ahead of us.
To help understand this concept, imagine there is close to $50 trillion in total debt for our country. (This number is close to accurate) If that debt contracts by $2 trillion, down to $48 trillion, that means there has been a loss of $2 trillion to the total money supply which includes credit.
If Bernanke prints $1 trillion in new dollars, there is still a net loss of $1 trillion, which means we experienced deflation.
This is what is occurring today. The shadow money supply, also known as m3, is contracting faster than the Federal Reserve can create new money.
For this reason I feel that we have one more deflationary shock ahead of us at some point over the next few years, which will correct prices downward and bring strength to the dollar.
At that point, Bernanke will print a final nuclear storm of money to try and stop the deflation from occurring. This will create the final push upward, bringing massive inflation or possible hyperinflation.
My advice to an investor is to prepare for both scenarios utilizing the investment recommendations in each of the inflation or deflation scenarios below.
Please understand that in both scenarios I recommend holding 0% of your wealth in these areas:
1. American Real Estate
2. American Stocks
3. Long term Treasury Bonds
4. Municipal Bonds
5. American Corporate Bonds
Please also understand that 99% of Americans hold 100% of their wealth in these five categories. Also understand that 99% of financial advisors recommend holding 100% of your wealth in these five categories.
Let's begin...............
Scenario One: Deflation (2011 Update)
For an understanding of how our world will look in this scenario I recommend reading Conquer The Crash: Second Edition, by Robert Prechter which was released in late 2009. I also recommend subscribing to his monthly investment newsletter: The Elliot Wave Theorist, which can be found at http://www.elliotwave.com/.
In Prechter's book he describes the investment classes that should be used under the deflation scenario. They are as follows:
1. Cash in safe banks
(Safe bank list provided and updated at www.Elliotwave.com)
2. Short Term (1-3 Month) Treasury Bill Funds
(Provided In Conquer the Crash)
3. Gold and Silver
(An depth discussion on Gold and Silver in Scenario 2 below)
What he does not recommend is holding money at cash equivalents such as:
*Money Market Funds
*"Cash Equivalent" Funds that hold municipal bonds and AAA corporate debt
*Unsafe banks
The reason for this is because if the Federal Reserve is not able to stop what is coming, then FDIC insured banks accounts, money market funds, state and local governments, and corporate debt may all fail or lose significant value.
4. Shorting The Stock Market
This last option, to short the market, means you are betting the stock market will fall and you will profit as they do. This is recommended for speculative funds only. In a market where the final endgame is going to be inflation, it is dangerous to hold a large portion of your investment capital short the market. (Inflation or hyperinflation can take the nominal value of stocks higher even if their true value is falling)
A fund that provides investors with a focus on specific stocks that are overvalued in the current secular bear market is The Prudent Bear Fund. (BEARX)
The fund also keeps a position in gold and gold mining companies, meaning you are essentially betting that stocks will fall and precious metals will rise.
In Prechter's book he describes the investment classes that should be used under the deflation scenario. They are as follows:
1. Cash in safe banks
(Safe bank list provided and updated at www.Elliotwave.com)
2. Short Term (1-3 Month) Treasury Bill Funds
(Provided In Conquer the Crash)
3. Gold and Silver
(An depth discussion on Gold and Silver in Scenario 2 below)
What he does not recommend is holding money at cash equivalents such as:
*Money Market Funds
*"Cash Equivalent" Funds that hold municipal bonds and AAA corporate debt
*Unsafe banks
The reason for this is because if the Federal Reserve is not able to stop what is coming, then FDIC insured banks accounts, money market funds, state and local governments, and corporate debt may all fail or lose significant value.
4. Shorting The Stock Market
This last option, to short the market, means you are betting the stock market will fall and you will profit as they do. This is recommended for speculative funds only. In a market where the final endgame is going to be inflation, it is dangerous to hold a large portion of your investment capital short the market. (Inflation or hyperinflation can take the nominal value of stocks higher even if their true value is falling)
A fund that provides investors with a focus on specific stocks that are overvalued in the current secular bear market is The Prudent Bear Fund. (BEARX)
The fund also keeps a position in gold and gold mining companies, meaning you are essentially betting that stocks will fall and precious metals will rise.
Scenario Two: Inflation (2011 Update)
The number one overall macro trend facing our world today is the fall of the US currency from its long term dominance. The Future Tense home page is dedicated to discussing why this trend is occurring today and why it will continue in the future.
With this understanding in place, an investor should focus on how to maximize his or her portfolio to benefit from this massive worldwide shift. The following investment choices will provide that opportunity:
1. Gold/Silver
Gold and Silver are in long term secular bull market and will reap the greatest rewards during the dollar's fall. These two investments have unlimited upside and over the next 3-5 years will only be exceeded by mining stocks in percentage gains.
How do I buy gold and silver?
I advise purchasing gold and silver in three different ways:
1. Physical Gold and Silver kept at home
2. Physical Gold and Silver kept at safety deposit box
3. Physical Gold and Silver stored overseas
For the first two options I would recommend using trusted company such as The Northwest Territorial Mint. They also charge low premiums for the metal.
For the third option I would utilize two companies: Goldmoney and The Perth Mint Program.
Goldmoney is a service provided by one of the most well regarded members of the gold community: James Turk. Their services allow you to purchase metal and have it stored in either London, Switzerland, or both. All transactions are done by electronic transfer so if you decided to sell, the dollar amount would be wired back into your bank account here.
The Perth Mint Program is provided by the government of Australia. Similar to Goldmoney, they store bullion for you in a secured vault in Australia.
Both services allow you to take delivery of the physical metal if you desire. They both have strict auditing services quarterly to make sure the total amount of metal in their vault matches their customer accounts. I would recommending using both services and keeping some of your metal in London, Switzerland, and Australia.
If you have funds in a 401k or IRA and you need to purchase precious metals through a fund, I would not recommend purchasing the popular (GLD) for gold or (SLV) for silver.
Both these funds come with the risk that they may not be backed 100% by physical precious metals and a portion of their holdings may only be backed by a "paper promise" to receive metals in the future.
Sprott Asset Management launched two funds this year to compete with these two ETF's. The Sprott funds purchase physical metal that are stored in a vault, and investors can take delivery of their metal at any time. The funds are:
(PHYS): Sprott Physical Gold Trust
(PSLV): Sprott Physical Silver Trust
To speak with a representative of their organization contact Sprott Private Wealth.
2. Foreign Stocks Focused On Energy, Agriculture, Water, Natural Resources
Markets go through cycles that usually last 20-25 years.
During 1960-1980 we had a bear market in stocks/bonds (paper) and we had a bull market in commodities (things).
During 1980-2000 we had a bull market in stocks/bonds (paper) and we had a bear market in commodities (things).
Beginning in the year 2000, the cycle has once again reversed. Real stock values adjusted for inflation peaked in the year 2000 and have been in a bear market for the past 10 years.
Commodities bottomed in 2000 and have been in a bull market for 10 years.
I expect this trend not only to continue over the next 3-5 years, but to accelerate.
There are many factors that lead to this, but the most important are:
1. Weakening dollar pushing commodities higher
2. Supply still recovering from the 2008 credit crisis spike shock
3. Demand has increased and will continue to do so in the emerging markets who are all hungry for oil, food, and natural resources.
The best way to play this opportunity is to purchase companies that focus on energy, agriculture, water, and natural resources.
I would focus on buying companies in countries that are rich in resources and are in growth stages such as:
1. Australia
2. Canada
3. Asia - China, Hong Kong, Singapore
4. New Zealand
5. Brazil
Not only should you purchase the companies within these countries, but you should
purchase them in THEIR currency. As the dollar falls and these companies rise in value you gain value in three different ways:
1. Currency Exchange
2. Stock Appreciation
3. Dividend Payments
For example, if you buy $100 worth of Agro Growth shares out of Australia today and in five years the Australia currency has appreciated 25% against the dollar, when you go to sell your stock you have made $25 EVEN IF THE COMPANY GAINS NO VALUE.
If the stock appreciates $25, then you have made $50.
If the company pays a 10% dividend, then you have made $100.
($25 currency appreciation)
($25 stock appreciation)
($100 worth of stock paying 10% a year is $10 per year. 5 years =$50 in dividends)
Please note that if the dollar rises in value then the opposite happens. You lose the difference in currency exchange.
My personal favorite option to utilize this investment strategy is through EuroPacific Capital.
By speaking with one of their brokers they can put together a portfolio for you in multiple countries and multiple currencies that is focused on these investments.
If you have a higher net worth (Europac requires no minimum investment) and you do not wish to be actively involved with your investments, I would also recommend speaking with the PFS Group. They have an excellent understanding of the world ahead of us and have funds highly focused toward natural resources and inflation protection.
3. Precious Metal Mining Stocks
All of the investments listed above will experience tremendous volatility over the next 3-5 years, but they pale in comparison to the wild ride in mining stocks.
During the financial collapse of 2008, many gold mining stocks lost 50-80% of their value in a few months. Most of the stocks regained their value in 2009 and surged to new highs in 2010.
If you have the stomach to ride the storm, mining stocks will be the largest percentage gainers during this bull market. I would allocate a percentage of "speculative" money to invest in this sector. The following are very attractive:
GDX - This is a basket of 20 of the largest gold mining stocks
SLW - Silver Mining Company
SSRI - Silver Mining Company
PAAS - Silver Mining Company
TGLDX - Tocqueville Gold Fund - This is a fund managed by professional investors dedicated to mining stocks
For additional resources and professional research on mining companies I would recommend investing in the following newsletters:
Gold Stock Analyst Newsletter - GoldStockAnalyst.com
The Morgan Report - Silver-Investor.com
4. Shorting the Long Term Treasury Bond Market
This will be one of the most profitable investments over the next 3-5 years, but will face a very bumpy ride similar to the other investments described above. The bond market has been in a 29 year bull market which peaked during the fall of 2008 during the financial crisis. The market is currently still in the mania stage which provides an attractive short opportunity. The main investor tool to short the market available today is through an ETF called TBT, which shorts long term treasury bonds.
This should be considered part of your "speculative" position.
QUESTIONS AND ANSWERS
With this understanding in place, an investor should focus on how to maximize his or her portfolio to benefit from this massive worldwide shift. The following investment choices will provide that opportunity:
1. Gold/Silver
Gold and Silver are in long term secular bull market and will reap the greatest rewards during the dollar's fall. These two investments have unlimited upside and over the next 3-5 years will only be exceeded by mining stocks in percentage gains.
How do I buy gold and silver?
I advise purchasing gold and silver in three different ways:
1. Physical Gold and Silver kept at home
2. Physical Gold and Silver kept at safety deposit box
3. Physical Gold and Silver stored overseas
For the first two options I would recommend using trusted company such as The Northwest Territorial Mint. They also charge low premiums for the metal.
For the third option I would utilize two companies: Goldmoney and The Perth Mint Program.
Goldmoney is a service provided by one of the most well regarded members of the gold community: James Turk. Their services allow you to purchase metal and have it stored in either London, Switzerland, or both. All transactions are done by electronic transfer so if you decided to sell, the dollar amount would be wired back into your bank account here.
The Perth Mint Program is provided by the government of Australia. Similar to Goldmoney, they store bullion for you in a secured vault in Australia.
Both services allow you to take delivery of the physical metal if you desire. They both have strict auditing services quarterly to make sure the total amount of metal in their vault matches their customer accounts. I would recommending using both services and keeping some of your metal in London, Switzerland, and Australia.
If you have funds in a 401k or IRA and you need to purchase precious metals through a fund, I would not recommend purchasing the popular (GLD) for gold or (SLV) for silver.
Both these funds come with the risk that they may not be backed 100% by physical precious metals and a portion of their holdings may only be backed by a "paper promise" to receive metals in the future.
Sprott Asset Management launched two funds this year to compete with these two ETF's. The Sprott funds purchase physical metal that are stored in a vault, and investors can take delivery of their metal at any time. The funds are:
(PHYS): Sprott Physical Gold Trust
(PSLV): Sprott Physical Silver Trust
To speak with a representative of their organization contact Sprott Private Wealth.
2. Foreign Stocks Focused On Energy, Agriculture, Water, Natural Resources
Markets go through cycles that usually last 20-25 years.
During 1960-1980 we had a bear market in stocks/bonds (paper) and we had a bull market in commodities (things).
During 1980-2000 we had a bull market in stocks/bonds (paper) and we had a bear market in commodities (things).
Beginning in the year 2000, the cycle has once again reversed. Real stock values adjusted for inflation peaked in the year 2000 and have been in a bear market for the past 10 years.
Commodities bottomed in 2000 and have been in a bull market for 10 years.
I expect this trend not only to continue over the next 3-5 years, but to accelerate.
There are many factors that lead to this, but the most important are:
1. Weakening dollar pushing commodities higher
2. Supply still recovering from the 2008 credit crisis spike shock
3. Demand has increased and will continue to do so in the emerging markets who are all hungry for oil, food, and natural resources.
The best way to play this opportunity is to purchase companies that focus on energy, agriculture, water, and natural resources.
I would focus on buying companies in countries that are rich in resources and are in growth stages such as:
1. Australia
2. Canada
3. Asia - China, Hong Kong, Singapore
4. New Zealand
5. Brazil
Not only should you purchase the companies within these countries, but you should
purchase them in THEIR currency. As the dollar falls and these companies rise in value you gain value in three different ways:
1. Currency Exchange
2. Stock Appreciation
3. Dividend Payments
For example, if you buy $100 worth of Agro Growth shares out of Australia today and in five years the Australia currency has appreciated 25% against the dollar, when you go to sell your stock you have made $25 EVEN IF THE COMPANY GAINS NO VALUE.
If the stock appreciates $25, then you have made $50.
If the company pays a 10% dividend, then you have made $100.
($25 currency appreciation)
($25 stock appreciation)
($100 worth of stock paying 10% a year is $10 per year. 5 years =$50 in dividends)
Please note that if the dollar rises in value then the opposite happens. You lose the difference in currency exchange.
My personal favorite option to utilize this investment strategy is through EuroPacific Capital.
By speaking with one of their brokers they can put together a portfolio for you in multiple countries and multiple currencies that is focused on these investments.
If you have a higher net worth (Europac requires no minimum investment) and you do not wish to be actively involved with your investments, I would also recommend speaking with the PFS Group. They have an excellent understanding of the world ahead of us and have funds highly focused toward natural resources and inflation protection.
3. Precious Metal Mining Stocks
All of the investments listed above will experience tremendous volatility over the next 3-5 years, but they pale in comparison to the wild ride in mining stocks.
During the financial collapse of 2008, many gold mining stocks lost 50-80% of their value in a few months. Most of the stocks regained their value in 2009 and surged to new highs in 2010.
If you have the stomach to ride the storm, mining stocks will be the largest percentage gainers during this bull market. I would allocate a percentage of "speculative" money to invest in this sector. The following are very attractive:
GDX - This is a basket of 20 of the largest gold mining stocks
SLW - Silver Mining Company
SSRI - Silver Mining Company
PAAS - Silver Mining Company
TGLDX - Tocqueville Gold Fund - This is a fund managed by professional investors dedicated to mining stocks
For additional resources and professional research on mining companies I would recommend investing in the following newsletters:
Gold Stock Analyst Newsletter - GoldStockAnalyst.com
The Morgan Report - Silver-Investor.com
4. Shorting the Long Term Treasury Bond Market
This will be one of the most profitable investments over the next 3-5 years, but will face a very bumpy ride similar to the other investments described above. The bond market has been in a 29 year bull market which peaked during the fall of 2008 during the financial crisis. The market is currently still in the mania stage which provides an attractive short opportunity. The main investor tool to short the market available today is through an ETF called TBT, which shorts long term treasury bonds.
This should be considered part of your "speculative" position.
QUESTIONS AND ANSWERS
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