The following are the major trends that we are anticipating will continue to develop over the coming years. We will continue to watch these trends and look at ways to profit from them through regular blog content.
American Standard of Living
If you look at where the standard of living was for the average American a few years ago, it was completely unsustainable. The huge houses, the multiple BMWs in the driveways, the luxurious vacations and the latest gadgets. It has been on a decline since in the forms of unemployment checks, foreclosures, etc.
The government response has been to attempt to keep the game going with an increase in debt and keep people spending money. This is impossible to continue, however, and there is only one direction for the standard of living for the average American to go: down.
If you look at this on a global scale, you can see the imbalance between say the average American and the average Chinese person. The American spends more than he earns, has an entitled point of view, has the benefits of a global reserve currency that has kept the dollar artificially high and thus supported an artificially high standard of living. The Chinese person works hard, makes hardly anything and saves most of his money. His standard of living is very low. The two will rebalance to a certain degree. Production, consumption, currencies, debt levels will all be adjusted and force a standard of living adjustment. This is a simple example but is one that is definitely relevant.
As I view this as a major trend, I want to be invested in companies that will do well in a weak economy, where spending and consumption has indeed peaked for the average American.
My main positions in this area are:
- Wal-Mart (WMT) – I own this in a DRIP account and invest regularly accumulating shares of this company
- McDonalds (MCD) – I own this in a DRIP account and invest regularly accumulating shares of this company
Negative Real Interest Rates
The government has responded swiftly to the bursting of the finance/consumption dominated economy that essentially blew up in 2008. Interest rates were set to near zero by the Federal Reserve. While you can argue whether or not this is a good strategy to improve the economy, you can’t argue the effects of the policy on savings and real rate of return on money.
Coupled with the policies is an inflationary environment where the prices of basic goods are going higher: namely gasoline, food, etc. With inflation going higher and interest rates so low, you essentially have an environment where you have negative real interest rates or where your cash is actually losing purchasing power while sitting in a savings account.
The natural market reaction to this is for money to pour into instruments that are viewed as a better store of value. One of these areas is precious metals. Gold and silver have performed very well in recent years with the negative real rates phenomenon as one of the main factors.
To gain exposure to the rising prices in gold and silevr, I own the following positions (may or may not own them currently at time of reading):
- GDX, CEF, GTU, GDXJ, SLV
- physical silver
Changing Global Monetary System
In addition to the negative real rates phenomenon, one of the major developments that is impacting the global economy is the transition into the post-dollar dominated global monetary system. For decades the dollar has been the reserve currency and dominated world trade. This is already showing cracks and the change is almost certainly going to happen at some point.
Whether it is the rise of China and their strengthening currency in the global economy or the fact that the dollar continues to weaken due to policies from the US government, there are many signs on a regular basis that various countries are moving away from exclusive dollar based trade.
While most fiat currencies are all weakening to various degrees, there’s an alternative currency that is being purchased by central banks around the world: gold. This is where gold differs from most other metals in that it is definitely viewed as a form of money or an alternative currency. Gold has always been held by central banks sort of as an insurance in case of the implosion of the current monetary system and this seems to be accelerating.
Whether or not gold is an actual part of the new monetary system (i.e. a gold backed currency) isn’t really important. The reality is that regardless of what that new system looks like, gold will be worth much more US dollars then versus today. As such, gold priced in dollars should be much higher down the road.
Owning gold is an excellent idea in the current environment. I don’t own any physical gold, but I do hold GTU (and some other positions as noted above).
While I have a hard time jumping on the peak oil bandwagon (“We are running out of oil”), I do put some stock into the peak cheap oil bandwagong (“We are running out of cheap oil”). What makes cheap oil? Well oil that is easily drawn out of the ground versus the harder to get stuff that takes more money.
Energy is a good place to be with regards to investing because demand for energy is increasing and there’s a good chance we’re running out of the cheap oil to fuel global energy.
I’m not a big fan of solar or most forms of alternative energy that are not sustainable without massive government subsidies. I am a fan of natural gas which I think will be a major part of America’s future.
I’m constantly looking to add energy exposure to my portfolio, but have dabbled in names like DIG, EVEP, NKA and XOM. Buy energy companies on violent dips in the price of oil, preferably ones with nice dividends. The energy story isn’t going away any time soon.