There’s a debt crisis brewing not only for European countries, but for America. Investment Contrarians editors have been critics of the U.S.’s inability to reign-in government spending. Based on the White House’s own figures, the national debt will reach $20 trillion by the end of this decade—about 140% of our current Gross Domestic Product. In our studies of history, countries who have incurred considerable debt, countries that have experienced a consistent national debt to GDP multiple of 120% or more have experienced currency devaluation. The U.S. dollar has already been in a free-fall since 2009 against other major world currencies. We expect the devaluation of the U.S. dollar to continue as the U.S. continues to pile on the debt. You can find regular commentary on the U.S. dollar in Investment Contrarians.
With practically every central bank around the world having the throttle fully open when it comes to monetary policy, investors with extra cash just lying around need to do something with it. While you could put this cash in a government bond or simply keep it in cash, these options aren’t going to help you beat the rate of inflation. Instead, investors should take a cue from the superrich and consider an investment strategy that includes hard assets.
As you may already know, an investment strategy that comprises hard assets includes traditional stores of wealth (such as gold and silver) and commodities (such as oil), as well as artwork and even cars.
While I advocate the traditional investment strategy of becoming a part owner in companies through equities, there are growing signs that even the superrich are becoming increasingly worried about having cash sitting idle and are looking at hard assets as part of their portfolio.
Just recently, a 1963 Ferrari “250 GTO” sold for $52.0 million! I like a nice car as much the next guy, but $52.0 million is a lot for one vehicle.
Obviously, the person buying it is not using it just to go grocery shopping; rather, it’s likely that the new owner is incorporating this item as part of their investment strategy to include hard assets (in this case, collectible cars).
To show you just how strong the market is for alternative hard assets by the extremely wealthy, a similar Ferrari 250 GTO sold last year for $35.0 million, which means this year’s sale is a 49% increase in price.
Of course, price appreciation in … Read More
Keep your eyes on China. One of the themes I keep reiterating in these pages is that our world is more interconnected than many investors think. While it is certainly important to be aware of how the American economy is performing, we cannot forget that we are part of the global economy.
While the U.S. is still a large player in the global economy, we are not alone at the top. Over the past decade, the Chinese economy has grown to rival our own in size, and its effects can be felt everywhere. The Chinese economy has been a huge driver for many parts of the global economy, including commodity prices and the materials sector.
However, recent attempts by leaders in that nation to shift the Chinese economy away from a production- and export-oriented nation into one that is driven more by domestic demand is causing significant problems.
The latest gross domestic product (GDP) data for the second quarter indicated that the Chinese economy grew at a 7.5% rate, according to the National Bureau of Statistics in Beijing. That was much lower than the forecast conducted by Bloomberg, of which the median estimate was for 7.7% growth in the Chinese economy. (Source: “China growth slows to 7.5% as 2013 target under threat,” Bloomberg, July 15, 2013, accessed July 16, 2013.)
Whether we like it or not, the global economy is heavily dependent on the Chinese economy. For much of the past decade, many companies, including U.S. firms, have deliberately focused their attention on the rapidly rising Chinese economy.
With the slowdown being worse than expected, I believe that this is … Read More
One of the biggest fears for investors is to buy at the top of any market. This is a natural reaction because most of us were taught since childhood to do the opposite. For example, my parents always emphasized the importance of buying products when they’re on sale.
Some people view the significant rise in home prices with apprehension, believing that these prices have risen too far. While it is true that home prices have risen substantially, as long as interest rates remain low, there is potential for further capital appreciation.
Americans aren’t the only ones considering real estate as part of their investment strategy. Recent reports state that China is considering diversifying its foreign exchange reserves, totaling approximately US$3.4 trillion, into U.S. real estate. (Source: Yang, S., et al., “China said to study US property investments with reserves,” Bloomberg, May 27, 2013.)
With the Chinese investment strategy in the past based primarily on investing in U.S. government debt, considering how little this asset class is currently yielding, it does make sense for the Chinese to look at diversifying into other sectors. When looking at the potential for home prices to continue rising versus U.S. government debt, this diversification seems quite prudent.
The ramifications for American home prices could be substantial. It really depends on how China goes about allocating its investment strategy. There are already shortages in many real estate markets across the U.S., which is part of the reason home prices have moved up so quickly.
The Chinese sovereign wealth fund could look at taking stakes in companies that are already involved in real estate and that benefit … Read More