Exiting the U.S. Dollar: An Approach for Weathering the Storm

If you’ve read some or all of the posts on this blog, by now you might be asking yourself “what am I to do about all this?” Given that, I’ve outlined below some thoughts on my own approach to the present economic realities, which you can adopt or discard as you wish. Note that my own philosophy behind investing is essentially based on three tenets:

1) virtually no exposure to the U.S. markets (you’ll see why as you read on)
2) exposure to foreign markets with all of the money that I can afford to lose
3) stockpiling into black swan protection protocols the money that I cannot afford to lose

(This post will address numbers 1 and 2; item 3 will be expounded upon in a later post.)

One of the underlying themes to my personal investment portfolio is simple: reduce my exposure to the U.S. dollar as quickly as possible. The reason for doing so is fairly obvious, especially if you’re a regular visitor to this site. The dollar is being devalued through deliberate monetary policy, for reasons ranging from “stimulation” of a stagnant economy to the need to pay off mounting debts by printing money out of thin air. This dollar devaluing means you are losing purchasing power steadily, even as your portfolio might be gaining in empirical value. In even simpler terms, inflation is going to reduce the real value of your portfolio. What good is having a net worth of $5M at retirement if your yearly living expenses have hemorrhaged to $500,000 a year due to inflation and a weaker currency? The bottom line is this: if you know the government’s monetary policy is to continue weakening the dollar in order to pay the ballooning interest off the crushing debt they have obligated us to, then a good policy for an investor would be to remove yourself from that currency and seek ones that are retaining more relative value.

To add to the urgency behind this flight from the dollar, there are several individuals whose opinion I value deeply who are actually forecasting, and in some cases building funds oriented towards, hyperinflation. (See 1920’s Germany for a great hyperinflation vignette...and yes, it unfortunately involves using a wheelbarrow to cart your money around.) Namely, Nassim Taleb’s Universa Investments (run by Mark Spitznagel), is actually developing a black swan protection protocol (see my July 15 post) that hedges against hyperinflationary scenarios. Marc Faber made an appearance earlier this year on a financial network and claimed that it is a near 100% certainty that the U.S. will experience hyperinflation—that it simply could not be avoided now that the government has created several trillion dollars out of thin air in such a short time span. Jim Rogers has trumpeted essentially the same message, labeling the dollar a “flawed currency.”

These predictions are nothing short of dire, but here’s why they really should be heeded: the individuals making the assertions have a remarkably good track record at being correct. Of course, contrast this to every forecaster and analyst you see on a regular basis on CNBC, FOX Business, and Bloomberg, where being wrong is the primary stipulation for employment there. (In fact, it would be entirely possible to make an investing career out of choosing the exact opposite stance to whatever you hear and see through these mainstream media outlets. That would be an interesting experiment, but I digress.)

I became cognizant of the above themes through individuals like Euro Pacific Capital president and owner, Peter Schiff, initially through his best seller Crash Proof, and then later through his web postings, video blogs and TV appearances. (Others, like Jim Rogers and Marc Faber, have been saying similar things on the financial networks and through other outlets.) Schiff’s philosophy centers on the notion that foreign stocks in particular afford a much higher potential for gain, given three basic realities:

1. foreign stocks purchased in the respective foreign currency provide protection from the rapidly-weakening U.S. dollar (foreign currencies move opposite to U.S. dollar fluctuations)
2. foreign stocks have the potential for paying more substantial dividends (upwards of 10% are not difficult to find; I own an Australian utility company that paid a 10.25% dividend in January 2008, and moved to 15% by the end of 2008)
3. foreign stocks in conservative industries have a reasonably good outlook for stability when coupled with the notion that the economies they are situated in are also more likely to be stable, based on increasing capital savings and productive capacity, as opposed to currency devaluation and reliance on consumer spending and debt assumption (such as in the U.S.)

It is important to note that none of the above is guaranteed to yield gains or meant to represent a one-size-fits-all approach for a potential investor. Each individual must evaluate his/her situation and decide upon what risks they are willing to assume. The point is, when examining economic fundamentals, it is not hard to distinguish between an economy like the one we have in the U.S. (based largely on consumption and over-leveraging, coupled with intentional weakening of the currency) and ones in places like China, Australia, New Zealand, and Japan. There, central banks have far less leeway in manipulating their currency, since none of them enjoys reserve currency status (like the U.S.). These economies are not running enormous trade deficits and racking up trillions in debt, thus there is greater stability to the underlying economic foundation and virtually no need to inflate the currency to pay back debts by printing more money.

An interesting phenomenon perpetuating itself these days on the financial networks, is that the talking heads who work there appear to believe there is only one country left to invest in on the planet. They have skewered guests (such as Schiff) who refuse to buy into the notion that the U.S. is the best place to invest right now, ignoring the fact that foreign stock markets have risen even more dramatically since the February/March lows compared to U.S. markets. Granted, the U.S. indices have shown significant growth, but those numbers need to be discounted based on the inflation that was created to generate such lift. On the other hand, foreign markets have not received nearly as dramatic a boost from our voodoo economic policies, and their growth is more rooted in an actual recovery. Thus, when you compare the S&P 500’s 44% rise since March to the Hang Seng’s dizzying 70% gains (China’s index), the difference is not only empirically dramatic but even more so once inflation is factored in.

So you might be asking how one can actually go about implementing this approach and achieving the three advantages I mentioned a few paragraphs above. While there is more than one brokerage firm that will invest in this manner for you, my choice was an easy one: Euro Pacific Capital. No other firm’s president has been more visible and more accurate in forecasting the present conditions and recent market volatility. Peter Schiff has been unwavering in his commitment to stating the truths about our economy and where we are headed, regardless of the criticism and scorn which has been heaped upon him (YouTube “Peter Schiff was right” and you will understand why I say this). But whatever firm you choose, talk to your broker about buying into foreign markets in the respective currencies, and begin fashioning your own shelter from the dollar.

To summarize, the long term outlook for economies that maintain solid fundamentals is simply going to be better than one that does not. As an investor, I want my money situated in sound economies with strong foundations, wherever that place may be. Such is the reason why I’ve implemented the kind of investment approach outlined above for the money that I wish to put into play in the market. As mentioned above, a future post will address what I am doing with the money which I absolutely do not want exposed to the systemic risks of the market.