We all manage our own personal finances and are forced to make sure the numbers add up. Spending more than we make on a regular basis is not a sustainable way for us to live as individuals so why would it work for governments? The US and a lot of the rest of the world are operating at unstable debt levels by manipulating the system borrowing more and more money at artificially manipulated low rates. This system has many implications primarily passing an unsustainable debt load on future generations to pay for those living today. But what happens if the cheap financing situation ends and China and other creditors start raising our rates to reflect the true risk picture on our ability to pay back what we are attempting to borrow. Minor changes to our interest rates have major implications to our ability to service the debt and keep the bubble going. The most likely method to pay back what we are borrowing in this type of situation would be to continue to print more dollars reducing their value and causing mass inflation in the process. I expect this scenario to play out at some point but probably not for at least a few years. While in the library with my kids I picked up two investing books that predict this type of scenario and offer advice on how to preserve your wealth if it does materialize.
The author makes a strong case for future hyperinflation and a massively lower value of the US dollar based on unsustainable government spending and the eventual need to inflate the currency to pay the debt back with a dollar worth significantly less than it is today. Here are some tips I picked up from reading the book:
- The author likes gold for stability and a store of value vs. inflation but acknowledges anyone just buying gold now is late to the party. Gold has had a huge run up but in times of hyperinflation people will reach for stability so buy gold on dips especially if you do not have any.
- Silver is undervalued relative to its historical ratios to gold and looks to be a real good investment over the next 5 years. Load up on your silver.
- If you own a home and are still not locked into a low fixed rate mortgage stop gambling and do so now rates will have to eventually go up.
- Oil, farmland, food stocks, and gold mining stocks are good plays in this type of scenario. Farmland has had a big run up similar to gold but opportunities in other countries are attractive especially in South America.
- Some people think 401k seizure is a big risk but the real way the government would seize your 401k is through massive inflation not outright theft.
- Stay out of debt and invest wisely based on the long term trend. No one will be able to time it perfectly but invest according to the trend in incremental phases.
The collective authors of this work are even more pessimistic than the first book mentioned above. They credit themselves with calling the housing bubble and think that this next bubble to come will be the bubble to end all bubbles (called bubblequake) . The reason for this is they predict several bubbles will pop at once including:
- The government debt bubble
- The dollar bubble
- Real estate bubble (they think even now real estate is drastically overvalued)
- Stock market bubble (strong arguments made that only Fed action and QE programs are keeping the market going)
- Discretionary spending bubble
- Student debt bubble
To preserve your wealth in this type of scenario they recommend getting out of the stock market, bonds (especially long durations), and real estate. The authors do not see China or other parts of the world as a big refuge either, they view them as connected to the broader bubble and no source of refuge when things go belly up. Instead keep your money very liquid and go with strong proven commodities such as gold and silver (they recommend physical ownership for at least a percentage of the holdings). Lastly, get out of adjustable rate debt as fast as possible, reduce your spending and stay in your job a little longer to build an extra safety net to weather the impending hard times.
I have to admit reading these books can get you worked up and potentially caught up in the fear if you do not have a plan. It is important to read them with a level head and remember no one can predict the future even if the long term scenarios presented are logical. I was tempted to get out of equities quickly after reading this but kept a balanced portfolio approach. If I would have reacted on emotion I would have missed January’s big run up but I am increasing my percentage of precious metals incrementally since I had no exposure to them before. I do sense unwarranted euphoria on Wall Street based on the recent performance so I am looking to get more liquid in stages. Happy and strategic investing in 2013!