Scotbgaw (95.28)

Investing Amid the Bailouts

January 26, 2009 – Comments (2) | RELATED TICKERS: FCX , FXY , TLT

The federal budget deficit for FY09 is projected to be approxiamtely $2 trillion.  Of course, that only takes into account what the government has promised to fund.  I have seen still other reports that project the deficit will actually be around $3 trillion.  The reasoning is that the government will certainly spend at least as much as they have promised, will probably spend more, and the CBO figures do not take into account the funds that the Fed and Treasury have dispersed to "stabilize" the financial sector.  For the past decade or so, much of our deficit spending has been offset by foreign willingness to purchase our debt.  However, with interest rates effectively at 0 and the staggeringly large sum of the projected deficit, what country(ies) can even help to dent it?  I believe that the time of relying on strangers to help us is coming to an end whether we like it or not.  Mostly because the foreigners used to reap the benefit of American consumption, and our pockets are zipped close and millions struggle to make ends meet due to layoffs, a slowing economy, and equity depreciation.  However, Congress will still appropriate the funds, and the Fed will print off the money to pay the debt which result in rapid inflation.  This is a matter of when, not if, at this point.

So what to do?  Well, first acquire positions in companies that produce things that hold value while the currency is debased, namely commodities.  Oil, natural gas, and base metals are trading at or below the average cost of production.  This will not last, and its whithering effect on related securities will dissipate as well.  So we are free to accumulate shares in quality producers and low valuations: FCX, COP, CHK, SU to name a few.  These companies will rebound in time, maybe quickly.  But in the interim, there is still time to build a position in these firms and use options to generate cash flow and lock in a low buy-in prices. 

Next, look for interest rates to rise, at least eventually.  The Fed might keep rates around 0% for a while, but eventually they will have to raise rates.  So inverse bond ETF's, such as TBT, seem almost a lock for absolute returns over the next couple of yearrs.  Also, TIPS will be a solid place to store funds as inflation picks up in the near term. 

Last but not least, diversifying currency positions out of the dollar will also provide net positive returns.  Some currencies to consider: Candian Loonie, Japanese Yen, Aussie Dollar, and Yen.

The government has made its agenda relatively well known.  Prudent investors will react accordingly. Happy hunting!