With hyper inflation on the horizon, where should you put your money?
The US is in a awful financial state right now. Banks have been flooded with money from the Fed just to keep them afloat. All of this money is keeping the banks from collapsing but is also devaluing our currency. The result of this is inflation and it is rising faster than any official government estimate.
Many successful investors are looking outside of the US for investment opportunities. A couple of names you may have heard of are Warren Buffett and one of the co-founders of the Quantum hedge fund, Jim Rogers. Both have been seeking investments outside of the US.
The US dollar can no longer stand out as the currency of choice. Investors are now skeptical of the underlying value of the dollar and most likely will be more critical of it. The dollar for so long was propped up by the view that the US is the #1 country with the #1 currency.
The dollar has been off of the gold standard for a while now and the broadest measure of US money supply, M3 stopped being published in March 2006. With fewer hard measures on how to value the dollar, the less attractive the dollar becomes.
The dollar is no longer #1 and investors are looking elsewhere. This leaves plenty of room for the dollar to continue to fall. The deficit and the growing money supply makes the dollar a poor choice for an investment.
The result is a falling dollar and double digit inflation. How can we as investors make good investments if inflation is running at 12-20% a year? Fifteen percent which has been considered a good return is break even if inflation is at 15% a year.
Higher growth stocks become more important in this environment. A stock that can grow at 25% a year can possibly overcome inflation to make a profit for you. However, the hurdles become higher and the chances of finding a high growth company that can continue the high growth rate for several years seems unlikely.
It is possible that a company overseas growing at 5% can make more money for you than one growing 15% in a hyperinflationary environment. Overseas investments will be an obvious choice for 2008-2009.
Dollars should be held as shortly as possible. Of course if you live in the US, payments are made in dollars but it is possible to ofset the loss by keeping idle funds in an international money market or bank account. A couple such companies I found that offer money market accounts that can be converted into foreign currency is Everbank and HSBC. Everbank has a low required initial deposit of $2,500 compared to HSBC's $10,000. Many of the currency accounts with Everbank pay a small interest rate.
As a day-to-day account the Everbank money market option seems interesting until the 1% currency conversion fee is taken into consideration. So to get your dollars converted to euros is 1% then to get the currency back into dollars it is another 1%. This fee is too high for day-to-day transactions.
Commodities are also something that should continue to go up. Commodities can go to the highest bidder regardless of currency. If the dollar drops another 75% to the euro, commodities will still be worth a certain amount overseas. You can't say that about companies that have a strong balance sheet. A once strong balance sheet with cash becomes a liability when the dollar falls and when there is hyperinflation. The cash a company holds then becomes a declining asset.
Off the top of my head, overseas investment seems like it has an edge over commodities. Commodities have already recently risen 3-4 times what they were previously selling at just 12 months ago. Overseas stocks most likely have not seen those sort of increases.
The reason for the huge increase in commodity prices does not seem to be so clear. Sure, oil prices have went up and the substitute energy commodities have went up as well such as natural gas, and corn which is being used to make ethanol. However, should wheat and soybeans be going up at such a fast rate? Corn is the feed of choice for livestock. Wheat is rarely used for livestock.
So looking for foreign stocks seems like a good choice for the long-term and for the short-term finding a safe place for idle cash in non-dollar demonimated accounts seems like the way to go. Look for the next article on where to put idle funds in 2008-2009.
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