Hedging the US Dollar: Strategies for protecting your wealth

Published by Bryce Foster on

The dollar up until very recently has enjoyed an incredibly high valuation.  The US stock market is at absolute all time highs for what seems like no reason at all.  Interest rates are about to nudge up from complete insignificance to sort of insignificant.

Without getting too deep into this topic,  keeping interest rates low near zero for so long has never been done before.  The reason behind it is to make borrowing/investment cheap in order to stimulate economic growth.  Lower interest rates means you can afford ‘more’ of a home.  Unfortunately so can everyone else so prices will continue to rise until people are buying things that just maybe they can’t really afford.

As prices goes up, to lend money for investment should become riskier (higher prices means lower profit margins).  So to compensate for the risk in investment, the interest rate should be higher.  We’ve kept rates so low for so long that this key part of the market process never happened.  Money stayed cheap.

The big problem with raising interests rates (for the government)  is that it means that financing their debt (through treasury bonds)  becomes more expensive (higher interest rates).  And we’ve borrowed such an insane amount at the low interest rates that things will get hairy should rates rise a few percentage points.

Peter Schiff wrote about the 2008 market crash, and what he calls now “The Real Crash” which essentially culminates in the US not being able to pay their massive and growing debts.  Pick up a copy of his book, it’s very detailed and much more convincing than this blog post could ever be.

The purpose of this post is to outline some strategies gleaned from Schiff and others who aren’t so convinced of the permanency of our currency as the global reserve currency.

Most people reading this probably have a good job and a retirement account or two.  Maybe you have a ‘finance guy’ who you pay a fee to manage your investments for.  Whatever the case may be I can be pretty sure that your entire investment portfolio, cash savings account etc.  are denominated in US dollars.  This means that you are betting your future prosperity not just on the stock market, mutual funds etc.  but on the strength and value of the US dollar.  What happens if the dollar becomes worth 1/10 of what it is today?  Could you still retire on time?

I’m not interested in arguing the likelihood (or inevitability in my opinion) of a dollar devaluation.  I just know that it will come some day in the form of either a loss of faith in the US (we reneg on our debts and restructure them)  or hyper inflation (we print a whole bunch more cash to pay off the debts).  Either way the value of the dollar will drop.  When this happens and how bad it will be I’ll leave up to you to decide.  But my point is if you decide that there’s any remote chance of this happening then you need to have a strategy to protect your wealth.

Without further introduction here are the things I’ve invested in to mitigate risk in the value of the dollar

Rental Property

This is the hardest one to get done, especially now.  But the beauty of rental property is that your debt is fixed (in a mortgage etc.)  but your rents can float with the market.  So as the currency gets weaker, rents can go up.  At the same time, the amount you owe (in the weakening currency)  is still fixed no matter what the value of the dollar is.  Whether $200k buys you a condo, or a cup of coffee if that’s what your mortgage balance is then that’s what you owe.  I have some posts written about my property adventures, hopefully will have more up soon.  Check out the post on the best books I’ve read on investing.

 

Gold

Gold is not a true ‘hedge’ against the dollar (meaning if dollar goes down 10%, no guarantee gold goes up 10%).  But in my opinion it’s mis-priced often enough to be valuable in times of poor dollar performance.  As a hard asset, it offers much more security in a crisis (Look into a price per ounce vs. Argentine Peso).  As the Argentinian government sorted out it’s debt problems (and devalued their currency)  the price of gold went through the roof and remains there today.  It’s not a perfect investment, but beats watching your peso denominated savings get eroded into oblivion.  If something similar were to happen to the US and the dollar gold would likely perform in an identical fashion.  Check out my post on Goldmoney for a great way to start putting some of your cash into real physical gold.

 

Bitcoin (and Litecoin/Ethereum)

Bitcoin is a lot of things,  I don’t pretend that it’s a complete replacement for cash or that it’s a perfect solution.  However, it is becoming the currency that people turn to when their government ruins their paper money.  See Argentina, Brazil, more recently Venezuela for examples.  If the government sets the fake price of money (after they’ve destroyed it’s value)  citizens had very little recourse (the black markets)  before bitcoin.  Now someone can transfer huge amounts of their wealth to bitcoin and there is nothing their government can do about it (or even know about it).  That’s powerful, and seeing as financial crises are becoming more common not less holding some bitcoin will generally be a positive thing for your wealth.  It’s worth a percentage of your portfolio, though as of today (October 2017) Bitcoin has shown substantial signs of speculative fever and overall i’m a net seller of it instead of a buyer.

 

Foreign Stocks

Not just a ‘foreign markets fund’, I’m talking about buying dividend producing stocks in countries (and currencies)  that have great economic prospects.  Singapore, Hong Kong, Australia (less so Aus, check out New Zealand also) are at the top of my list for strong economies, sound money (not bankrupt) and long term growth prospects. I’ve slowly started accumulating dividend paying stocks in these countries.

 

Cash

The markets have gone straight up for 8 years, things have been just too good.  That means (historically)  that something catastrophic is bound to happen to lower the stock market and real estate markets.  To benefit from this correction in prices, it’s essential you have cash on hand (to buy cheap stocks, cheap real estate etc.)  when times are tough.  In order to make sure you have that cash, that means sitting out right now while prices are sky high, no easy task.  See “The Dao of Capital”  by Mark Spitznagel for an entire book on being able to invest this way.

Foreign Cash

I’d wager that if the US dollar ever runs into problems, it’ll take most other currencies with it.  But in that scenario there may be other currencies where your investment doesn’t get hurt AS MUCH, and that’s worth considering.  Countries with strong (and not reckless) banking systems are worth having some cash in (Singapore, Hong Kong, Switzerland).   I’d stay away from the Euro as they have the same problems the US has.

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