The dollar, up until very recently, has enjoyed an incredibly high valuation. The US stock market is at absolute all-time highs for no reason, and interest rates are about to nudge up from complete insignificance to insignificant.
Keeping interest rates low near zero for so long has never been done before without getting too deep into this topic. It is to make borrowing/investment cheap to stimulate economic growth. Lower interest rates mean 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 go up, lending money for investment should become riskier (higher prices mean lower profit margins). So to compensate for the risk in investment, the interest rate should be higher. We’ve kept rates so low that this crucial part of the market process never happened, and the money stayed cheap.
The big problem with raising interest 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 the rate 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 its massive and growing debts. Pick up a copy of his book. It’s more detailed and convincing than this blog post could ever be.
This post aims 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. Maybe you have a ‘finance guy for whom you pay a fee to manage your investments. Whatever the case, I can be 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, and I just know that it will come someday in the form of either a loss of faith in the US (we renege on our debts and restructure them) or hyperinflation (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 it up to you to decide. But if you choose that there’s any remote chance of this happening, 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 dollar’s value.
This is the hardest one to get done, especially now. The beauty of the 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 the dollar’s value. 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 bar on the best books I’ve read on investing.
Gold is not a true ‘hedge’ against the dollar (meaning if the dollar goes down 10%, there is no guarantee gold goes up 10%). But in my opinion, it’s mispriced 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 the price per ounce vs. Argentine Peso).
The Argentinian government sorted out its debt problems (and devalued its currency), and the cost of gold went through the roof and remains there today. It’s not a perfect investment, but it beats watching your peso-denominated savings erode into oblivion. If something similar happened to the US and the dollar, gold would likely perform identically. 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 a perfect solution. However, it is becoming the currency that people turn to when their government ruins their paper money. See Argentina, Brazil, and, more recently, Venezuela for examples. If the government sets the fake money price (after they’ve destroyed its value), citizens had very little recourse (the black markets) before bitcoin. Now someone can transfer vast 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 tangible signs of speculative fever. I’m a net seller of it instead of a buyer.
I’m not just a ‘foreign markets fund.’ I’m talking about buying dividend-producing stocks in countries (and currencies) with significant economic prospects. Singapore, Hong Kong, and Australia (less so Aus, check out New Zealand) are at the top of my list for stable economies, sound money (not bankrupt), and long-term growth prospects. I’ve slowly started accumulating dividend-paying stocks in these countries.
The markets have gone up for 8 years, and things have been 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, you must have cash on hand (to buy cheap stocks, cheap real estate, etc.) when times are tough. That means sitting out right now while prices are sky-high; no easy task to make sure you have that cash. See “The Dao of Capital” by Mark Spitznagel for an entire book on being able to invest this way.
I’d wager that if the US dollar ever runs into problems, it’ll take most other currencies. In that scenario, there may be other currencies where your investment doesn’t get hurt AS MUCH, which is worth considering. Countries with robust (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.