Investments for 2012

Investors are worried. On one had inflation theatens to reduce the value of the money holdings and on the other hand, they may lose money if they invest. Stocks can be volatile and has not plumbed to the depths of the past financial crisis of 2008 OF WHICH THE WORLD HAS NOT RESOLVED. Banks in US continues to pay obscene bonuses , Companies are robbed dry by their CEO and senior executives who speculate with companies's money to get huge bonus. Tom Cook who replace Steve Jobs at Apple  is said to receive an annual compensation package in excess of US$300 million.

Banks sells investment products with layers of hidden fees and commissions. They are ruthless in their pursuit of profitability. So what to invest in? Bonds may decline in value once interest rates spikes up. The recent high interests paid by the Italian Government shows that interest can shoot to over 7%. Imagine you had a year ago bought Italian sovereign bonds with a coupon rate of 3.5%.  The increase in coupon rate would cause your bond to drop in value substantially.

Properties in Singapore are now in suspended animation where the direction up or down is not clear. If we cannot invest in stocks, hedge funds, private equities , bonds or properties what can we invest in?  We can invest in shares of companies with good long term prospects. This means we must be prepared to ride the down cycle and hold on to these assets. Think of yourself as not holding stocks but hard assets. Assets can be physical or intangible as in intellectual properties.

What does the world need in the longer term  whether there is a financial crisis or not? The world population is increasing and the increasing middle class in China, India and Indonesia will eat more meat , fish and consume more milk. I would invest in companies that have links , the more direct the better, to food production. If I had the funds, I would start a private equity fund investing in companies that are into producing more food with less inputs. There are agricultural commodities funds but one needs to look beyond the name to see what they actually invest in. Many commodities funds don't invest in hard assets but in options which fluctuate with the prices. Avoid these.

Market Vector Agricultural ETF invests in large companies related to agribusiness. It has holdings in Potash Corporation, the world 's largest manfacturer of fertilisers, Mosanto which is well known for its genetically modified seeds  and claims that it can increase yields dramatically, Deere & Company which makes large farm machines and Wilmar, one of the largest palm oil plantation companies in the world. Its expense ratio is 0.56% and if you hold for four years, your holding costs is less than 3% .  In four years, the world will have recovered from the debt problems and with the increasing wealth of China and India, agribusiness would be the next big HIT.

Rather than buy gold we can invest in Market Vectors Gold Miners ETF.  It has a low expense ratio of 0.53% and invests in gold mining companies such as  Barrick Gold Corporation, Newmont Mining Corporation and Goldcorp  Inc. As paper currencies devalue, gold mining companies will appreciate due to their assets in gold. Now that gold has dropped  to US$1,640, off its high of US$1,800,  this could be a good time to invest inn gold mining companies.

I am not promoting Market Vectors ETFs and don't even know how we can buy them since they are a US based company .I am just using them as an example of low expense ratio ETFs that invest in companies with solid long term assets such as agribusiness and gold. You can look for other similiar ETFs to invest in as I am sure they Market Vectors are not the only one with ETFs in oil , gold and agribusiness.

The final recommendation is Market Vectors Oil Service ETF. This ETF invests in companies that service the oil industry such as Halliburton, Schlumberger and  Baker Hughes. If you think oil is getting scarce and if you believe that oil production has peaked and there is a need to look for new oil fields in areas that are hard to drill, oil service companies will be a good bet.

These three recomendations are not instant hits but safe bets that in two to three years time, may give you more than 10% annualised yield!  These are "hard core" companies that will not go broke, or be over-leveraged because of speculative investments. They have good residual value regardless of the market outlook. The three sectors are in food ( we need to eat) and energy ( we need to keep our homes warm or cool and our cars running!). They are the basic necessities the world needs. Gold is a hedge to protect against rapid inflation or devaluation of paper currencies.

Geopolitics and Regional Currencies

The new weapon is currency, This is the new WMD that could have vast impact on a globalized world. The Cold War has not ended but has morphed into a war fought with money, energy and commodities. Indeed a top general from Europe forecasted that Third World War will be fought over water. Wars, whether hot or cold, are about countries trying to protect themselves and gain advantages over other countries. That is why we have trade pacts and G7, G20, ASEAN and all manner of meetings between heads of states. Each country tries to position itself to gain by forming blocs of all kinds.

Five major players are in this competition . USA, Europe,BRICS, pro-USA Middle East, anti-USA bloc. Each party is in the competition for survival. USA and Europe faces large and growing unemployment and massive debts. BRICS wants to protects its reserves especially US Treasury Holdings and want to improve living standards of its people . Oil rich Middle East has declining oil outputs and may fall back on its reserves to sustain its lifestyle. Anti-USA ENTITIES want nothing more than the collapse of USA or a toothless USA.

In simple terms, it is a battle between the haves and have-nots. The have-nots are countries with massive debts and need to continue to borrow .Like drug addicts, they cannot face the withdrawal pains of not having easy either by borrowing or printing. The haves are those with large reserves , lots of which Is in US dollars which faces steady devaluation. Both parties are locked in a fatal embrace and this year will see a more rapid unlocking of this embrace.

The most obvious unlocking is to stop using US dollar in international trade. Countries have SWAP agreements which enable them to trade using a regional currency. Four regional currencies may appear, the Russian ruble, the Chinese Yuan, Euro and the SDRs of the IMF. Japan is too fearful of the USA , it's political leaders too weak and fragmented to be a regional currency.
Russia will try to persuade Ukraine, Central Asia and Eastern Europe to use the ruble. China will corner Africa and Latin America and even Middle East to use the yuan or the SDRS. Euro will continue to be used by its member states. There already exists various SWAP agreements to allow trade between different currencies without the US dollar.

What this means is that trillions of US dollars will go back to America causing high inflation.It is like a man who eat excessively but his friends get fat , not him. The more he gorge himself, the fatter his friends became. He enjoys all the pleasures of eating and his friends suffer from its effects. Imagine that one day, all the fat accumulated ny his friends suddenly returns to this glutton. Imagine the impact on the glutton even is 20 percent of all fat accumulated on his behalf by his friends is returned to him! That glutton has a name.Hebis called America and his friends are called Japan, China, Russia and Brazil.

Most of these arrangements will be done in secret or with little publicity. We don't get to read it or even understand its importance as the world media covers US presidential elections , Euro debt crisis and the Arab Spring. But momentum is slowing building and like the bamboo, regional currencies suddenly become the talk of the town. It won't be a global catastrophe except for those with US dollars, but there will be confusion by idiots who cannot envision a world where US dollar is no longer the world's reserve currency.

It is good for the world even for America. Take the glutton example. Isn't it better for each country to face the effects of own monetary policies rather than defer the bad effects by temporarily transferring it to others? Not being the world reserve currency will impose fiscal discipline on American politicians who seem to think that it can print and borrow money ad infinitum.

Investors who understand the above stands heads over shoulders above those who blindly follow trends and fashion based on the assumption that US dollar wil be strong as always.

2012 The End of Paper Money

World war 3 has begun but few people recognized it because it is a war not fought with guns and bombs but with currency manipulations. In a world with a shrinking wealth pie, Government scrambled to keep their economies competitive. Sadly, rather than look at long term solutions, most Government goes order the quick fix , which is to devalue their currency. A country exports more when it makes products that are desired by the rest of the world. China produces low cost goods at rock bottom prices by having low wages, ignoring pollution and seizing peasant lands for peanuts . Germany produces expensive quality goods likes its BMW cars through design and manufacturing discipline. But a country with high wages and not enough quality goods and services will end up earning less. This is not bad as lower earnings will result is lower wages and eventually the country will be competitive again.

The problem is the citizens cannot take the pain of earning less . To make up for the deficit in export earnings , the Government spends more. Everyone is happy as the gravy train continues to roll. The problem is that Governments borrow or print money out of the air to sustain the increased expenditure without raising taxes. Raising taxes would mean the people have less to send which is what the Government wants to avoid! But for the time being it is party time until Government either can no longer print money or borrow .

They cannot borrow because lenders are too nervous and believe the borrower would not be able to pay them back. This is amazing as we are not referring to an individual or company but a Government. This lack of trust means lenders are willing to lend only at high interest rates but high interest rates mean the Government would be even less likely to repay debts. This leaves the second option of printing money. Unless the currency is used outside the country, the printed money would return to the country causing inflation . Inflation is when too much money chase after too few assets.

Inflation is political dynamite where there is a large section of the population who are poor. Food prices goes up and the poor starts to protest as they find they can afford less and less food. When a country is awash with money, the rich can borrow more to invest in stocks and properties. The rise in stock and properties benefit the rich while the poor earns the same but has to pay more for food. From China to Africa, political instability is one of the side effects of inflation especially when it is not matched by rising wages at the lower end.

Even in America, the Occupy Wallstreet movement is a protest by the average America against rising cost of living. The US Government wants China to revalue the yuan upwards but this will ake imports more expensive. When before there is a choice of the more expensive locally made product or the cheaper imported product, there is no choice for the Americans since most of the consumer products they want are imported. A rising yuan will increase the cost of imported goods which means inflation will be higher. The American will have to pay more for his clothes, shoes, computers and TVs. They will be unhappy and will express their unhappiness at the coming Presidential elections.

There is no short term solutions and in democratic countries where elections are held every four years , no politician wants to commit suicide by adopting painful long term solutions. So the money printing and the debasement of fiat currencies on a global basis continues until one or more countries get knocked out. Greece for example cannot continue its party since it cannot borrow excessively anymore. America may find that quantitative easinf increases the cost of living and becomes politically untenable. I think the world will continue to debase paper currencies as this is the only option left for Governments.