In our opinion, the American economy is a grand ship in danger of sinking. As we believe the problems with her hull are structural, current efforts by government officials and central bankers to plug up the holes will not likely prove sufficient to keep her afloat. Though we remain hopeful that she may eventually return to a more seaworthy condition, we feel there is nothing currently being done to alter her fate. Unlike the vast majority of American investors who choose to optimistically dance the night away on her decks, we urge our clients to consider a different approach. In our opinion, a carefully selected portfolio of high-dividend paying, non-U.S. equities may provide a more viable alternative.
Such a portfolio of investments can potentially provide the following:
- They often pay high dividends, many of which qualify for the lower dividend tax currently in effect.
- Because these dividends are paid in the companies’ local currencies, their value will rise when the dollar falls, as will the principal value of the underlying shares.
- They provide the potential for true capital gains, as the shares themselves may appreciate in terms of their local currencies.
While it is true that U.S. stocks also offer the potential for capital gains and dividend income, we do not believe that they will perform as well as foreign stocks should the dollar's value decline substantially.
As a result of these three separate and distinct sources of current income and capital gains, the U.S. dollar need not be falling for a portfolio of foreign stocks to produce positive returns. However, it is during a period of sustained dollar declines that we believe such portfolios could provide the greatest value. Since no one can be certain when such a decline might occur, we feel it is better to prepare for the possibility in advance.
Though the dollar may experience several counter-trend rallies along a downward path, we feel that it is a mistake for retail investors to attempt to time the market. As a result of our buy-and-hold strategy, during those time periods when the U.S. dollar is rising in value, or when global stock markets are in decline, our portfolios may lose value. Though such declines may be partially offset by dividends, investors unwilling to assume short-term volatility as a trade-off for the potential of long-term performance should not implement this strategy.
Also, if you view the U.S. economy as a sinking ship, it is not unpatriotic to get off before it goes down. Those who stand on deck saluting the flag as it sinks will likely be of little assistance to survivors left treading water. By moving assets abroad in advance of a potential dollar crisis, we are potentially positioned to repatriate those funds in the future to help rebuild a viable American economy.
The most important step for investors to take before adopting an investment strategy is to first define their goals. Some investors may simply desire to conserve what they have. However, one must first determine what specifically one is attempting to conserve. If one's goal is simply to conserve the number of dollars one owns, then there are several domestic investments that will satisfy that simple criteria. However, what good is it to conserve dollars if the dollars themselves do not conserve their purchasing power? After all, we do not want dollars for their own sake; we want them for the goods and services they can buy. However, we feel that based on current U.S. monetary and fiscal policy, the many structural imbalances underlying the U.S. economy, and the potential monetization of massive funded and unfunded federal liabilities, the purchasing power of the dollar is likely to diminish substantially over time.
From our perspective, a truly conservative investor must seek to conserve the purchasing power, not merely the nominal dollar value, of his holdings. At one time, when the dollar was sound and Americans produced the goods they consumed, this goal was readily accomplished with certain types of dollar-based investments. However, it's our opinion that times have changed and anyone now wishing to be truly conservative must change with them.
One potential way to guard against the lost purchasing power that would result from a crash in the U.S. dollar is to invest in foreign stocks. However, stocks by definition are not conservative, and neither are foreign currencies. The challenge is to choose the currencies most likely to conserve purchasing power, based on objective economic and political criteria, and then invest in stocks denominated in those currencies that best satisfy your investment objectives.
Respected figures like former U.S. Comptroller General David Walker and former Fed Chairman Paul Volcker have issued dire warnings about the state of the U.S. government’s finances. We are not alone in our belief that our country is floating in part on the confidence of its foreign creditors. If and when they decide to sell their massive stockpiles of U.S. dollars and Treasury bonds, there could be a dollar crisis unlike any seen before. It is therefore no longer prudent for investors to believe blindly in the invincibility of the U.S. dollar. Prudence demands that alternative measures be sought. That is what we offer.
All investment strategies contain various elements of risk. No guarantees, either expressed or implied, are made that the strategy outlined above will perform as it is intended. Investors in foreign stocks can lose principal due to a variety of risk factors, including currency risk, political risk, systemic risk, and company specific risks. Also the economic assumptions inherent in the formation of this strategy may in fact be incorrect, thereby adversely affecting the performance of the recommendations. Furthermore the fact that these strategies might have preformed well in the past does not assure similar results in the future. Clients and prospective clients are advised to carefully consider these risks prior to investing.