The Key to Your Investment Survival Next Year
By Tom Dyson
November 5, 2008
Back in 2001, I took care of trillions of dollars in government bonds for Citigroup. At the time, "Citi" was the world's largest bank.
We were financing Citigroup's balance sheet. We took trillions of dollars of bonds and lent them to other banks in return for interest. I was the accountant on the team. My job was to figure out how much interest my traders were bringing in... versus how much interest Citigroup was charging them to use its capital.
Our trades were much bigger than any other bond-trading desk anywhere at Citigroup. I once handled a $4 billion trade, for example.
Now... when most people in the financial world think of bond traders, they imagine guys buying and selling bonds all day. This is the glamorous side of the business. These are the guys who drive around in Maseratis. No one ever thinks about the traders who do the borrowing and lending. It's not as glamorous.
Even though my team moved trillions of dollars every day... and were one of the most profitable trading desks in the building... the rest of the firm treated us like a backwater.
I see the same attitude every day in the real world. We watch CNBC for the stock market prices... we're all experts on house prices... and flat screen TVs... and new cars. These are the things we buy and sell. These decisions have much less impact on our daily economic welfare than our income and expenses... but we all pay much more attention to them.
Here's the thing: I haven't spoken to my old colleagues in a while, but I'm willing to bet, after the pummeling we've just seen in the credit markets, Citigroup is giving this "unglamorous" function more respect right now. We'll see more respect for the basics in the real world, too. Let me explain...
The market is a giant prediction machine. By falling 35% in the last year, it's saying America is going into a recession. That means higher taxes, more inflation, and fewer jobs: 2009 is going to be a tough year for most Americans.
I think this will make people turn their focus back to the basics again... back to our jobs, our mortgages, our car payments. The economics of these cash flows are not glamorous... but they're fundamental to our quality of life. In tough times, controlling these cash flows is the key to people's survival.
What am I doing in my personal life? I'm not thinking about new houses and cars right now. I'm figuring out how to make sure my income exceeds my expenditures. I'm paying attention to my job security, my mortgage costs, and my utility bills. I'm trying to reduce my tax liabilities.
And in the stock market, investments that pay solid income streams are going to be the hot item for 2009. Investors are going to dump stocks that don't pay dividends. They're unnecessary luxuries. They'll buy stocks that help them meet their monthly expenses instead.
I'm looking at blue-chip stocks with long track records of paying bigger dividends every year. Wal-Mart and McDonald's are good examples. Their products help people save money. Cheap shopping and cheap food are going to get more popular.
On the other hand, I'm avoiding companies like Tiffany's and Whole Foods. And I'm not interested in money shufflers like banks and brokers or property companies. They all rely on people making large investments.
I'm looking at the master limited partnership (MLP) sector. Natural gas is a critical commodity we all use, even in a recession. I'm picking out closed-end funds that trade at big discounts to asset value and pay large dividends. I like covered call strategies. And I like companies with large cash balances, low debt burdens, and the power to generate strong cash flows.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
Sign up today to read more investment ideas from Tom Dyson.
|
 |
GOLD AT $750? IT'S A BARGAIN!
For much of the past few months, the major question on the mind of the American gold investor has been, "Why isn't gold going higher?"
Gold tends to rise when financial institutions are collapsing... when governments create blizzards of paper money to "fix" problems like mortgage meltdowns and wars. In other words, gold is one of the world's best crisis hedges.
But calling the collapse of giant financial institutions like Wachovia, Fannie Mae, Freddie Mac, and Lehman Brothers a "crisis" is putting it lightly. It's utter catastrophe for hundreds of thousands of people. That's why gold's 18% decline in October was shocking to most American investors.
Our advice? Think globally. Sure... gold has decreased in value when measured in U.S. dollars. Folks have flocked to the dollar because they need cash to cover debts... which has pushed up the dollar's value. But when measured in euros, Aussie dollars, or Canadian dollars, gold is still near all-time highs.
This "paper currencies down, gold up" trend began six years ago. And with the enormous liabilities the U.S. government is assuming, gold is going to resume its uptrend against the dollar... as well as all other currencies. At $750 an ounce, it's a bargain.
|
|
 |
The U.S. Treasury said Monday it would seek to borrow a record 550 billion dollars in the October-December period to help stabilize the financial sector hammered by the global credit crisis.
The fourth-quarter borrowing estimate was substantially higher than the 408 billion dollars announced in July, and is a record high for quarterly estimates, a Treasury official said.
"The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of state and local government series securities," the Treasury said in a statement.
The Treasury said the federal government had borrowed 530 billion dollars from the markets in the third quarter. Of that amount, 300 billion dollars was borrowed for the Federal Reserve's Supplementary Financing Program, launched in mid-September in a bid to support the ailing economy.
In July the Treasury had estimated third-quarter borrowing at 171 billion dollars. |
|
|
Once the economy starts to recover, we could be facing an inflationary episode that could rival the 1970s.
We're going to see these extremely easy borrowing policies, and a tremendous amount of government borrowing. The federal government is taking on a tremendous amount of risk by taking stakes in insurance companies and banks, and its balance sheet is exploding.
Eventually, they'll have to monetize those liabilities, and the way they do that at the end of the day is by printing money. That's hugely inflationary.
If the economy gets back on track, we'll see the same supply issues we were facing a year ago in all the commodities – Metals, Ags, etc. That will feed into an inflationary cycle on top of the Fed monetizing their debt. I see this morphing into an inflationary episode several years out that could be very painful. |
– Joe Foster, portfolio manager of the Van Eck International Investors Gold Fund, as told to HardAssetsInvestor.com
|
|
|
