This Asset Is Like Gold, Only Better
By Chris Mayer, editor, Capital & Crisis
Wednesday, September 30, 2009
In the past few years, there's been an explosion of investor interest in "hedges."
Investors want to own foreign real estate for a hedge against a big depression in the United States. They want to own gold for a hedge against a dollar crisis. They want to own oil for a hedge against inflation.
But consider this "hedge factor"...
Between 1941 and 2002, average farmland values outpaced the growth of inflation by 2%.
In fact, some call farmland as good as gold with yield – because you clock in steady income from rents while you wait for the value to grow. I can think of no better asset to own during any kind of financial crisis.
In some ways, farmland is even better than gold or silver. At least farmland is an intrinsically useful thing. It provides a tangible yield in the form of good things from the earth. We all have to eat. As consumers trim their sails, they'll give up a lot before they give up their calorie intake.
Governments, particularly in times of crisis – like now – have a tendency to flood the system with money in an attempt to "goose" the economy. Mostly, such efforts have succeeded in destroying the value of the currency in question.
Anyway, if you believe that we will continue to feel the bane of inflation, then farmland's performance in the 1970s will give you some comfort... While you lost half of your money in the S&P 500, your farmland kept its value nicely. Again, I think that's rooted in the fact that farmland is intrinsically useful. It produces useful and needed things.
Now imagine what farmland might do in today's climate, in which you have not only the likely prospect of inflation, but also a tightening supply of farmland and rising demand for crops. You have biofuels eating up more of our grain supply. I imagine you'll do quite a bit better than in the 1970s.
Farmland treated British investors great just last year. As British housing prices collapsed in 2008, British farmland value rose by 21%. Over the last five years, Brit farmland rose a total 135%. Forget commercial property. That's not a bad ROI in my book.
And there's one more way to look at it: This hedge can outperform gold. In Britain, the farmer outpaced the gold owner. Expanding land values rode up 115% since 1983, versus gold at 81%. You can be sure institutional investors are already placing their long-term bets. Almost half the farmland bought there last year was snapped up by banks and funds.
The obvious investment conclusion: If you're worried about the dollar, the economy, or any other problem, buy farmland today. This is hard to do directly through the stock market... so I encourage you to consider a private deal. You can play agriculture through companies that manufacture irrigation equipment, produce fertilizer, or operate grain-handling facilities.
Check these investments out soon. I think we're in for broad farmland/agriculture rally that should be good for hundreds of percent returns. As you can see from farmland's past results, it's a great hedge in all kinds of environments.
Sincerely,
Chris Mayer
Editor's note: Chris Mayer is the editor of Capital & Crisis, a monthly advisory we consider required reading at DailyWealth. With Chris' research, you can always count on contrarian investment ideas you won't read about anywhere else. Click here to learn more about Capital & Crisis. We think a subscription is one of the best investment deals available today. |
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THE DOLLAR HAS BOTTOMED
After months and months of steady declines... and after the whole world hates the thing... it's time for a dollar rally.
Remember, you can view currencies like the "stock" of a country. When times are good and its finances are in order, a country's currency tends to rise. When times are bad and its finances are a mess, a country's currency tends to fall.
Today's chart displays a "mess." It's the 13% decline in the dollar from its March peak – a giant fall for a major currency. The market doesn't think much of Washington D.C.'s new "tax and spend our way to prosperity" idea.
But as our colleague Jeff Clark has covered in Growth Stock Wire, the negative sentiment toward the dollar is at extraordinary levels... so a solid rally lies ahead. And last week, we saw a bit of price confirmation for this trade...
The dollar index struck a low at 76.25 early this month... then started moving higher. It looked like the bottom was in until sellers pushed the dollar down even farther. This last selling surge had no power, however, and the dollar climbed back to its highest point in three weeks. Everyone hates the dollar, but it's rising... which is a great bullish sign.
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Acknowledging that they had greatly underestimated the problems plaguing the nation's banking system, federal officials proposed a plan on Tuesday to replenish the fund that protects bank depositors.
They also announced that the fund, which began the year with more than $34 billion on hand but has been battered by bank collapses, would fall into deficit this week.
The plan proposed by the Federal Deposit Insurance Corporation would, in effect, have the nation's banks collectively lend money to the insurance fund by requiring them to prepay their annual assessments this year, which they would otherwise pay over the next two years.
The plan would raise $45 billion from the banks to replenish the fund, which is suffering severe problems both with its capital and liquidity.
If nothing were done, the fund would find itself by early next year holding assets that are almost exclusively illiquid. At last report, the fund had about $22 billion in cash and other marketable securities, but as more banks have collapsed, most of those liquid assets have been exchanged for the less marketable assets seized from the failed institutions, like foreclosed property.
– New York Times
The Federal Reserve decided to keep pumping $1.25 trillion of new money into the mortgage market to focus on rescuing the U.S. economy as the financial system revives and banks ask for less help.
The central bank has purchased $694 billion of mortgage-backed securities since January and plans to spend $556 billion more by April 2010 to keep interest rates down. The debt-buying is the biggest program in the Fed's arsenal.
The debt-buying pushed the average 30-year mortgage interest rate this week to 5.04 percent, its lowest since May, according to McLean, Virginia-based Freddie Mac. The debt is guaranteed by Freddie Mac and the other government-sponsored home-loan financiers, Fannie Mae and Ginnie Mae, both based in Washington.
– Bloomberg
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