I finished Crash Proof, by Peter Schiff of Euro Pacific Capital. It paints a dire picture of the US economy and what the near future holds for the US dollar. A summary:
Prognosis: Devaluation of the dollar vs other currency, resulting in both inflation and recession. The devaluation is due to the excesses of printing dollars backed only by faith and credit (but not gold), and deficit spending. Plus the $50 trillion in unfunded liabilities like SS and Medicare.
Key info: real inflation is closer to 8%, not what the government tells you in the CPI.
Treatment and cure (for individual investors): Invest in foreign dividend-paying stocks and gold (through physical bullion, certificates of deposit at the Perth Mint, and maybe an ETF like GLD). His advice is something like 70/30 with additional adequate liquidity (6 months living expenses) denominated in yen, euros, yuan, or swiss francs. You can do this through various ETFs or open a foreign bank account.
The book was released in February, 2007. For fun I decided to take a look at what might have happened if I had been smart enough to follow the advice to the T on October 10, 2007 (just after the peak of the US stock market). Using a fictional $100,000 for ease of calculation we'll allocate $60 grand to VTRIX (Vanguard Intl Value Fund - no US Stocks), $30,000 to gold (spot price), $5,000 to Swiss Francs, and $5,000 to Japanese Yen.
$100,000 on 10-10-2007 buys:
$5000 to Yen = 586,050 yen.
$5000 to Francs = 5,932 francs.
$30,000 to gold = 40.47217 ounces
$60,000 to VTRIX at 47.57/share = 1261.3 shares
Converting back to USD on 10-10-2008 (1 year later):
We'll add 1% interest to the cash on yen and francs figuring we had them in interest bearing accounts of some sort:
591,910.5 Yen to USD at 100.481 = $5,890.77
5,991.32 francs to USD at 1.129 = $5,306.75
40.47217 oz gold to USD at 900.5/oz = $36,445.19
1261.3 shares + 3.35 dividend at 23.78/share = $34,227.87.
total = $81,870.59. The foreign markets have been hit as bad as the US lately. The total allocation has done better than a US equity portfolio (but not a cash account) and if you believe that the US economy is in trouble then taking another look at this sort of allocation might be worthwhile.
Anyways, it is a good read.
Monday, October 27, 2008
Crash Proof review
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