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A couple of days ago, legendary investor, commodity bull and one-time partner of George Soros, Jim Rogers, was interviewed by Betty Liu of Bloomberg’s Singapore office. It seems that Jim Rogers is also of the opinion that Fannie Mae is going to lose a lot of money along with other investment banks.

He’s still bullish on commodities like oil and food grain and he’s bearish on the US Dollar. Surprizingly, he’s also bullish on Arline stocks.

Here’s an excerpt of the relevant portions of the interview:

Financial Sector

LIU: All right. Jim, first, talk to us about the story of the week that we’ve seen so far, Lehman Brothers, you know, you’ve been very critical so far about what’s been going on on Wall Street, the accounting, all of that. Do you believe, I mean this is relevant – do you believe that Lehman Brothers is in fact in so good shape that they’ve got no liquidity problems or what’s your view on this right now?
ROGERS: Well, okay, I am still all – short all of the investment banks on Wall Street through the ETF. I know they are all in trouble. I know most of them have phony accounting. And you know, in bear markets, they all go down to eight. So, I just presume they are all going to go to eight before it’s over, before the bear market is over.
LIU: Do you believe that we could another Bear Stearns as we did in March?
ROGERS: Oh, why not, sure. There are certainly – and I’m also short Citibank and I’m also short Fannie Mae. So, you know, some of these companies have – have horrendous balance sheets and if the bear market has a ways to go, which in my view, it does, then you are going to see some really, really low prices. But, Betty, there’s nothing unusual about this, just go back and look at any previous bear market. Financial stocks sell at unbelievably low prices during bear markets. This was not going to be any – well, this one may be a little different because it’s just going to be worse for the financial companies during this bear market, because the excesses during the past five or ten years have been so horrendous in the financial communities.

LIU: All right. And Jim, you know, I want to turn back to, of course, the Fed and the banks and all of that. You were talking before about some of the stocks that you’re short on. Are you short on Lehman Brothers?
ROGERS: I’m short the ETF, Betty, the investment bank ETF, which means I’m short all of them. I am not short any specific investment banks. First of all, I have too many friends at all of those places, I don’t want to short any of them specifically. So, I am just short at the ETF, which means I am short all of them, I mean some would do well, some will do probably too badly, but the ETF in my view is going to go down a lot more.
LIU: Well, does what happened with Lehman Brothers over the past week, does it perhaps stoke your interest in shorting Lehman along with Citigroup? And Fannie, I believe is the one you talked about as well.
ROGERS: I’m already short Fannie Mae and Citibank, and have been for sometime. I’m just going to kind of stay with the ETF. It’s easier for somebody like me, who’s too lazy to spend a lot of time on any specific one, except for Citibank and Fannie Mae.

Monetary Policy

LIU: All right, Jim. So, tell us, you have also been very critical of the Fed and Ben Bernanke. I want to ask you first one thing. How do think the Fed has handled so far what’s been going on on Wall Street? You think that they helped situations or actually made things worse?
ROGERS: They made things worse, Betty. They printed huge amounts of money, which has caused great inflation which could cause the dollar to go down, and the Federal Reserve has taken on something like $400 billion of bad assets on to its balance sheet. Now, you and I as American taxpayers are going to have to pay off that debt some day. What’s Bernanke going to do? Get in his helicopter, and fly around, collecting bad debt? Is he going to start repossessing cars, repossessing houses that go bad? I mean, this is insane Betty, the Federal Reserve has $800 billion on its balance sheet. They have already committed $400 billion to bad debt. What then they are going to do next? Where are they going to get the money the next time things start going wrong?

Investment Strategy

LIU: Okay. Okay, well, given that scenario, Jim, as an investor, where are you going to put your money right now?
ROGERS: I own commodities, I have been buying agriculture, I bought airlines today. I bought a lot of airlines around the world today, both stocks and bonds. Swiss franc, Japanese yen, renminbi, these are the few things I have been buying recently.

Airlines

LIU: You bought airlines? A lot of people are very bearish on the airlines, talking about the fuel cost. Why are you buying airlines?
ROGERS: Well, Betty, you just got through the same why, everybody is very bearish. No, I don’t buy things just because people are bearish, but I fly a lot, and the planes are full. You cannot buy a new – if you order a new plane today, you couldn’t get it for several years. This Boeing and Airbus have problems. You read every day that the airlines are cutting back their capacity. Fares are going up. I mean, Betty, everybody knows about the fuel cost. Is there any airline left that doesn’t know we have fuel problems? They are adjusting for all of it.
LIU: Well, that’s true. But there’s also talk about bankruptcies in the airline industry. And you think some could go bankrupt?
ROGERS: How much more bullish in the news do you want? Twenty-four airlines have gone bankrupt this year. That’s great news. You know, five out of the seven largest American airlines went bankrupt during this decade. So, fine. Bankruptcies are signs of bottoms, not signs of tops.

Commodities

LIU: Right. You know, staying with oil and commodities, we’ve seen a pullback in some commodities in recent months. But which commodities do you like right now, Jim, and which don’t you like?
ROGERS: Well, I mean, yes, a lot of commodities have come down pretty hard. If people are talking about a bubble, I’d like to know what they’re talking about. I mean, many commodities, nickel, zinc, lead are down 50 percent. Silver is down 80 percent from its all-time high. Sugar is down 80 percent from its all-time high. What kind of bubble is that? Cotton is down 40 percent from its all-time high. Coffee is down 60 percent from its all-time high. I have been buying agriculture recently, I’m holding off a little bit right now because it looks like Congress is determined to do something to drive down commodity prices. If they do, it’ll be a fantastic buying opportunity and I’ll buy more.
LIU: Jim, you – .
ROGERS: But what I bought most recently is more agriculture.
LIU: More agriculture? In China, did you buy?
ROGERS: I bought agriculture stocks in China. It’s not legal for – I mean, it’s almost impossible for foreigners to buy commodities – commodities and sales in China.
LIU: Right. Okay, also, you’ve said before that we’re half- way through the commodity bull run. You still think that, or I mean how long can this bull run last for?
ROGERS: Well, Betty, there are number of acres devoted to wheat farming. It’s been declining for 30 years. The inventory of food is at the lowest level in 50 or 60 years. We are burning a lot of our agricultural products in fuel tanks now, as fuel. That’s useless, that’s hopeless. Talk about a bubble, that’s a bubble. It’s crazy that we’re spending so much money burning our agricultural products as fuel. But you can go on a long time, nobody has discovered any major oil fields for over 40 years. Betty, all the oil fields in the world are in decline. I mean, there’s been one lead mine opened in the world in 25 years. The last lead smelter built in America was built in 1969. Unless somebody starts bringing on a lot more capacity soon, that bull market has got a ways to go.

Oil

LIU:All right. Jim, also talk to us about oil. You know, you’ve been very bullish on oil. We’ve had a lot of people talk about, you and I had a debate about whether or not there’s speculation in oil markets right now. You say no, others say yes, like Soros, he says it’s going to bubble. What do you know that others don’t about the oil market?
ROGERS: Look, look, Betty, there are always speculators in every market. Look at the New York Stock Exchange right now. You think there aren’t any speculators down there on the floor of the stock exchange? There are always speculators. That’s what business is all about. I submit to you that most of the people and – I don’t know about most of the people, I shouldn’t say that, but we know that the IEA, the definitive authority on oil has said that the world has an oil problem. The Saudis have told Bush that we have an oil problem. Betty, if there is lot of oil, please, would somebody tell us where it is, so we can all invest in it? The world has a serious oil problem. Now, Betty, that does not mean that oil cannot go down 50 percent. During this bull market since 1999, oil has gone down twice by 50 percent, going down by 50 percent in 2001 and again, in 2000 whatever it was, ‘05 or ‘06. So sure, you can have big reaction in any bull market. But that’s not the end of the bull market. There is no supply of oil unless you – somebody can tell us where the oil is, the bull market in oil has years to go despite new corrections which may or may not come.
LIU: Well, but you know, and I know you always hate having me ask you about – about limits or caps and all of that. But, given the supply/demand situation that you’re talking about, how high can oil go?
ROGERS: Betty, I know you – how you’re paid to ask questions like that, but I don’t know the answer. I’m not smart enough. I know that unless somebody discovers a lot of oil, the price of oil can go to $150, $200. You pick the number.

U.S. Dollar

LIU: All right, Jim. And I’ve got to turn to the dollar very quickly. What do you make of the comments by Bernanke earlier this week, noting the dollar slide, you have been very, very critical of Bernanke on this.
ROGERS: It is astonishing. Now, this is a man that under oath in Congress said, “If the price of the dollar goes down, it doesn’t affect ordinary – it doesn’t affect most Americans.” So, I almost fell out of my chair when I saw him say that. We know the man doesn’t know about markets, we know he doesn’t know about the currencies. Now, we know he doesn’t even understand civil economics, simple economics. So, I was astonished to see him, what, two or three days –
LIU: Right.
ROGERS: – suddenly said, “Well, if the dollar goes down, it affects us all.” It’s called inflation. So, somebody’s been teaching him economics. It’s about time, he should go back and take Economics 101.

This post is a follow-up from a previous post about Going Long The Dollar. There were some valid arguments for being bullish on the dollar, however, based on yesterday’s economic news, they no longer sound very convincing.

The jobless claims came out and the national unemployment rate is now at 5.5% (and this is after the bogus birth-death model numbers that are used to under-represent the actual unemployment figures).

Oil prices shot up 8.4% to $139/barrrel, marking the highest ever one day gain for oil prices. This occurred after the U.S. dollar nosedived on speculation that the European Central Bank would raise its key lending rate and on worries that a bigger-than-expected spike in unemployment meant the U.S. economy was far weaker than feared.

I actually had taken a small position in RYBSX, but I closed it for a small loss after hearing Friday’s news.

It’s much easier to predict long term trends rather than short-term trends. In the long term, I still think the Dollar is going down, so there’s no point buying RYBSX – might as well just stick to my Australian Currency shares ETF that has done so well for me. I continue to believe that we’re going to see stagflation and have been investing accordingly. I think it commodities like gold and foreign currencies will continue to do well.

I also think it’s much easier to make money on sure things like Countrywide(CFC) and WCI Communities (WCI) going bankrupt. (Disclaimer: even though my direction for the CFC and WCI trades was correct, I was just a few weeks early and still lost money!). I’ve been harboring suspcions about Fannie Mae(FNM) and Freddie Mac(FRE) going bankrupt. Not wanting to get in to early, I’ve missed the major decline in both stocks, but there seems like theres still a bit of downward movement. Let’s see how that pans out.

Regular readers know I’ve been pretty pessimistic on the outlook of the US economy and bearish on the US dollar as well. However, since it seems like everyone is echoing the same sentiment, could it be that we’re due for a short (or medium) term spike in the US Dollar?

According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:

1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

2. The “Smart Money” is Cashing In. The smart money – Wall Street institutions – tends to be a great leading indicator. If you can figure out what they’re doing in time. Right now they’re sending a clear signal – take profits on your bearish dollar bets. Case in point, as the dollar met heavy selling on May 21, the smart money took almost $100 million in profits out of Currency Shares Euro Trust (NYSE: FXE). Enough to top the Wall Street Journal’s “Selling on Strength” screen. And this isn’t the first time the ETF recently made the list. All told, the increased selling activity indicates the smart money fears we may never see such high prices again.

3. George Soros Changed His Mind. Even the smartest investors are entitled to a mulligan. After bouncing roughly 3% off the March lows, in recent weeks, George Soros told the Wall Street Journal he is now “neutral” on the dollar. And expects it to strengthen over the next 12 to 18 months. Accordingly, he “greatly reduced his bets against the greenback.” Bottom line – we should pay attention when this hedge-fund phenom changes his mind. Here’s why, copied and pasted from my first article in defense of the dollar…

“A trader named Jean-Manuel Rozan once spent an entire afternoon arguing about the stock market with George Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed.”

“Two years later, Rozan ran into Soros at a tennis tournament. ‘Do you remember our conversation?’ Rozan asked. ‘I recall it very well,’ Soros replied. ‘I changed my mind, and made an absolute fortune.'”

My guess is he will make a fortune on this change of heart, too.

4. The Fed is Done. Okay. Maybe one more cut looms on the horizon. But after that, it’s time to get back to fighting inflation and hiking rates. Futures traders awoke to this same reality once revised GDP numbers were released May 29. They ratcheted up their bets that the Fed would raise rates in late October, putting the odds at 88%. Before the release, odds of an October hike stood at 70%. As I said last time, the Fed will hike again. Soon. And such moves will immediately strengthen the dollar.
5. Busted Rhymes and Tattered Clothing. The crickets are chirping among the rappers and super models. It’s been a long time since we’ve heard (even rumors) about the world’s fashionistas and rhyme-slingers extolling the virtues of the euro over the dollar. In other words, when pop-culture embraced the dollar hating, it signaled the inflection point. And it’s time for them to get caught on the wrong side of the trade for such foolish speculation.

6. The Retail Investor is (Blindly) Headed for the Slaughter. Sad as it may be, the retail investor tends to always show up late to the profit party. Right now they’re headed to the slaughter. The proof – the number and popularity of currency ETFs literally exploded in recent years. As one long-time advisor told an IndexUniverse.com reporter, “I’ve never seen this much interest in currency ETFs before…There’s just a pile of money coming into these funds now.” And that pile, according to my research, sits around $4 billion, despite most of the ETFs being less than two years old. This reminds me of my days back at Morgan Stanley. Whenever management decided to launch our own Small Cap Growth Fund for example, because the asset class was so “hot,” the asset class was too hot. It was time to recommend our clients take profits. And now that betting against the dollar is fashionable on Main Street, it’s time we head the other direction or risk getting burned like the rest of the performance chasers.

7. New President = Clean Slate. Whether Barrack “Haven’t-Been-to-Iraq-In-A-While” Obama or John “I-Have-Anger-Issues” McCain gets the nod, a new president will get a clean slate to establish their very own dollar policy. At least temporarily. And thanks to record crude prices, expect the new Commander-in-chief to move from the current administration’s weak lip service to more meaningful actions in support of the dollar.

8. We’re Still Not Decoupled. At least not from Europe. Doubts about euro-zone growth continue to pop up. The latest – a weaker than expected composite purchasing managers index reading, compiled by the Royal Bank of Scotland and NTC Economics. The measure from across the 15-nation euro-zone slumped to 51.1 in May, the worst in nearly five years. Bottom line – the European Central Bank is in a pinch. It can’t hike rates in the face of a slowdown. And it can’t cut rates with inflation running around 3.5%. In the end, the stalemate buys the dollar time to narrow the interest rate gap.

9. Institutions are Secretly Hedging their Bets. It’s not news that international stock funds significantly outperformed U.S.-focused funds over the last seven years. Or that the dollar decline aided their outperformance. However, few realize these very same funds are now protecting their portfolios against a dollar rally. Three of the top money managers in the business (Harris Associates, Dodge & Cox and Henderson Global Investors) are now hedging up to 55% of their currency exposure. A big jump, considering the international funds from Henderson and Dodge & Cox never hedged their exposure since opening in 2001.
And last but not Least…

10. The Dollar Decline is Getting Too Long in the Tooth. As I said before, “the cyclicality of the markets instructs us that the pendulum will eventually swing back the other way.” Combine that with Einstein’s theory of relativity and one thing is clear: Although the “real” value of our flat currency may never recover, its relative value certainly will. And with the worst of the financial crisis probably behind us, I stand by my conviction. The worst of the dollar weakness is behind us, too.

Consider this my second warning that the dollar will rise. And soon. That makes now perhaps the last opportunity to position your portfolios for maximum gain.

Good investing,

Lou Basenese

If you do feel like going long, Rydex Strengthening Dollar 2x Strategy (RYSBX) is a good way to enter this trade.

If the dollar does strengthen, there’s a good chance my commodity investments (includes gold and oil stocks) and foreign currency ETFs will decline. I might use RYSBX to hedge against the rising dollar.

As I mentioned 5 weeks ago when oil breached $115/barrel, demand for the black gold will cause the price to keep on rising. On Wednesday, I drove to USC where I had an interview at the Marshall School of Business for the full-time MBA program. While driving there, I heard that Oil had exceeded $133 per barrel. I had a great interview (where I spoke about my background, my interests, the state of the economy, what a moron George W. Bush is, and the current elections) and then proceeded to a friends’ place to spend the night.

I later heard that oil prices hit $135/barrel. That news was broadcast incessantly on all the news channels and I kind of felt that it was being overdone. Whenever everyones saying that the price of something is breaking all records, it usually pulls back. I think thats why the US Dollar had shown some strength this year. I woke up on Thursday and bought the ULTRASHORT OIL & GAS ETF (AMEX: DUG), it went up a dollar and I exited my position, happy to have made enough money to pay for my gasoline bill for this month.

After that I went to UCLA for a class visit. I attended a class on Risk Management. One of the case studies they discussed was a deal between Amoco (American Oil Company, which is now part of British Petroleum) and Apache (APA) involving the sale of an oil producing property. Amoco sold the property with a guarantee to pay Apache a certain amount of dollars if the price of oil dropped below a certain amount. On the other hand, they would participate in some of the profits if the price of oil exceeded a certain amount. This was managed through the use of Put and Call Options.

It was interesting to see how large companies managed to hedge the price of oil through options, and especially ironic since oil was all over the news that day. Its not too different from how you can hedge your own expenditures on gasoline and heating oil. If you’re bullish on the price of oil and are willing to bet on this movement, you can buy the United States Oil ETF (USO). You can also buy options on this too.

Similarly, if you’re bearish you can buy the ULTRASHORT OIL & GAS ETF (DUG). You can also invest in Oil Futures contracts, however, if you’re that brilliant I doubt you’d be reading this blog!

But making directional bets in any asset class requires a certain amount of knowledge, homework and commitment. Its much easier to invest in high-yield Canadian Income Trusts like ERF, PGH, AAV, HTE, PEY-UN.TO, etc. They pay out a pretty good dividend (over 8% for most of them) and that should theoretically go up as the price of oil & gas goes up. (I say theoretically since there is some uncertainty regarding the Canadian Governments’ taxation of these trusts, so there is a black cloud hanging over them).

So far I’ve been pretty happy with my investments. I had been buying more on dips. For those of you lucky enough to have bought AAV under $9 back in January, in addition to the monthly dividends, you’ve already seen a 40%+ appreciation in the stock price! (unfortunately I wasn’t one of the lucky ones!)

But there are many ways to profit from the economic news if you keep your eyes open. By the way, USC called me on Friday. I got admitted to their MBA program with a Fellowship (tuition remmission)! So now it’s time to decide between UCLA, USC and UCSD!

Oil dropped below $114 today after hovering around $117 per barrel. But I still think the long term trend is up.

According to Kevin Kerr, editor of a commodities investment newsletter,

“The U.S. is filled with gas hogs, but the developing world is catching up. Last year, Chinese drivers bought 5.5 million cars, minivans and SUVs and 3 million commercial vehicles, up from just 1.6 million vehicles sold in 1997. Sales are expected to grow 15-20% this year. Looking down the road, China’s auto sales are expected to grow by 1 million vehicles annually through 2015.

“Meanwhile, India is poised to rocket past China as the world’s fastest-growing car market. Sales of passenger cars in India increased 12.17%, to 1.5 million, in this past year.

“As a result, China’s oil imports are expected to nearly double by 2020, and India’s oil imports are projected to more than triple over the same time period. So while $120 oil and $4 gas may seem expensive, it’s likely that in three years, we will have $250 crude and around $8 gas. I wonder if the ‘experts’ will still be debating whether oil prices are high by then.”

Seems like someone else agrees with my prediction of $8 per gallon gasoline!

Solar energy stocks have also been on a tear lately. I had shorted First Solar (FSLR) earlier this year and I closed out my position with a small profit. However, since then its spiked from $195 to nearly $295! I would’ve made a lot more money if I had just gone long! It’s currently sporting a very high PE ratio of 143. Despite its ~50% jump, I don’t feel comfortable buying stocks which have absurd valuations. As Buffett’s mentor Benjamin Graham believed, you should always look for a margin of safety. There’s no safety in over-paying for a stock.

But regardless of the increase in green energy stock prices, I think alternative energy sources will take a lot of research and time before they can replace oil as a major source of the world’s energy. Until then, I’m happy to keep holding on to my dividend-producing canroys.

For any of you that think ethanol is a viable long-term alternative, I strongly recommend reading Time Magazine’s article: The Clean Energy Scam.

[Amazon Rainforest surrounded by Sugarcane fields]

This is a picture of Brazil’s Amazon rainforest which has now been replaced by sugarcane fields to produce ethanol. Yes, its a cheap alternative to Oil, but it is in no way a better or a green solution. In the US, using a food source to produce energy is even more moronic. But until we start having our own food riots, I doubt the government subsidies will go away.

Oil just broke through $115 per barrel today. While this may come as a shock to many , I’ve been preparing for it for the past 2 years. All the signs of an oil shortage have been visible in the media, but most people have either been ignoring it, been in denial or been too focused on what Paris Hilton or Brittany Spears have been up to!

China and India together have  a third of the world’s 6.66 billion people. If 10% of these 2.2 Billion people start buying cars, that’s 220 million new cars on the planet ready to start guzzling more gasoline. I think thats the current number of cars in the US, so effectively the demand on oil is set to double over the next few years. And along with Tata Motors new $2,500 car, you can be sure that eventually atleast 20% or more of India’s and China’s population will be driving cars instead of cycles or mopeds that give 247 miles/gallon. That 247 number is  not an exaggeration. Owners of Suburbans should refrain from crying right now.

Based on the growing prosperity in just these two countries, the demand for the world’s resources is growing at a furious pace. Unfortunately, oil is a key component of prosperity and the global supply of it is somewhat stagnant. Despite a few  new oil fields being found here and there, new reserves are not keeping up with the depletion. According to one report, all the oil in Alaska would last the US for only 6 months.

If you think that gas prices are high at over $3.50 per gallon (I just paid $3.95 for mid-grade for my wife’s Acura TSX), wait until summer. There are reports that the refineries are absorbing the cost of high oil prices right now (and some of them have hedging contracts in place to mitigate this high price), but within a few months they’ll be passing this burden on to the consumers. Oil prices at the pump could very well hit $5 and if this trend continues, it could hit $8/gallon. 

In the UK, petrol (that’s what the rest of the world calls gas) costs about 1 pound per litre, which equates to $7.50-8.00 per gallon. Now you Suburban owners can cry now if you like. Or you can start investing in oil related investments like Canroys and oil drilling programs.

gold bullion coins, krugerrands, maple leafs, australian gold nuggets, american golden eagle

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

Of course, the stock markets loved this move because it means the Fed is going to prevent banks from failing. However, this $200 Billion bail-out doesn’t come without a cost. The Fed is going to have to print an extra $200 Billion to cover this deficit. But it was a clever move, because Bernanke didn’t have to cut interest rates before the 17th of March, when he’s slated to do so anyway. Another move like that might have created a panic in the markets instead!

Bloomberg reported today that OPEC is going to make about $927 Billion dollars from the sale of oil this year. That’s almost $1 Trillion dollars! Worldwide, sovereign wealth funds (SWF) are thought to be worth about $2.8 Trillion. Considering that the combined wealth of global nationalized assets is about $12 Trillion, that’s really impressive. It probably means that SWFs and OPEC will start buying up pieces of America, since they really can’t do much else with all those US Dollars. Of course, they could buy Treasuries, but it seems like everyone’s now realizing that they’re useless as the dollar keeps on devaluing. Meanwhile, the US government is helpless against stopping the sale of US assets. Our own SWF is negative $9 Trillion, so we have some catching up to do before we can actually buy anything. I think the government’s best bet is to make all those Trillion worthless by printing more and more dollars. Bernanke knows this and so far he’s doing a bang up job. Of course, this leads to severe inflation, but don’t say I didn’t warn you.

Considering how wrong our economic advisers have been so far, I think it’s safe to assume the 0.3% GDP growth that’s forecast for the year is a tad optimistic. While everyone’s still denying it, I think we’re already in a recession and along with inflation, that amounts to a 70s style stagflation scenario.

Considering that consumer spending has slowed down and is likely to continue, US companies are going to go through some tough times. How do you protect your stock investments then? You can’t sell them and move to cash, because the US dollar is sliding too. Coupled with inflation, your wealth is going to slowly (or maybe not so slowly) erode over the next several years.

Here are some investment ideas:

1. Diversify into foreign currencies: I like Australian Dollars, Swiss francs, Japanese Yen. Jim Rogers likes Chinese Remnimbi and Warren Buffett like the Brazilian Real. Take your pick.

2. Buy US giants with international exposure: Consumer staples have historically done very well over the past 60 years, regardless of the economic scenario. I like stocks with a decent dividend yield like Pfeizer (PFE), Johnson and Johnson (JNJ), Merck (MRK), Unilever (UNL), Proctor & Gamble (PG), Kraft Foods (KFT) and Anheuser-Busch (BUD).

3. Invest in agriculture: Bush’s moronic plan to reduce our reliance on foreign oil by substituting ethanol has only resulted in a surge corn prices. The economic growth in countries like China, India, Russia and Brazil is increasing the size of the world’s middle class. These people will be improving their diet and adding more meat and veggies. They’ll also be drinking more milk. There’s already surge in global prices of all of these soft commodities. There are quite a few ETFs that will help you profit from these trends, like PowerShares Agriculture (DBA) which consists of 30% soy, 28% wheat, 23% corn, 16% sugar, Van Eck Agribusiness (MOO) [8% Monsanto, 8% Mosaic, 8% Komatsu, 8% Potash Corp] and PowerShares Commodity (DBC) [33% crude oil, 20% heating oil, 14% wheat, 11% aluminum, 10% corn, 10% gold].

Along with this, a demand for fertilizer will result in compannies like Potash Corp (POT) doing very well. If you’d like to invest in milk, American Dairy (ADY) and Dairy Crest (DCG) are too suggestions, but I haven’t done much research on them.

4. Buy Gold: I don’t think it’s too late to start investing in gold. You can buy gold coins and bars, the gold ETF (GLD) or mining stocks (GDX).

5. Invest in Metals: The global boom is creating a huge increase in the demand for metals like copper, iron, aluminum, zinc, etc. Mining stocks like BHP and RIO have done very well. Indian company, Sterlite (STL) also looks like it has good long term prospects.

6. Invest in Infrastructure: Not only is America’s infrastructure collapsing, but global growth makes betting on infrastructure a safe bet. I like Brookfield Infrastructure Partners (BIP).

7. Invest in Oil and Gas: Major oil companies like Exxon-Mobile(XOM) have served its investors well for decades. I’ve also invested in direct oil drilling programs, which go out and drill wells with your money and give you a share of the proceeds. I also like Canadian Royalty Trusts that invest in oil fields. There a few new ETFs that buy heating oil and gasoline futures. I’d stay away from these as their performance is as yet unknown and they might be subject to backwardation and contango.

8. Invest in Water: Water pipes all over the US are breaking. Built after WWII, these pipes had a lifespan off about 50 years. As the nation replaces these pipes over the next several years, cast-iron pipe companies are set to make a killing. Check out NorthWest Pipe (NWPX) and the water ETF (PHO).

I don’t know about the rest of US, but Nevada and Southern California are going to face a huge water shortage in the next decade. Most of the water comes from Lake Mead and the tremendous population growth in Las Vegas and Henderson has tapped the limits on the lake’s capacity. Check out this photo:

Lake Mead Hoover Dam

Dont’ you think a company that owned the water rights in Nevada and California would make a decent amount of cash over the next few years.


India’s Tata Motors just unveiled its 100,000 rupee car today. According to today’s exchange rate, that works out to $2,551 which makes it the world’s cheapest car. Its a small car, with a 624 cc engine and seats 4 adults comfortably. (If you’ve ever sat in a rickshaw, you’d have a slightly lower standard of comfort).

[Tata Motor's Nano: The World's Cheapest Car.]

This is good news of hundreds of millions of Indians who currently drive scooters and motorbikes and can now afford a car. The Nano costs about twice as much as a mid-range bike does. So you can expect it to wildly popular, especially in India and South East Asia.

Even though its very fuel efficient, at 76 miles/gallon in the petrol version (diesel version is expected to give you 92 miles/gallon) compared to the 195 miles/gallon you’d get from a scooter (& more from some bikes), its a rather large step down. This means that India’s consumption of oil is set to increase.

According to Peter Schiff‘s Global Investor Newsletter:

In 1900, we Americans were using one barrel of oil per person annually. By 1970, we were using 27 barrels per capita. At the end of World War II, Japan was using 1 barrel per person. By 1970, they were using 17. Today, China uses 1.3 barrels per person annually and India uses .7. The increased demand this similarity infers is staggering.

The standard of living for millions of Asians has been increasing dramatically over the past few years. The per capita consumption of oil is going to rise significantly as these people buy more cars and goods. If you believe that we’re at peak oil production already, this means that there is going to be a severe shortage of oil over the next years, which should lead to higher prices. Higher oil prices led to higher inflation.

According to Bloomberg, option traders are speculating that oil will hit $200/barrel in a year. While I think this is a long-shot, oil prices are likely to keep heading higher.

Oil is currently trading around $100/barrel. Why oil at the pump costs the same as when oil was $60/barrel is a bit of a mystery. Maybe the upcoming election has something to do with it? I really don’t have a clue. But so long as my Canadian Income Funds keep producing, I’m happy!

Click here for deals on a used bmw or used japanese cars.

Since I decided to kick the old job (which was a hard habit to break), I’m going to be more reliant on my passive income. Part of my passive income comes from Canadian Income Funds, some of which pay out over 16% in annual yields. They pay out the dividends on a monthly basis and after tax (which the Canadian Government takes out at source) it still works out to over 1% per month. This is about 3 times what I get in my savings account!

Also, being enrolled in the dividend-reinvest program (also called DRIP) my dividends are used to buy more stock every month without paying a commission. Any best of all, some stocks offer a discount to the prevailing market price.

I added to my position in Harvest Energy Trust (HTE) yesterday. I calculated I have too much money in savings, even if I don’t have a job for the next year. So I decided to take a little bit of money (from my Bank of America account, which pays half a percent in interest) and buy something that yields 16.5% per year (just over 14% if you consider the Canadian Tax). While the monthly increase in my cashflow is not significant, its still a good optimization of my resources. And after all, leveraging and optimizing one’s resouces is how you get rich. Their DRIP offers a discount too.

If it drops a bit from here, then I’ll probably buy more, else I’ll buy Australian Currencyshares Trust (FXA), which pays out ~5.5% yield. If the Federal Reserve cuts the rate tomorrow and the Reserve Bank of Australia boosts it next week, we could see parity between the USD and AUD in fairly short order.

In the long run I think energy prices are heading higher and the USD is heading lower. Having the conviction to follow through with your beliefs is also an important factor to becoming rich. Either way, I’m pretty sure exchanging my USD for something else is a good idea.