Quantum Pranx

by Lorimer Wilson
Originally posted May 11, 2010

http://www.munknee.com

THE GREAT DOLLAR DEVALUATION DISASTER HAS BEGUN and will continue — with minor short-term pauses and corrections in the decline — for at least the next two to three years and at the very least, the dollar will sink so low and inflation will soar so high that you will eventually need at least TWICE the income you have now just to survive. A lifestyle that costs you $100,000 per year today will be $200,000 or more.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited excerpts from Larry Edelson’s (www.uncommonwisdomdaily.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Edelson goes on to say:

The U.S. Dollar: Not Worth the Paper it’s Printed On! If that is not bad enough, as the dollar dives and global confidence is totally shattered, inflation is likely to be even worse as happened in:
a) 1923 Germany where inflation was so rampant some people fed marks into their stoves, because they burned longer than the amount of wood they could purchase with the worthless paper.
b) 1970s Brazil where inflation was so rapid that merchants had to close their stores at mid-day to mark up prices on merchandise.

Whether inflation becomes this severe in the U.S. or not, I am certain it will NOT be limited to our inflation experiences of years past. Those were caused strictly by higher energy prices, soaring wages or shortages in select commodities. The coming hyperinflation will be triggered by many of those forces PLUS the death of the dollar as the world’s reserve currency … a collapse in confidence in the U.S. government … and the ensuing stampede of global investors out of the dollar … into things that protect them as the dollar careens into the abyss. That will affect you in ways most people haven’t even begun to fathom. It will mean:
1. The purchasing power of your money will collapse like a house of cards.
2. The prices of the most basic goods and services will soar.
3. Savers will be left in the dust as the value of their cash implodes.
4. For those who truly understand history, the profits will be almost boundless — and found in every corner of the globe! Indeed, for those who know what YOU now know … and who take steps immediately to protect their wealth, this great crisis could be a Godsend.

How to Protect Your Wealth in Such Times
1. Keep LESS cash on hand Cash, quite simply, is about the worst place to put your money when the dollar is being deliberately devalued. Don’t believe me? Consider what famed investor Warren Buffet recently said about cash: “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” this is not new. It’s been that way for cash for a very long time. For instance, today it takes …
- $6,167.83 to buy what $5,000 bought just ten years ago
- $27,319.59 to buy what $5,000 bought in 1970
- $44,075.92 to buy what $5,000 bought in 1950
- $4.29 to buy a McDonald’s hamburger — which cost a mere 57 cents in 1959 — an increase of 653%, or just over 13% per year. A little over six years from now a Big Mac could cost twice that, or $8.58, if not more.

This is happening because: a) this the worst financial crisis since the Great Depression, and b) Washington is now doing more to deliberately devalue the dollar more at any other time in our country’s history.

What should you do with your cash? Should you keep most of it in CDs, money market funds, notes or bonds or Treasury bills? My answer is, no way, because whether it’s in money markets, bonds, or hidden under your mattress — cash dollars are quickly becoming trash.

My rule of thumb is to keep no more than 6 months worth of living expenses in cash to pay bills, to pay for basic services, for emergencies – and the more cash you can keep in NON-U.S. dollar accounts, the better. That way, you’re automatically reducing the damage that can be caused to the purchasing power of your money as the U.S. dollar falls — because, plainly and simply, you’re keeping a minor fraction of your money in the dollar!

2. Avoid these allegedly “safe” investments
a) Dollar-Denominated Certificates of Deposit (CDs). 
Used by millions of retirees and conservative investors — deemed “even safer” today due to the FDIC’s higher $250,000 coverage — CDs are just as bad an investment as cash because of the penalties for early withdrawals, for one thing, and paltry rates for another. For example, if you invest $250,000 in a one-year CD is government-insured right now and you are only earning 1.6% and you need that money, for whatever reason, you’ll get hit with a penalty that will wipe out your earnings. In addition, were the dollar to fall just 10% in the next 12 months you would experience a net LOSS of 8.4%! Safe investment? Hardly!

b) Money market funds, short-term U.S. Treasury bills and Treasury-bill funds
Yes, you can pretty much count on getting your money back, but not the purchasing power of that money. BIG DIFFERENCE.

c) Traditional savings and checking accounts
Forget them, other than for perhaps your six months of emergency cash. Although insured, the yield is effectively zero and there’s no protection against the falling dollar.

d) Bond and bond funds
These are potentially even worse than cash because your investment is denominated in dollars, and those dollars will be losing purchasing power, no matter what the yield is on bonds. Furthermore, with mountains of debts crushing the U.S., bonds are most likely going to crash. You could easily lose another 20% or even 30% of the principal you invest in the bond market. Taken together, if the dollar loses just 10% of its purchasing power in the next 12 months and bonds lose 10% as they fall, you’re effectively looking at a 20% loss. A lousy investment indeed.

e) Treasury notes
Any Treasury with a maturity of more than one-year, most corporate bonds, municipal bonds, and most sovereign bonds. In other words, stay the heck out of bond market!

3. Dump stocks in vulnerable, dollar-sensitive, stock market sectors You don’t want to be in the stocks of companies that will see their revenues, earnings and balance sheets destroyed by the dollar’s demise. You’ll lose your shirt on them. My recommendation: With few exceptions, dump the stocks you own in the following five sectors because of their vulnerability to rising inflation and interest rates:
— Pharmaceutical
— Banks
— Insurance
— Utilities
— Tech

Three Investments Likely to Keep Your Money Safest in 2010
What should you do with the cash you have above and beyond your six months of emergency dough? My recommendations are as follows:

1. Inflation-adjusted Treasuries, or TIPS
Don’t plan on putting money in TIPS and keeping it there for much more than a year. They will underperform inflation and the loss of purchasing power in the dollar because they are based on the jerry-rigged and absolutely fraudulent inflation figures put out by the government via its Consumer Price Index (CPI). In the end, they are also bond investments. However, since they do offer you some inflation protection, and since you can own them short-term and they are very liquid, they are worthy vehicles for holding most of your cash. At least when your cash is not invested making you big money, which I’ll get to shortly.

One of my favorites is the iShares Barclays TIPS Bond Fund (TIP) which is an ETF, which means you can get in and out easily. This investment has had a one-year total return of 8.27% … a three-year of 6.15% … and a five-year total return of 4.43% … and, as such, a great place to put some of your cash — but I repeat, only when that cash is not invested per my profit strategies below. Keep in mind, as an ETF, this investment is also subject to market fluctuations, meaning the potential for both gains and losses.

One way to help eliminate the downside risk in the bond market now, while holding an ETF like the above for greater returns that you can get just about anywhere else with your cash — is to simultaneously buy an inverse bond ETF that gains when interest rates rise and bond prices fall. That way, you’re market neutral. So if you want to reduce risk of owning a short-term bond ETF like TIP, consider buying the Direxion 10-Year Treasury Bear 3x Shares (TYO). Since TYO is a triple-leveraged ETF, for every $100,000 you invest in the iShares Barclays TIPS Bond Fund (TIP) — invest only about one-third that, or $33,000 in the Direxion 10-Year Treasury Bear 3x Shares (TYO). Overall it reduces the yield you earn a tad, but it goes a long way to protecting your principal. Keep in mind though that I recommend this type of investment for your idle cash, but only for short-term purposes, since you are still exposed to a falling dollar.

2. EverBank’s Commodity Basket CD Available in three- and six-month terms, this CD is comprised of four currencies from commodity-based countries, and invests 25% equally in the Australian dollar … the New Zealand dollar … the Canadian dollar … and the South African rand. They yield about 2% right now … there are no monthly account fees … the minimum investment is $20,000 … and they are FDIC insured. Overall, a nice contra-dollar investment, but again, only for short-term three- and six-month purposes. You should not tie up your cash in long-term CDs. Not now, and probably not later either!

3. Gold: The World’s Only Real Money
Forgive me for being so blunt, but I can think of no other way to convey the urgency of what I have to say now: If you don’t own gold, you’re not only being screwed by Washington, you’re screwing yourself! Don’t think of gold as speculation. It’s not. Gold has proven its value. It has maintained its purchasing power for five thousand years and it’s outperformed cash by light-years. Consider the following:

On one hand, $5,000 in cash squirreled away in 1913, when the Federal Reserve was created, is now worth only 4.5 cents. That’s right, 4.5 cents. Or, put another way, it would take $110,582.14 of today’s money to buy what $5,000 would have bought in 1913. On the other hand … $5,000 invested in gold in 1913 would be worth $287,500 today! So whereas cash lost almost 99% of its value since 1913 … gold gained 5,650%!

Pick just about any other 20-year period, and you’ll find a similar relationship. Cash is a lousy investment, while gold is the only true form of money that has not only held its value, but also kept pace neck for neck with the decline in the purchasing power of the dollar so that’s not speculation in my opinion. That makes gold the ultimate insurance policy … the ultimate protection … the ultimate form of money.

What Gold Investments? Don’t just run out and buy gold, because buying gold the wrong way could be a costly mistake. I recommend that all investors keep up to 12.5% of their total liquid net worth in physical gold and gold ETFs, further divided in half per the following allocation:

a) Gold Bullion: I prefer the one-, five- and ten-ounce gold ingots and bars purchased only through the most reputable of dealers. Store it in your bank’s safety deposit box. It’s simple, safe and worry free. [Absolutely not! Since when can you trust a bank? Or trust a government not to take over a bank? Keep it where you have full control over it! –Aurick]

b) The SPDR Gold Trust (GLD): This exchange traded fund (ETF) owns the physical gold for you, letting you have a share without the storage hassles. Each share of the GLD equals 1/10 of an ounce of gold.

Five Investments Set to Soar as the Dollar Dives
Also, invest in assets that are going to benefit from what Washington is doing to the dollar, including:

1. Foreign currencies, which are rising in value against the dollar, and where you can also get a nice return. Two of my favorites right now are the New Zealand and Australian dollars.

2. Foreign stock markets, especially those that are rich in natural resources and where billions of new consumers are driving their economies upward. Examples: China, India, and most of Southeast Asia.

3. Natural resource companies that control huge amounts of commodities now in great demand … the very same commodities that are also rising in value as the dollar plunges. The list includes not only gold but also oil, gas, iron, steel, aluminum, zinc, nickel, uranium, wheat, corn, soybeans, sugar, coffee and even water.

4. Gold stock mutual funds such as: Tocqueville Gold Fund (TGLDX), U.S. Global Investors World Precious Minerals Fund (UNWPX), and the U.S. Global Investors Gold and Precious Metals Shares (USERX).

5. Select gold mining shares but do not buy just any gold mining company. Many don’t have enough gold to make it very far or they hedge their gold and won’t profit as gold continues higher or they are just plain mismanaged – or all three. Instead, buy the cream of the cream — not only big, senior miners, but also highly leveraged, well run, mid-tier producers. Plus, don’t miss out on up-and-coming gold exploration companies, the ones that will be the next giants in the industry.