Investing Away from America

There is a high liklihood that the public debt will be paid back through several different means: higher taxes, limited spending and most significantly dollar devaluation (aka inflation) over a long period of time. Higher taxes and limited government spending will put a cap on American economic growth and will ensure a very slow economic recovery or even stagnation. An extended period of 1-3% GNP growth can be expected. But with a weakening dollar, it is possible that rate of growth will not keep pace with inflation of 5-7%. So, real GNP will be negative for several years undermining domestic investment returns. All this is very remiscent of the late 1970s.

But there was a way to make decent, and maybe even excellent, real investment returns in the 1970s. It was by investing away from America in hard or real assets like commodities and in the growth of non-dollar economies like Japan.

In the 2000s, the new Japans are the BRIC nations: large, motivated and politically willing. Today's post is on investing in three of those four. Brazil, India and especially China meet my requirements for foreign market investing. But Russia, I do not trust. Its political system has shown contempt for foreign investment. It very much resembles the politics of the USSR, with a newly energized "politburo" that controls the economy and stifles free enterprise (though we here in America are catching up fast on this front). So, I will focus my non-dollar investments in BIC, not BRIC.

As of today, I am selling all of my long term international mutual fund investment in Fidelity Diversified International (FDIVX) and will gradually move those dollars in equal amounts to IFN (India Fund), EWZ (Brazil ETF) and FXI (China ETF). I will dollar cost average in because all three markets / funds have just experienced a very strong surge from the bottom of the market crash and may correct.

My goal will be to move my portfolio to 20% in non-dollar market investments. Beyond the country ETFs, I also will buy strategic investments in Canada, Australia and non-China Asia. I will have another 35% of my total portfolio invested in commodities and energy. This position is already in place with most of the commodity portfolio in Canadian Royalty Trusts (Canroys). I am also adding FXC and BHP to provide more industrial metals exposure along with additional precious metals exposure, adding to VGPMX and GGN by buying gold miners like AEM and AUY. The balance of my portfolio will be in domestic stock and bond funds, especially high yield bonds which can keep up with the devaluing of inflation. In this way, my portfolio will have less than 50% US dollar exposure to protect against inflation and a decade long weak economy.

Today's Barrons runs a great story on this same subject.

The [most important factor in the coming commodity boom is the] growth of the middle class in the rapidly developing economies; large-scale infrastructure investments in many developing nations; and the emergence in these regions of a huge new consumer cohort, which has developed out of the poverty of the past. The size of this low-income cohort dwarfs anything the global marketplace has ever seen. Approximately one billion people, one- seventh of the world's population, are moving out of poverty and entering the market as consumers. If these billion consumers were a nation, they would have the third-largest population in the world and the 10th-largest gross domestic product.

China lacks the raw materials it needs to manufacture steel. This has turned it into the world's largest importer of iron ore. It has been accounting for 40% or more of the international iron-ore trade in recent years. China's need for steel will continue long into the future. Remember that the U.S. took 35 years to finish its Interstate highway system. It took 16 years for Japan to build its New Trunk Line railway. Even with China spending a reported 9% of its GDP on infrastructure, it will take decades to bring its roads, ports, airports, power-generation capacity and other infrastructure systems up to speed.