I am not a gold bug. I am not a Peak Oil fanatic. I am neither an Obamaniac, nor a raving, anti-Obama loon.
But I am a realist.
And I realize that presidential policies can affect our success as investors. So when the president gave his State of the Union speech a few months ago, I listened in -- and here's what I heard him promise to do:
- Control the deficit, without raising taxes.
- Create jobs.
- Double American exports over the next five years.
In his 69-minute speech, the president touched on many subjects, but these three were the ones that jumped out at me. Why? Because they've all got something in common: They will probably require us to devalue the dollar, and unleash inflation.
Shrink that greenback!
Each of these goals, you see, costs money. But "money" is a funny subject -- on any given day, any given country's currency varies relative to every other country's currency. When the U.S. dollar is "weak," for example, debts incurred when the dollar was "strong" cost less to pay off.
For example, say you're the U.S. Treasury and you owe China 20 bucks over the next week, but you have only $10 allocated from the tax-receipt kitty. To make up that $10 shortfall, you could borrow another $10. Or you could print $10 and pay off the whole debt right away.
That second option won't please China, of course. But it doesn't sound as dirty as "default," and technically, it does pay off the loan. On the other hand, as Berkshire Hathaway Chairman Warren Buffett famously foretold: "Unchecked greenback emissions will certainly cause the purchasing power of [the U.S. dollar] to melt." More dollars in circulation means each individual dollar is worth less. Which brings us to the president's other objectives.
How do you pump hundreds of billions of dollars worth of federal spending into the economy?
- You can raise taxes -- but for the vast majority of taxpayers, the president has promised not to do that.
- You can borrow the money.
- Or you can manufacture money out of thin air.
That last point is key. Printing money and spending it on federal programs doesn't just create jobs for the workers on those programs. By creating more dollars, it further dilutes the value of the dollar, making it weaker against other currencies. A given number of euros, yen, or renminbi can therefore purchase more dollars. Likewise, goods priced in dollars become cheaper to foreign buyers.
You can see where this is going. Everybody loves a sale, and as the dollar shrinks, and U.S. goods become cheaper, foreign demand for these goods should rise. This will boost exports (as the president promised) and create jobs in export-related industries (as the president also promised).
So you see how neatly inflation and devaluation of the dollar accomplish the president's three key goals. It makes it easier for us to pay off our debt. It increases exports of cheap U.S. goods. And it creates jobs. Mission accomplished.
Of course, there's a downside to all of this. Devaluing the U.S. dollar is great news for exporters of U.S. goods, but it means that when we want to import stuff priced in dollars, our purchasing power will shrink (as Buffett foretold). Which brings us to the question of how investors should prepare their portfolios for D-valuation Day.
The first and most obvious answer is: Buy gold stocks. Gold's the classic inflation hedge, which is why whenever people start batting "the i-word" about, the stock prices of Goldcorp (NYSE: GG ) and Newmont Mining (NYSE: NEM ) skyrocket. Both stocks are beating the S&P's returns this year, and as for the future ... Newmont, at least, still trades for a below-market multiple on forward earnings. If inflation kicks into high gear, shares of these two gold miners should perform well.
But gold is only one commodity. Many -- and many more useful -- commodities get priced in dollars. Oil from ExxonMobil. Copper from Freeport-McMoRan. Corn from Monsanto. If inflation rises, expect these industry top dogs' goods (and stocks) to rise in price as well.
Alternatively, a defensive response to a declining dollar would be to purchase shares of American companies that do substantial business in currencies other than the dollar. Ford (NYSE: F ) and Microsoft (Nasdaq: MSFT ) are two classic examples of global businesses that find profit in a plethora of places. Forty-three percent of Microsoft's revenues flow from abroad, while Ford actually does most of its business interenationally.
Mission accomplished (?)
These, as I say, are the logical moves to make in preparing your portfolio for several more years of an Obama administration. So why do I not own any of these seven stocks?
The answer is simple: I'm not convinced that the way the president wants things to play out is the way they actually will. Sure, one year ago the president said he wanted to "fix the banks." One year later, shares of Citigroup (NYSE: C ) , Bank of America (NYSE: BAC ) , and Wells Fargo (NYSE: WFC ) look much healthier than they once did. While their balance sheets remain opaque, it's clear that they're in better shape than they were around this time last year. But other presidential objectives -- keeping unemployment below 8%, or passing health-care reform by August 2009, didn't go quite according to plan. Which just goes to show you that ...
The future's uncertain
It's never easy to predict how monetary policy will play out -- not ours, and certainly not the policies in foreign lands such as Greece or China. Nor do we know yet how quickly (or slowly) the global economy will rebound, or how this will affect commodity prices, interest rates, or other factors. Some investors will choose to respond to this uncertainty by hedging against inflation, and I don't blame them for doing so.
Personally, though, I'm willing to accept that there will always be macroeconomic uncertainty that I cannot control, and focus instead on controlling those risks I can control. In short, I hedge against uncertainty, period. I do this by investing as the smart folks at Motley Fool Hidden Gems advise, by putting my money in companies:
- Run by management I trust.
- Producing copious cash flows.
- Sporting impregnable balance sheets with minimal debt.
But most important of all, companies that are small and nimble enough to shift their business models to handle whatever the economy throws at 'em -- inflation, deflation, recession, or recovery.
If that sounds like the way you want to invest, too, then we've got a great deal for you: Motley Fool Hidden Gems access for free for 30 days. Zero strings attached. Click here to read all about the team's favorite stock ideas right now.
Fool contributor Rich Smith does not own shares of any company named above. Berkshire, Coca-Cola, and Monsanto are Inside Value picks. Coke is also an Income Investor selection. Ford is a Stock Advisor recommendation. Microsoft is an Inside Value pick. Motley Fool Options is recommending a diagonal call position on Microsoft. Berkshire is both a Stock Advisor recommendation and a Fool holding. The Fool has a disclosure policy.