Last week, I attempted to show how the debt burden of the United States is comparable to homeowners who've since bit the dust. Some bought the argument, others didn't. Either way, I promised to propose a way to invest around such circumstances.
How to invest around a stupendous national debt
Take a look at this quote:
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value ... If everyone decided ... [to stop accepting dollars], bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods ... Deficit spending is simply a scheme for the confiscation of wealth."
There's so much negativity swimming around markets right now, it's hard to take anything so downbeat seriously. If that quote were penned by a looney-bin conspiracy theorist, a doomsday forecaster, or a hedge fund manager with a huge bet against the dollar, I'd expect you to ignore it.
But it wasn't.
Those are the words of Alan Greenspan back in 1966 when, ahem, the nation was on a gold standard, meaning you could exchange your paper bills for actual shiny gold.
Those were the days
In 1971, Richard Nixon abolished the gold standard, giving the U.S. free rein to print unlimited amounts of currency. Unlimited ability to print turns into unlimited amounts of debt, and unlimited amounts of debt lead us to where we are today.
Consequently, as Warren Buffett put it last year, "We are following policies in this country that will lead to a continued decline in the dollar."
Fair enough. So how do investors maneuver around the weak dollar? You could turn to gold, which might do quite well in the near term. Unfortunately, gold has never paid a dividend, costs a bundle to store safely, and hasn't gained much purchasing power in thousands of years, literally. If you're looking to hold gold indefinitely, you're unlikely to come out ahead with superior purchasing power.
Head abroad, young man
There is, however, a better route investors can take: Purchasing domestic stocks that do large amounts of business in foreign currencies. The idea here is that revenue derived in a stronger currency translates into a higher number of dollars, which is what you and I living here in America really care about.
Here's a list of some well-known large-cap companies that derive the majority of their revenue outside of our borders.
|
Company |
2007 Percentage of revenue outside the U.S. |
One-year return |
Five-year return |
CAPS rating |
|---|---|---|---|---|
|
Intel |
80% |
(7.9%) |
(13%) |
**** |
|
Coca-Cola |
74% |
(2.1%) |
13.6% |
**** |
|
Schlumberger |
76% |
4.9% |
327.1% |
***** |
|
ExxonMobil |
69%* |
(5.7%) |
125.6% |
**** |
|
Hewlett-Packard |
67% |
(7.4%) |
100.9% |
**** |
|
3M |
63% |
(22.7%) |
(1.5%) |
***** |
|
Procter & Gamble |
58% |
1.6%
|
42.6% |
***** |
*Latest 12 months.
Contrast that with the Dow Jones Industrial Average being down some 16% in the past year, and up around 20% in the past five years, and you'll notice this short list of overseas powerhouses has done a bit better than the averages as a whole.
The big winners, ExxonMobil and Schlumberger, moved higher over the past five years on the strength of the price of oil, of course. Before you consider these companies outliers in the list, ask yourself a question: What came first ... profits, or a weak dollar?
Sure enough, ExxonMobil boasts on its web site, "From January 2002 to March 2008, the price of Brent crude increased in nominal dollar terms by about 430%, compared to about 200% in Euros, reflecting the weakness of the dollar." For domestic consumers, a weak dollar can be miserable. For companies doing business in foreign lands, it can be a blessing. Given the choice, which side would you rather be on?
Foolish bottom line
No, investing in companies that pull in money from overseas won't balance our trade deficit, pay down our national debt, or help right the economy. What it can do, however, is give you a leg up on years of policies that are all but certain to keep the dollar weak. What the economy does and what economic policies get implemented aren't exclusively up to you; what policies your portfolio follows and how you decide to react to the current situation, is.
For more on trade deficits, national debt, the weak dollar, and other Foolish economic dilemmas, check out:
- A closer look at trade deficits.
- How some of the major problems plaguing the economy are all linked to each other.
- What companies are set to benefit from the weak dollar.
- Why some Fools think the dollar will rebound.
