Navigating the Depression: Investor Edition

In the last edition of Navigating the Depression, we discussed a few simple ways to save precious dollars. But if you're in the enviable position of having two nickels to rub together, how do you preserve and grow your wealth?

We have advocated a diversified portfolio of gold, stocks, and cash. The gold and cash have done phenomenally well; the stocks, not so much. While most investors are panicked about stocks right now, we are more worried about the cash. Bernanke, Paulson, and the incoming Obama Administration have made it clear that they will take on any liability and increase the public debt to previously unimagineable levels in order to bail out every reckless debtor in America: Citigroup, Fannie Mae, Freddie Mac, AIG, GM, Ford, housing speculators, credit card binge buyers, etc. Such policy can only lead to one thing: hyperinflation. Sure, we face short-term Depressionary deflation, but the policy response is sure to go too far the other way.

What do you want to own in a hyperinflationary environment? Gold, foreign currencies of responsible governments, stocks, and, yes, even real estate. As overpriced as real estate is today, it will do well during the coming inflation. Why not borrow a million dollars to buy yourself a nice house today when you'll be paying it back with Monopoly money? If the politicians are intent on destroying the currency, you might as well get a free house out of it. If you can get a fixed 30-year mortgage around 6%, that's the closest thing to free money you'll ever see in this lifetime. And if you ever get in trouble making the payments, the government-owned Fannie and Freddie and the government-dependent banks are highly unlikely to ever foreclose on you.

We are still wildly enthusiastic about the GDX gold miners index. We have March call options on it, as well as holding plenty of the GDX itself in addition to the GLD ETF and what little physical gold we could find the past several months. We also like stocks with good balance sheets and cash flow. This blog cannot recommend individual stocks, but there is a huge, very well-known semiconductor company with a rock-solid balance sheet that has a dividend yield around 4.5%, far higher than Treasury bonds. Its competitors face bankruptcy if the economic downturn continues. Do you buy the Treasury bond that will be destroyed with inflation, or do you buy the chip stock whose products, assets, and dividends will rise with inflation? We at the W.C. Varones Blog would buy the chip stock all day long.

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