March 7, 2007
I wrote a piece over at The Liberty Papers about the potential destruction/decline of the American economic empire.
Basically I look at it this way: The housing meltdown, coupled with a recession and the bursting of an enormous mortgage-backed securities and derivatives markets, will make our economy take a serious hit. That, coupled with the inability to cut taxes further, a government in major deficit, and a tight credit market, and the situation will be nearly impossible to get out of for a while. Further, our government will attempt to provide liquidity by printing dollars, inflating away the housing crunch, and inflating away a lot of actual wealth at the same time.
Further, with the news that Venezuela is looking to divest the dollar as a reserve currency (worried about inflation), and the implicit assumption that a quickly-inflating dollar will cause more countries to do the same, and America could hit a level of hyperinflation worse than we’ve ever known here.
Bad, bad stuff.
So I’m wondering how to protect myself against it, and potentially reap some profit off the situation. Right now, the wife and I have a decent modest sum (at least considering our age) in 401k and Roth IRA, currently in vanilla mutual funds (decent risk for hers, S&P-based index funds for mine). I’m looking at the idea of rolling my 401k over into an IRA, where I have more ability to place it in investments I can control.
I think right now seems like a great time to jump out of the broader stock market and get into commodities (probably precious metals) and energy. After all, we’ve done fairly well in our generic stock market holdings over the past few years. But the market seems to be dropping out of a period of stable growth (as was evidenced in last Tuesday’s 400-point drop in the Dow), and that will destroy leveraged positions. Precious metals should do very well in an inflationary environment, and I think energy will carry some stability in an economic downturn, as energy usage is somewhat inelastic.
I was thinking about taking my wife’s holdings (about 33% of our total position) and splitting it between gold/silver directly and gold/silver mining stocks. I was then thinking of taking my holdings, and putting about half of it into the energy sector, and the other half in foreign holdings (if I can get them somewhere I think will avoid following America’s economic meltdown).
For those of you who understand investing a little better than I do, what do you think?
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