The US Treasury, Federal Reserve and Congress are attempting to re-inflate the US economy by working in concert to pump massive amounts of US dollar liquidity into the system. Although their policies have been successful in averting a complete financial meltdown, and stability has returned to US equity markets, the questions still remain: can US policymakers solve a commodity problem (oil) with financial policies? Can the US ever again attain financial solvency and economic security without first solving their addiction to foreign oil by adopting a strategic long-term comprehensive energy policy? If you’re an American investor and believe the answers to these questions are “No”, how should you position your investment portfolio to protect your assets and prosper in a future when America’s star is likely to dim?
The author has written many articles suggesting Americans invest in energy and gold to protect themselves against US dollar depreciation and the inflation resulting from decades of unwise US energy, financial, and fiscal policies. Just as important is what not to invest in: broad and “diverse” investments like the S&P500 and bonds (with few exceptions) for example. But today I will look outside the US to suggest another investment theme: natural resource rich countries.
Scanning the globe, there are several countries that will benefit from a recovering world economy and the growth taking place in countries like China and India. These resource rich countries are listed in Table 1.
Table 1: Resource Rich Countries
Coal seam gas, iron ore, copper, gold, uranium, zinc, silver, coal
Oil, iron ore, nickel, gold, uranium, platinum, manganese, timber
Bitumen, Iron ore, nickel, zinc, copper, gold, molybdenum, potash, silver, timber
Oil, natural gas, coal, precious metals, timber
Each of these countries will provide the growing economies of China and India with raw materials to fuel that growth. Energy is again a major theme with each of these picks, so I am not straying too far from my usual peak oil preaching.
These investments will also benefit investors if the US dollar continues to weaken.
Many US investors are wary of the political risks associated with some of these countries. However, as I explained to a friend just the other night, they seem to neglect the political risks of investing in the US! For example – the talking heads on CNBC love to call President Lula of Brazil a “socialist” or “leftist”. Yes, Lula worked his way up from shoe-shine boy to lathe operator to union organizer. But Lula cares about the middle class in Brazil and works tirelessly for economic fairness and to strengthen the middle class.
Contrast that with the US where hard-earned middle class taxpayer money is stolen and given as bonuses to already wealthy executives of insurance, banking, and financial services firms. How does Brazil's efforts to strengthen the middle class compare to the US where policies continue to enrich the already wealthy and there is an effective war on the middle class? Which is the greater risk? By the way, note that Brazil solved their energy crisis of the past and now is an exporter of oil. Meanwhile, the US is going bankrupt fighting oil wars halfway across the world. Sometimes it's hard for Americans to take a true risk assessment of American economic and foreign policies.
Take Canada for example. Again, the talking heads on CNBC call Canada’s health care system “socialism” (or Joe Kernen’s now favorite term “Eurocare”). Yet Canada at least has a functioning health care system that is not bankrupting the country in order to make a small minority (doctors) super-rich (in America, simply “rich” isn’t good enough). Also, note that Canada’s banks and budgets are run much more conservatively than America's and are therefore in much better shape than those in the US. So again, which is the greater risk? Again, please note that Canada exports oil and natural gas to the US.
Russia is vying with Saudi Arabia to be the largest oil producer in the world. On the other hand, the US is the world’s largest importer of oil and every day imports more oil than either Russia or Saudi Arabia can pump out of the ground in a single day. Yet, US policymakers refuse to make use of America’s abundant, clean, and cheap natural gas reserves for use in the transportation to reduce foreign oil imports. So, again, which is the greater risk, Russia or the US? The point is, arguments can be made on both sides of this question. Americans must be careful to view foreign investment risks by taking a critical look at US policy risks as well.
Funny how the CNBC commentators always make fun of the countries we import oil from. Am I the only one that ever notices that? I always remember an interview I saw with a Brazilian man on the street in Rio de Janeiro. When asked what he thought about the huge oil discoveries off the coast of his country, he replied, “I wish they hadn’t found it - now America will probably invade us!” How classic is that?
All that said, I would agree that of the four country ETFs listed, the Russian and Brazilian ETF’s may well be the riskier investments. Of course that is probably also why the YTD returns of those two countries are more than double Canada and Australia. It’s all risk/reward.
All four ETFs shown are obviously miles ahead of US equity markets YTD. Speaking of YTD returns, I can already anticipate the comments coming in - “hey Fitzman, nice call, why not wait until your investment picks are up 100% YTD and then recommend them?” All I can say to that is - good point! However, despite the impressive YTD returns, these ETFs fell so far last year they would all still have to near double (and then some) to reach the heights attained in 2007/2008. In other words, I think there is plenty of time to jump in. That said, you may want to wait for a pullback in the oil and gold markets after the recent nice rallies. This pullback could be imminent and might well create a better buying opportunity than today. Also, be sure to check out the top-10 holdings in each ETF and make sure you are comfortable with them. I was surprised to see such a large group of communication companies in the RSX ETF, but they have done really well this year.
So, add these ETFs to your “watch list” and wait for a better entry point. Long term, oil is going much higher than $145/barrel and gold much higher than $1000/oz. Each of these ETF’s should prosper in such an environment. On top of that, a falling US dollar will simply provide an added kicker. Good luck to you.
Disclosure: The author does not own the ETFs discussed in this article. Yet.