Buy Zero Coupon Bonds to Hedge Against a Decline in U.S. Economy

Aug. 5.09 | About: Vanguard Extended (EDV)

If you want to make money and you believe, as we do, that Chindia will grow 7-8% regardless what happens in the developed world, then you must invest in that region. Sure there will be setbacks, but the long-term prospects are worth the risk.

Most of our stocks, including Coca Cola (NYSE:KO), Mosaic (NYSE:MOS), Potash (NYSE:POT), and all our energy plays will benefit from emerging market growth.

Gold will do well too, since it is one of the few alternatives to the U.S. dollar. As investors realize the real gains are being made in Chindia, they will be less inclined to hold dollars.

Certainly, some of the current strength in commodities results from China stockpiling raw materials. The Chinese think 20 years or more ahead, so stockpiling materials is their way of hedging against the dollar and protecting their economy from shortages. Well, if you can't beat them, join them.

We are issuing a buy at this time, because we think you need to hedge against a potential decline in our economy. We recommend a position in zero coupon bonds. The easiest way to acquire these is to buy the Vanguard Extended Duration Treasury Index ETF (NYSEARCA:EDV). This is an exchange-traded fund that invests in zero coupon bonds of extended maturity. For now, know that the fund is highly leveraged to a decline in the economy.

You may ask why we recommend this investment if the emerging markets are going like gangbusters. Honestly, we feel certain that at some point the U.S. economy will suffer another calamity, even if the emerging world remains unscathed. It's like our garden metaphor above. When fertilizer prices rise, gardeners with the poor soil who cannot compete will eventually go out of business, while those with fertile soil can remain solvent due to their higher profit margins.

We will have a hard time competing with Chindia for the next few years. Moreover, so will the rest of the developed world. The U.S. could easily suffer another economic downturn, in which case zero coupon bonds will outperform.

That's not as cheerful a prediction as Bloomberg's, but it is a more likely possibility which you should prepare for. The world has flipped on its side. Emerging economies, desperate for raw materials, now lead the way, while the American consumer must take a back seat. You must be prepared to profit from higher commodity prices and strong growth in the developing world, while shielding yourself from weakness at home by owning gold and zero coupon bonds.

Don't shoot us for saying this. We're just messengers with your best interests in mind.