Spring comes early in central Florida. Wrens sing, wild jasmine flowers in the woodlands. Today, as I write this, I'm in a quiet, small town cafe. Both customers and the early-morning sun are slowly filtering in -- a peaceful, idyllic scene.
But ... reality is in the headlines. North Africa aflame. Dire warnings of fiscal catastrophe here at home. Conservative governors clashing with suddenly indignant public employees. One gets the feeling that things could spin quickly out of control.
So how does one invest in this environment? After much thought, the best I can come up with is oil, real estate, betting on rising interest rates, and precious metals. Here is why:
This should be patently obvious. With Middle Eastern violence spreading, major oil fields in decline worldwide, and dollar weakness, it is folly not to invest in oil. On the demand side, billions of people in increasingly prosperous emerging nations such as China and India cannot wait to emulate American driving habits.
Yes, Cushing (the largest oil storage facility in the world) is near capacity. Its Oklahoma location is close to newly productive, "safe" North American oil fields in North Dakota and Canada. Pipelines all flow into Cushing, but U.S. demand is down, and it's not easy getting the stuff overseas from the middle of a country that is geared to imports, not exports.
Outside of North America, though, it is a different story. North African countries are shutting down oil production and exports one after the other as unrest spreads. And now, rumors are circulating that Saudi reserves are only 60% of what everyone thought they were. This is the type of stuff which can ignite panic in the oil markets.
Avoid the tumult. Consider investing in companies which have most of their production and reserves outside the Middle East. Chevron (NYSE:CVX), Statoil (NYSE:STO), and Devon (NYSE:DVN) might be good choices -- and you get dividends too.
Can oil fall? Of course! Easing Mideast tensions and/or a major economic downturn would, at least in the short term, do it. At this point, though, both seem unlikely.
Bet on Rising U.S. Interest Rates
The Obama administration now forecasts a deficit of $1.65 trillion in 2011. Total U.S. debt is over $14 trillion. Lira Gonzalo characterizes the U.S. fiscal situation as waiting for the big splatter -- you know, like a bug hitting a windshield. Gonzalo, of course, is not the only one who sees a train wreck if current U.S. fiscal policy continues. The modest proposals of the Deficit Reduction Commission were ignored in Obama's budget.
Some claim the Federal Reserve simply has no choice -- it must keep buying treasury bonds from this point forward. If it doesn't buy, there will simply be no demand for treasury debt, except at much higher rates ... rates which will bankrupt the U.S. government. In any case, higher rates seem unavoidable in the not-too-distant future.
Mideast events are now overshadowing the dire U.S. fiscal situation, sparking a mini "flight to safety." If the "big splatter" is indeed coming, now -- with the world mesmerized by the Middle East -- may be the time to short U.S. treasuries with TBF or TBT.
It should be noted that TBF and TBT are not long-term investments due to tracking errors. Read the prospectus and do your own due diligence.
The best thing to do in real estate? Own your own home -- preferably free and clear. Yes, the U.S. residential market is in shambles and shows no signs of recovery. But your home provides shelter --a very basic need. Boom or bust, living in a free and clear house is a good thing. And, if inflation does come back -- as seems more probable every day now -- you might actually see (shocking thought) appreciation. The best time to get in an investment is when things are darkest. For real estate, that could be now.
Renting and don't own real estate? Consider investing in a REIT (Real Estate Investment Trust), maybe one that owns apartments. Rental markets are strengthening as folks no longer qualify to buy. See this article for ideas. Seeking Alpha has several authors who write regularly about REITS; use the search function with "REIT" as the key word.
Currency debasement (money printing) is worldwide. They're doing it in Europe, China, the U.S. and elsewhere. Precious metals are one way in keep even.
If you haven't already, consider buying some physical precious metals or investing in an ETF such as GLD or GDX. Like oil, consider it an insurance policy. Cash this one out when times get better. Precious metal values fall with stability and prosperity.
It should be noted that GLD is not a long-term investment due to tracking errors. Read the prospectus and do your own due diligence.
Bonds and blue chips have historically been the conservative investor's choice. With inflation threatening, though, fixed income may become a terrible investment and most equities may have difficulty coping with rising fuel costs. The four sectors above may be the best way to ride the storms out.
Disclosure: I am long STO.
Additional disclosure: I am considering TBT.