Roger Nusbaum's Market Crash Shelter

Includes: DVY, EFA, PID
by: Roger Nusbaum

Roger Nusbaum submits: A reader asks for my opinion about how to protect against a collapse in the U.S. He asks if currencies or foreign stocks would help. Before I answer this, let me be clear I am not in the collapse-is-coming crowd.

I think it depends on the nature of the collapse. If the U.S. economy simply rolled over because of all of the things that are known and have been worried about for ages I think diversified basket of foreign currencies would work. There are the ETFs that I have written about. I also believe it is possible to have an account at Everbank with different currencies in it; here I am not talking about the CD's but just holding currency in an account.

Various commodities should do well also. Here the usual suspects like gold, silver, maybe some industrial metals that China steel needs and probably agricultural commodities too. I am sorry to report that the 29 commodity ETFs listed in London in September will not be available to trade in the U.S., so says Schwab. There are a couple of broad-based products here to trade that will have to suffice for now.

Foreign equities may not do well in a broad sense. The U.S. markets wag an awful lot of global dog. There are several types of countries that might be able to do well. The first type might be a country like Australia. It has a low correlation to the U.S. market and held up very well during the blow up of a few years ago. There are other commodity countries too like Norway, New Zealand and a few places in South America but I would not be too gung-ho on Canada in this regard.

I also think some "in their own world" countries might do well too like Turkey, Russia, China, India, and Iceland. Here the thought is that there are some countries where the internal story is such that there is not much reliance on the U.S. for these stories to continue evolving.

In a similar vein I think certain frontier investment destinations could keep chugging right along with or without the U.S..

There are certain themes that could prevail, here the water theme comes to mind. Now I may or may not be right about water prevailing but there would be special themes that would work out.

Staples stocks or certain healthcare stocks should do better overall be would probably not be completely immune to a big decline.

If you think foreign stocks would be a good place to hide out, OK, but watch out for iShares EAFE (NYSEARCA:EFA). It is heavy in Japan and the UK which would not be places I would bet on in light of a true collapse.

Domestic bonds might not be so great; I would think U.S. rates would go up a lot in the face of an economic collapse.

One last point on this. There are often a lot of comments in this context about owning dividend paying stocks. Be careful with that one. I think it is too broad a statement. Yes high dividends bring something to the table, but stocks of companies that pay dividends can still decline. During the U.S. blowup of a few years ago the financial sector had a couple of different times where it fell 20%-25% very quickly. I mention the financial sector because it makes up 36% of iShares Select Dividend (NYSEARCA:DVY) (client holding), in fact most of the domestic dividend ETFs are heavy in financials and I would not expect that sector to be a great place to hide in the event of a collapse.

I would also be careful, in this context, with Powershares International Dividend Achievers (NASDAQ:PID) (client holding). When PID first listed it had 20% invested in Canada including 13% in Canadian banks. Eyeballing the PID page it appears to be not quite as heavy in Canada but it still owns close to 10% in Canadian banks (under the sector header NA). Again this is about my opinion that in a U.S. collapse Canada would not be spared. I'm a big fan of Canadian banks ex-collapse, I own one personally and for clients, but I would expect it to get hit in the context of this question.

As an FYI most of the broad based WisdomTree funds are heavy in financials, but they do not invest in Canada which might make them an alternative to PID in light of a collapse.

If the collapse came because of a terror attack on some unprecedented scale I would expect the dollar to go up along with bonds, gold and the Swiss franc.