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Author: TMFAgewone Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 111  
Subject: Re: Hedging one's bets Date: 3/26/2007 12:32 PM
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Reading "Around the World with Jim Rogers" has got me thinking about my ability to withstand a downturn in the US economy. His experience took place from 1990-92 and was written soon afterwards. His conclusions were that everything in this world is transitory. The Roman Empire didn't last forever. Country borders are somewhat arbitrary and will always be changing. The United States as a power cannot exist forever, particularly when its financial policies are unstainable and spends money on things that do not have any long-term payback. He strongly suggests that everyone should diversify into overseas markets, currencies, and commodities, particularly in countries that promote free markets and disavow "statism." At the time he was particularly interested in Botswana, South Africa, Cameroon, Argentina (and a few other South American countries), and others that I can't recall offhand.

This book was written in 1990 and the world has changed. Since then we've seen the fall of communism, a rise in globalization, a tech bubble, a real estate bubble, a war in Iraq, ...etc, but the premise still remains. The U.S. was poor and in debt in the 1800s and early 1900s, but the debt was used to build up infrastructure and capabilities that made the U.S. a great country with a huge trade surplus through the rest of the century. Over time, our habits and policies have changed and the U.S. economy is set to decline.

If I am understanding Mr. Rogers correctly, if/when the country's financial situation collapses, there won't be enough buyers of American dollars for people to be able to get their money into a more stable currency without losing a lot of capital.

I don't know enough to form a strong opinion one way or the other, but Jim Rogers seems to me to be a very intelligent guy who has a better knowledge and fundamental understanding of the world's economy than most. Afterall, there aren't many people who have biked the world over!

So here are my questions.

Is he correct? Is the U.S. economy in general in a bubble? What is the best way to hedge against this? I'm assuming global gains is a good place to start.

I am not betting against the U.S. and the majority of my assets are in U.S. stocks. I have, however, begun to expand overseas primarily via ADRs and stocks listed in the US markets because it's easier and the currency exchange is automatically built in to the stock price. I'm guessing Jim Rogers would have me purchase all stocks using the primary market that they're listed in. There has been some discussion about the differences in ADRs vs original stock in the various boards, but most of it has to do with volume, arbitrage, voting rights, etc. What about the risk of delisting?

I would be interested in hearing some of the global gains staff's thoughts on appropriate ways balance ones risk, particularly for someone who has many decades left in their investment lifetime.

-Topspin

Topsin,

First, great question; it's an oft-contemplated and little understood question by market commentators, at current. The reason is quite simple--we've reams of data, but nothing more than hypotheses. And they're just that, hypotheses. It's also true that great dynasties--as Rome, China, and others--have fallen, and it's not unlikely that other superpowers will see their respective days come and go. Global politics, economics, and the like are naturally fluid, and so it's not illogical the U.S. may one day find itself

I wouldn't classify the U.S. economy's international standing as bubble-esque, if nothing else for the fact that the U.S. consumer currently plays a significant role in the world economy--financing the export economies of many an emerging economy. There are, of course, vested interests in sustaining the consumer's health--and I believe the monetary authorities will do that for our benefit, and that other countries alike.

Further, the dollar's status as the informal (and in some cases) international currency of reserve has enabled us to support massive deficits which might otherwise bear ominous repercussions, as developed and developing countries alike have proven eager holders of U.S. treasury debt. Part of this represents a self-fulfilling prophecy, as U.S. trade partners countries have continued to hold large positions, ostensibly to maintain their currencies' weakness against the dollar, thereby creating some trade advantage (in the form of a weak currency). Some interesting commentary on the deficit here, it's towards the middle of the video: http://video.google.com/videoplay?docid=-1563166633452527763.

The U.S. economy's maturity, an increasingly educated global populous (instead of just OECD economies), persistent deficits on the part of the U.S. and several OECD economies, and a host of other factors hearken to the idea that wealth will indeed become more dispersed over time. The bottom line though, is that we be sure of the U.S. economy's dominance, or lack thereof in 10 years.

That provides an easy segue point to your last question. First, because it's not easy to say with, at least with any degree of certainty, where the U.S. economy or any other might bein in 10 years, let alone 20-30--it makes sense to have exposure to more than one economy. There are a host of ways to do this: international companies proper, U.S.-based multinationals, or something in between. The natural effect: you're not tied to any one country's fate, but instead to global growth in wealth--a circumstance we can be reasonably assured of.

Some market sooths, Jeremy Siegel included, have suggested individuals should have as much as 40% of their portfolios invested internationally. I don't think that's too unreasonable. That's not because he's a bear on the U.S. economy, but instead because the U.S. economy, and markets, aren't the spring chickens they once were.

Hope this helps.

-Mike
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