Germans to Repay 1% of Their Debt- How to Set Yourself Up for Inflation
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Accumulated worldwide debt will soon be weighing heavily upon global stock markets. Europe right now is facing a tidal wave of debt, and the Germans don't have enough fingers to plug all the holes in the dike.
Meanwhile, over in the United States, Congress will soon be pressed into raising the debt ceiling (again), which last year, with Republicans in a temporary revolt against the lift, helped fill the markets with enough fear that the Dow Jones spiraled down nearly 20%.
Look, at some point this debt burden must catch up to us. For a household, it's okay to take out a loan if you really need the money to pay for some big ticket item like a car or a house, or an emergency like medical care or temporary unemployment, but even MasterCard and Visa, who want nothing more than enslaving the average person to a life spent paying off their usurious rates, will not keep lending you money indiscriminately as your debt piles towards the sky.
Following World War II, the U.S. government was the best risk out there. With an expanding economy, and thriving industry, people had no problems at all funding the U.S. debt. But why, even during these prosperous times, did the US borrow money? Because is was politically expedient to do so. It gave Congressmen the ability to fund more projects in their districts and helped them avoid having to cut needless and wasteful programs.
"Hey, if Visa is going to keep giving me the money, I'll keep spending it." The simple fact is that governments eventually must balance their budgets. It can't keep going like this forever, although, admittedly, they've had an excellent run at "forever." In the US we are at an impasse, because although the major advantage our government has is the ability to print $15,000,000,000,000 (trillion) and pay everybody off, this, of course, might "annoy" the Chinese who hold two trillion of our debt, as would it be anybody who holds cash as inflation would instantly eat through a life time of savings. On the bright side however, all the irresponsible debtors on the planet would throw their arms over their heads and scream "Hooray!"
The other option is for government to cut spending and raise taxes. Waiting for a laugh ... Okay, this was a joke, politicians would never take such simplistic actions because there is Pain in doing so.
And the failing states of Southern Europe, who would normally just print money to alleviate their problems (devaluing it in the process,) are unable to do so as they are part of the greater EuroZone, and the European Central Bank's (ECB) stated purpose is to fight inflation.
And every time there's a bailout, they're just kicking the can further down the road. No matter how hard Germany tries, they'll never be able to plug the dike. Its like giving an obese person liposuction, and watching them maintain the same diet. Yes, you can call for austerity, in the same way you cold call for fatso to pick up the Kentucky Fried Chicken; it's just not happening until you change the underlying psychology of the individual, or in this case, the country.
And now, in a bit of grand gamesmanship, the Spanish decided to play chicken with Angela Merkel, and pretty much stated the terms for which they would accept their bailout, knowing that the Germans believe it's more costly to let them fail, than to sweeten the honey pot a little. It's game theory at its best.
Now the June 17 election in Greece takes on a new importance, as its citizens, no doubt aware of the deal the Spanish carved for themselves, will likely throw a political temper tantrum either disavowing the austerity deal they made by electing a new party, or somehow demanding renegotiations.
So what does all this mean, and how will this help you make money in the market? Simple, in the US we're going to have inflation. There's no ifs, ands, or butts about it. We have already drastically increased the money supply the last several years, and politicians are loath to do anything but take the simplest route. It's a simple recipe.
Based on this prediction, investing in the commodities sector is the way to go. Anything from companies like Brasil Foods (NYSE: BRFS) (P/E- 25.5 yield- 0) which produces and sells poultry, pork, beef cuts, milk, dairy products, and processed food products in Brazil and internationally, and Archer Daniels Midland (NYSE: ADM), (P/E- 15.7 yield- 0.7) which grows crops including corn, wheat, soybeans, and cocoa. In addition, ADM has a strong position in Asia in the oilseed markets (soybean and palm oil).
For both of these companies, with inflation, their input costs will rise (fertilizer, feed, fuel) but so will the nominal value of their products, as the world has to eat and will have a difficult time replacing these staples from their diets. Of course, the good news is that the sun, the biggest contributor to agro growth, is always free. Famed George Soros partner Jim Rogers stated the other day that it would be the famers who drove the Lamborghinis of the future.
Also Chevron (NYSE: CVX) (P/E- 7.4 yield-3.6) and Exxon Mobil (NYSE: XOM), (P/E 9.8 yield-2.8) will see revenues and profits shoot through the roof, as their nominal price of their product will rise much more than their high fixed costs, and even Wal-Mart (NYSE: WMT) which not only has debt on its balance sheet (remember: "hooray!" during inflationary times), but is also a low cost producer, and owns a good amount of real estate which should increase in nominal value should do well as well.
The other option you have investing your money, if you agree with my inflationary vision, is to take a 30 year fixed mortgage out, and buy a house at the lowest rates ever, which is a form of essentially shorting the U.S. dollar.
As for Europe, you know what I say: let the Germans pay. Their citizenry could subsidize all of Europe's debt for the next century, and still be on the red side of the historical ledger. I'm genuinely hoping some loud mouth politician utters this basic truth. And after it gets all the press, and makes its rounds with Leno and Lettermen, don't forget, you heard it here first.
funspirit owns shares of WMT. The Motley Fool owns shares of Archer Daniels Midland Company and ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.