the Next 5 Years ...
by Larry Edelson
I often discuss what I think are the best investments out there. But this morning, I'm going to spend some time talking about what I think are the worst investments for today, tomorrow and the next five years.
Obviously, given the state of our economy and financial markets, there are a lot more lousy investments than there are good ones.
But don't worry: It's not all bad. By the process of elimination, we'll get additional confirmation of what the best investments are!
Five Lousy Investments
For the Next Five Years
These lousy investments are major asset classes where I believe — based on all my indicators and analysis — you will either ...
Suffer massive depreciation in the purchasing power of your investment. You may get a nominal rate of return of say, 5% or 6%, but after accounting for the "real" rate of inflation, you will be losing purchasing power.
Or ...
Incur the worst of both worlds: Lose in terms of purchasing power AND in terms of nominal dollars. In other words, invest $10,000 and get back $5,000 at the end of five years — but that $5,000 is only worth $2,000 in terms of purchasing power (because of the falling dollar and inflation).
Having said that, here's my list of lousy investments for the next five years ...
Lousy Investment #1: Bonds
I mean corporate, municipal, bonds of Government Sponsored Entities (GSEs) like Fannie Mae and Freddie Mac, and longer-term U.S. Treasury bonds.
The reasons are pretty simple: It's going to take years for this country to recover from the current financial crisis and the damage it's incurred. And all the while, there will be loads of uncertainty surrounding the bond markets.
At times, that uncertainly will come through in the form of rising interest rates, meaning the principal of the bonds will have to decline.
At other times, it will arise from the lack of liquidity now surrounding the credit markets, the falling value of the dollar, uncertainty in corporate earnings, companies going bankrupt, and more. All of these forces will negatively affect the value of most, if not all, bond markets. And cause you to incur losses.
The worst of all? Most likely the U.S. Treasury bond market. Five-year and longer-dated Treasuries. Reason: Their prices are inextricably intertwined with the value of the dollar and its perceived credit-worthiness.
But as we all know, the dollar is not what it used to be. A long time ago, it was backed by gold. Then it was backed by the full faith and credit of the U.S. government. That wasn't so bad, until the credit crisis hit.
Today, the faith part is losing respect all over the world.
And the credit part of the equation is also crumbling, as Washington bails out one company after another, printing paper money like crazy and accepting junk bonds as collateral.
In fact, as much as 22% of the Treasury's balance sheet is now comprised of junk bonds. That devalues the dollar and the Treasury bonds that are issued based on the dollar.
I think typical Wall Street staples like U.S. stocks and bonds will make lousy investments over the next five years.
So I suggest you stay away from the bond markets. Period. Their prices are only going to fall as interest rates are forced higher by the marketplace to try and attract investors. You don't want to be in bonds as that process unfolds.
Lousy Investment #2: Real Estate in the U.S.
While I say "in the U.S.," most real estate in most parts of the world will also be a lousy investment for the next five years. The only exceptions: Select properties like waterfront (here and overseas), and the Asian property markets.
Real estate values in the U.S. will stabilize and even bounce back a bit over the next five years. But, just as the bursting of the tech bubble put an end to the potential gains in that sector, the real estate market in general in the U.S. will never again experience the kind of bubble gains it did over the last several years. At least not in my lifetime.
There will be some bouncing back, as I noted, but it's highly likely that any positive returns you see in the property markets going forward will simply not keep up with inflation. To me, that makes for a lousy investment.
Lousy Investment #3: U.S. Stock Markets
The broad stock markets here in the U.S. — as defined by the major indexes like the Dow Jones Industrials, the S&P 500 and the Nasdaq — are going to destroy your money over the next several years.
I've told you before they have already zapped 72% of your money, in a giant stealth bear market.
And I showed you how the Dow could lose a heck of a lot more.
Do not underestimate it. Because the dollar has lost so much purchasing power, the value of our stock markets is also getting slashed, in what I call "The Squandering of America."
For instance ...
As you can see from the chart I made for you today, at the end of 2000, the market cap of the Dow Jones Industrials (DJI), the 30 "bluest" of the blue-chip companies in the U.S., was $3.81 trillion. That was equal to 14,025 ounces of gold.
Today, the market cap of the Dow is $3.67 trillion. Yet it takes only 3,952 ounces of gold to buy 100% of the 30 companies in the Dow.
In nominal dollars, the loss is $140 billion, or 3.6%. But in terms of real money, gold, the loss is a staggering 71.8%.
As the dollar continues to fall in value, as it most assuredly will, the losses in the broad stock market averages will widen. In fact, they will get worse, as the averages decline both in nominal terms and inflation-adjusted terms (based on gold).
That will put the U.S. stock markets amongst the worst investments you can park your money in, now, and for at least the next five years.
Ditto for ...
Lousy Investment #4: European Stock Markets
Yes, the euro currency is very strong. And that will help mitigate the losses investors are experiencing, and will continue to experience, in the European stock markets.
But Europe suffers from many of the same problems the U.S. does: Overheated real estate markets that are now imploding, large derivatives exposure amongst Europe's banks, and more.
So Europe's stock markets will continue to lose, both in nominal terms and in terms of gold. They just might not lose as much as U.S. markets.
Either way, I suggest steering clear of Europe's stock markets.
Lousy Investment #5: Most of Latin America
This includes both stock and bond markets south of the border. The big exception in my book is Brazil.
That's because most Latin American economies, Mexico included, are too closely tied to the fate of the U.S. economy. Even more so than Asian economies such as China and India.
Sure, Mexico and Venezuela have oil. But the former is too dependent on the U.S, and the latter I wouldn't touch with a 10-foot pole due to dictator Huge Chavez.
So if you're looking south of the border for investments, I'd look elsewhere.
Now, let's move on to my list of what I think are the best investments for the next five years ...
Best Investment #1: Gold!
There's no doubt in my mind: If you want to preserve the purchasing power of your dollars and make some healthy profits above and beyond the rate of inflation, by far the best investment of all is pure, honest, real money that has stood the test of time for more than 6,000 years — gold!
Gold is real money, and cannot be created or destroyed by any politician.
Gold has always preserved its purchasing power. And today, more than ever before ...
You need an asset that cannot be manipulated by the powers that be ... that has no politician to answer to ... no board of directors to dilute it by issuing stock and stock options ... and no gimmicky accounting to establish its fair market value.
Also not to be ignored: Platinum, palladium and even rare metals, such as rhodium and cobalt, which I will cover in my upcoming issue of Real Wealth Report.
Best Investment #2: Energy
Not just crude oil and gas, but also alternative energy.
Right now, the price of crude oil is pulling back in a normal, healthy retracement. I expect oil to trade as low as $107 a barrel. But then, Phase II of its bull market will kick off, sending the price as high as $200 a barrel. A gallon of unleaded gas will ultimately hit $5, perhaps even $6.
Oil & gas companies, once the current oil pullback has run its course, will be awesome buys. Many of them are trading at price-to-earnings ratios of less than 10, when they should be trading at double that.
Alternative energy plays in solar, ocean motion, nuclear energy, and wind are also great longer-term investments. But as with oil and gas, wait for my signals!
Best Investment #3: Natural Resources
In this category I group all other natural resources including agricultural commodities, soft commodities such as coffee, cocoa and sugar, base metals such as aluminum, copper, nickel and zinc, fertilizers, and last, but not least, water.
All are assets where supplies are limited, and where demand (largely due to Asia's growth) continues to grow at a rapid pace.
All are tangible assets with intrinsic value, and where real wealth is accumulated.
Best Investment #4: Economies that are driving demand for natural resources higher.
Reason: They are the economies that are also largely driving global economic growth these days. Countries like India and China. Indonesia and Malaysia. And more!
Best wishes,
Larry
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