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Deficit Investing

The congress is engaged in the political equivalent of trench warfare over the budget deficit. For the astute investor the issue is deficit investing. Unless someone comes up with a magic potion the USA will have a substantial budget deficit for years to come. Deficit investing is the notion that the deficit will continue with its attendant loss of purchasing power of the US dollar. As the dollar becomes less valuable the long term investor needs to find investments that keep ahead of this loss of value even before considering a positive return on investment. So, what do we look for in deficit investing? One option in deficit investing is to invest in foreign stocks by way of American Depository Receipts. Another is to look for US companies like Citigroup, 3M, or Proctor and Gamble who have a huge international presence.What is a good investment overseas? It will be a company that sells products to growing markets, especially in Asia which is leading the way out of the recession. Likewise US companies that have a solid foothold in growing markets will likely offset US stagnation with overseas growth. 

Learning how to invest is a full time job in and of itself. Deficit investing requires the investor to find good companies with solid prospects and find these companies in countries whose economies are growing without excessive debt. Profits made by these companies come back home and are banked in the local currency. Property is purchased which is valued in the local currency. Inventory is valued in the local currency. As any foreign currency outpaces the US dollar all of an offshore company’s assets are going to go up in value as denominated in US dollars. The same argument goes for US companies with overseas facilities. Inventories, cash deposits, and profits in general may be kept offshore where they will appreciate versus the dollar.

Deficit investing, to a degree, requires knowledge of foreign currencies as well a fundamental knowledge of how to pick stocks. The days when picking dividend stocks to populate a portfolio to guarantee continuing returns may be going away. When the US dollar loses value at a higher rate than annual dividends it is time to consider deficit investing and look for companies that make money and then store assets in currencies that are outpacing the US dollar. There are no guarantees in investing but looking down the years the ability of the USA to control its deficit is in question. This contrarian view is written to encourage the long term investor to take into consideration the steady decrease in purchasing power of the US dollar. It simply has taken a higher rate of return on investment in dollars for US companies to keep pace with companies in many foreign countries where the currency remains or is becoming stronger. As usual we are not suggesting that the investor invest in or ignore any given stock.  We are suggesting that they do not ignore the risk of dollar devaluation and consider what we are calling deficit investing.

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