What Will Your Investments Be Worth in Five Years?
We invest for the future. How well that works out depends on two things. What will your investments be worth in five years, ten years, or twenty years as valued in dollars? And, what will inflation do to the purchasing power of the US dollar? There is a fair amount of debate today as to whether we are going into a 1970s-style stagflation or if prices are simply up now due to supply chain issues and will go down when the Covid pandemic finally subsides. The other issue is what will happen to your investments when fundamentals start to determine stock prices again.
Effect of Inflation of Purchasing Power
As we noted in our article about saving with negative interest rates, traditionally safe, interest rate-bearing investments today are actually losing money. The New York Times Dealbook for 10/14/21 discusses how everything is getting more expensive and how that is causing problems for the Fed and White House. Because you want to be able to use your invested and saved money to live on and do things with over the years, you have a problem with “safe” investments like CDs and Treasuries and need to stick with the stock market to stay ahead of the effect of inflation on investment value. Unfortunately, there are value concerns today about the ability of the market or at least all parts of it to keep rolling forward at the same pace as over the last decade.
When Fundamentals Start to Determine Stock Prices Again
As the prices go up the Fed is going to have to raise interest rates and dial back on their quantitative easing measures. We are already seeing reticence in Congress in regard to what everyone pretty much agrees is necessary funding of infrastructure repairs and improvements due the stagflation concerns. The “talking heads” on business news sites like Bloomberg are starting to talk about what companies like Tesla or Amazon will be worth in five or ten years. The issue is that many companies have stock prices that assume continued fast growth when the companies have grown to a mature status in their business niche. An opinion that is gaining ground is that prices of many of the tech leaders of the last few years are going to adjust to a lower rate of growth or even back off a bit as investors come back to the use of intrinsic stock value as a way to judge when investing in stocks over the long term.
Investing With a Five to Twenty Year Investment Horizon
When asked what his preferred length of time to hold was, Warren Buffett replied, forever. His point was that when you pick the right company with the right business plan, strength in their market niche, customer loyalty, and global product recognition, you will want to keep that stock as it grows in value, pays dividends, and stays well ahead of the effects of inflation. The strongest argument for investing in the stock market is that the US stock market outperforms other investments over the years, providing that you stay invested and that you pick investments like ETFs that track the S&P 500 and thus reflect the overall market. The key to this approach is having an investment horizon of at least five to ten years. The obvious reason for this approach is that some years are good, some are bad, others are awful, and some are spectacular in the market. And, because predicting which years will be the best and the worst is not always that accurate, simply staying in the market for years is the most effective for successful investing over the years. By doing so your investments in five, ten, or twenty years are more likely to stay ahead of inflation and help you achieve a comfortable retirement.
How Can You Invest in Greenland?
Greenland is the largest island in the world with three-fourths of its surface covered by the only permanent sheet of ice outside of Antarctica. Until recently the most sparsely inhabited jurisdiction in the world was primarily known for trivia like the fact that if all of its ice melted world sea levels would rise by six meters (20 feet). Now, as the ice sheet is melting, Greenland has become a trove for minerals including strategic minerals such as rare earth elements. That being the case, how can you invest in Greenland and its mineral riches?
The World Wants Greenland’s Minerals
The receding of the Greenland ice sheet and the presence of valuable minerals for easy mining has not gone unnoticed. The New York Times wrote about Greenland and its minerals and the race to cash in on Greenland’s mineral riches.
Global superpowers are jostling for influence. Billionaire investors are making big bets. Mining companies have staked claims throughout the island in a quest that also includes nickel, cobalt, titanium and, yes, gold.
What The Times also notes is that Greenlanders are concerned about how mining operations could reshape or even destroy their world.
But those expecting to exploit the island’s riches will have to contend with Mariane Paviasen and the predominantly Indigenous residents of the village of Narsaq.
Who Lives in Greenland and Who Governs It?
The roughly 56,000 inhabitants of Greenland are 89% Inuit whose ancestors migrated across the Arctic from what is present day Alaska, 6% Danish, 1% other Nordic, and 1% miscellaneous. These folks live on an island into which would fit the countries of Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, the Netherlands and the United Kingdom. The island was “discovered” by the Vikings in the 10th century when a ship bound for Iceland was blown off course. The island is part of the Kingdom of Denmark but is autonomous and self-governing. When he was president, Donald Trump suggested that the USA should simply buy Greenland from Denmark to secure its mineral riches. Because the island is self-governing and because it has a small population, all of the issues revolving around mineral rights and mining tend to be very local issues as detailed in the article in The Times. The folks on Greenland are fully aware how fragile their ecosystem is and are not especially interested in moving somewhere else so that folks elsewhere in the world can drive electric cars.
How Can You Invest in Greenland?
Companies hoping to open mining operations in Greenland include a small Australian company, Greenland Minerals Ltd with a Chinese partner according to The Mongabay News. As the article notes, the company was “red-carded” to use a soccer term in its quest to mine an area rich in uranium and rare earth elements and discard huge amounts of radioactive thorium. Jeff Bezos and Bill Gates have teamed up to try to mine Greenland’s riches. According to Mining Technology, 41 companies have mining rights in Greenland with Denmark and the UK being the most prominent followed by Canada and Australia and not China or the USA. Major players include Anglo American and Glencore. Others include Arctic Energy Pty Ltd, Greenland Gas & Oil Ltd, East Greenland Oil A/S, and Bluejay Mining PLC, not all of which are listed companies.
The Five Eyes and Greenland’s Minerals
As we have noted in our articles about strategic minerals including rare earth elements, lithium, and the rest, access to and control of supply chains for these strategic assets could determine global economic and military dominance in years to come. It is of note that the leading companies in the rush to recover strategic minerals from Greenland include three of the “five eyes” nations, Australia, Canada, and the UK. These three along with New Zealand and the USA are strategic partners along with nations in the EU, Japan, and now India in working to avoid Chinese hegemony in the years to come. Keep this in mind when thinking about how to invest in Greenland.
How Can You Invest in Greenland? – Slideshare Version
How Can You Invest in Greenland? – DOC
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Fifteen Percent Multinational Tax and Your Investments
As multinational corporations have expanded more and more of their sales and operations outside of their home countries, they have sought to minimize their total tax burden. From the viewpoint of these corporations such actions make perfect sense since the job of the corporation is to maximize value for their shareholders. But, from the viewpoints of many nations, these corporations are engaging in multinational corporate tax evasion by paying low, or no, taxes in jurisdictions where they do not manufacture or sell their products. A recent agreement by over one hundred and thirty nations to rectify this situation brought this issue to mind. How do the new fifteen percent multinational tax and your investments relate to each other?
Is There a Fifteen Percent Global Minimum Tax?
After years of negotiating, more than one hundred thirty jurisdictions and nations have agreed to a fifteen percent global minimum tax for multinational corporations. These nations include more than ninety percent of the world’s gross domestic products. The agreement has two parts. The first is that taxes on these companies must happen where their profits occur. Thus, big companies with addresses in small countries where they say their businesses are will not be able to be taxed there and avoid taxation where they make millions or even billions in profits. The second part is that no signer of the agreement will have a corporate tax rate for less than fifteen percent. The last countries to sign on to the fifteen percent minimum tax rate include Ireland which has traditionally attracted manufacturing to its shores by offering low tax rates.
Is It Really Multinational Corporate Tax Evasion to Seek Lower Tax Rates?
The argument for the fifteen percent tax on multinationals with taxation occurring where profits occur is that these profitable and powerful companies are evading taxes. But, as the famous judge, Learned Hand, once wrote in an opinion on a tax case, there is nothing illegal about so ordering your life so as to legally avoid paying more taxes than you have to. What is really happening is the nations of the world are getting together and setting up the law so that corporations who benefit from doing business on their shores will pay what is locally considered their fair share of taxes. We expect this set of laws to be generally enforceable but multinational corporations will still look for every way that they can to minimize their tax burden and maximize their profits on behalf of their shareholders.
Effect on Corporate Earnings of a Fifteen Percent Minimum Tax
Apple has already noted that they expect to pay more in taxes and see lower profits due to the fifteen percent minimum tax and the fact that taxation will occur where they make their profits. Microsoft will also see changes due to their huge global presence. However, these companies keep seeing their share prices go up because they keep expanding their product lines and customer bases. This will not stop because of a new tax law. As such, we expect to see a one-time reduction in earnings that will play out over the next few years as the new agreement takes shape in the form of new tax laws in countries across the globe. For long term investors with an eye on intrinsic value, this may be the best time to buy at temporary bargain prices.
Fifteen Percent Multinational Tax and Your Investments – Slideshare Version
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Stagflation Investment Strategies
Investors old enough to remember the inflation of the 1970s will remember the term stagflation. Stagflation is the term invented to describe when the economy is growing slowly, unemployment is high, and inflation is rampant. A formal definition is when the gross domestic product declines while there is inflation. The market is already starting to see “stagflation trades! In this article we look at what stagflation investment strategies might be useful if this next decade is back to the 70s.
Origins of 1970s Stagflation
As the 1970s were ushered in, the USA had been at war in Southeast Asia six years since the Tonkin Gulf Resolution and for more like twenty years supporting France’s efforts to retain its colony, French Indochina. The costs of that war were coming to bear on the economy and on society. And, during the Johnson Administration from the death of President Kennedy in the fall of 1963 until he left office in early 1969, the former Texas Senator, Vice President and then President ushered in a host of social programs such as Medicare. The economy had been heating up and inflation was rearing its head to the degree that President Nixon instituted wage and price controls which were a disaster. Then the Saudis embargoed oil after the US supported Israel in the 1973 war after which they confiscated US oil assets in their country and raised the price of oil.
Government Stimulus Policy
What was “gospel” at that time for many in government was the idea that the government could stimulate the economy and create jobs by pumping money into the system. This came from the British economist, John Maynard Keynes. Every time the economy lagged a bit, Congress dropped taxes or spent money on something. This approach tended to win votes for the party in power but the national debt started going up to the point that Senator Dirksen of Illinois commented, “a billion here, a billion there, and pretty soon you are talking about real money”! His irony seems to have been lost on Congress then and now as today he would say a trillion here and a trillion there. The bottom line was that along with other factors, this was a huge reason for the stagflation of the 1970s.
Will We See Stagflation Today?
This is not 1970 although we just got out of Afghanistan and we were ready to leave Vietnam back then. We are no longer dependent on Saudi oil after fracking has taken hold and the US is pivoting to solar energy and other sustainable sources. Today the interstate highway system is in dire need of repair as are ports, airports, bridges, internet infrastructure, and dams across the country. Biden’s infrastructure pack in its original form was to cost $3.5 Trillion which many have said would be a budget buster and lead to more inflation. However, economists are generally not worried about long term spending that tends to increase productivity and economic efficiency. A concern of many is the list of “social program” expenses that include child care. But, even that expense holds the promise of getting more working age women into the workforce instead at home watching the kids which would tend to remedy some of the current labor shortages. As such, we think it is a tossup as to whether we see a repeat of the 70s.
Stagflation Investment Strategies
We recently wrote about whether or not investing in commodities was a good idea for balancing your portfolio. Although commodities are more a matter of trading futures (unless you hoard gold), this could be a good idea if you want to guard against inflation. During the terrible stagflation of the 1970s gold rose ten-fold in price while commodities like corn and wheat went up by three and four-fold respectively. Likewise real estate went up in price, especially in areas that were already highly priced. Farm land multiplied in value as their crops increased in value as well. If you don’t buy to buy and hold gold, consider a gold ETF.
Although the Dow went up by less than 5% during the 1970s some stocks did well. You are not going to buy and hold commodities like cattle and corn but companies with commodities in the ground like mining stocks for gold or in this era, strategic minerals are likely to be good bets if inflation gets out of hand.
Although the Dow went up by less than 5% during the 1970s some stocks did well. You are not going to buy and hold commodities like cattle and corn but companies with commodities in the ground like mining stocks for gold or in this era, strategic minerals are likely to be good bets if inflation gets out of hand.
Stagflation Investment Strategies – Slideshare Version
How Dangerous Is Inflation for Your Investments?
As the economy gets back on track, shortages of workers, commodities, things like computer chips have caused both shortages and price increases. There is a fair amount of honest debate about whether or not most of the current bout of inflation is temporary or the start of something prolonged and worse. Assuming that we are entering into a serious inflationary cycle, how dangerous is inflation for your investments? Part of the answer depends upon what your investments are.
Is Inflation a Risk When Investing?
To the extent that your investments give you a set annual return such as with CDs, Treasuries, corporate bonds, or simply a passbook savings account, you will typically find yourself receiving negative real interest rates. The point of saving and investing is to increase your purchasing power in years to come. While these investments will give you a positive return in the number of dollars that you have, those dollars will be worth less when measured in purchasing power. Thus the risk of inflation is that your real net worth when measured by your ability to pay for things that you want or need will be reduced despite steady, diligent investing and saving.
What Are the Negative Effects of Inflation on Investors?
The first negative effect of inflation, as we have already noted, is that interest-bearing investments lose ground in purchasing power. Another negative effect can be less easy to spot. Investors get worried when inflation ramps up and start choosing riskier ways to invest and investments. This sort of behavior includes staying with a stock or index as it becomes more and more clear that a bull market is nearing its end. Or, an investor neglects to rebalance their portfolio as stocks take up a greater proportion. This may make sense in the middle of an inflationary cycle but it leaves the investor open to market risks that having a “cash” portion of their portfolio is meant to protect against.
What Investments Are Safe From Inflation?
Over the years the value of homes and investment property tends to go up with inflation. This is always more pronounced in areas where prices are already higher. The old adage that the most important factors in real estate are location, location, and location applies with greater force when inflation drives prices up. When you are talking about your home, you won’t necessarily sell it and take a profit because you need to buy another and inflation has driven up prices across the market.
What Investments Do Well During an Inflationary Cycle?
Gold is a traditional favorite when inflation ramps up but so are other commodities. In the stock market, technology and consumer goods tend to do well too. A good rule of thumb is to avoid getting into growth stocks whose stock prices are held up by the expectation of futures earnings. When those future earnings are made less valuable in terms of purchasing power, it hurts the stock as well. Vehicles like REITs can do well in these times. And, when inflation is rampant, collectibles go up in price. These include fine art, rare coins, and vintage cars. If you have the knowledge and judgement to make good choices with collectibles they can be an excellent hedge against inflation. But, if you are naïve and make bad choices you will lose a lot of money which in turn will be worth even less because of inflation!
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Strategic Mineral Investments
Another cold war is ramping up. This time it is not so much between the USSR and the West but specifically between China and The United States. Issues for investors at the heart of this struggle for global political, financial, and strategic dominance include strategic mineral investments. High tech and the world of the future demand a set of elements collectively called rare earth minerals. These minerals are found in rocks all over the world but in trace amounts. Mining companies with strategic mineral investments seek out higher concentrations of these valuable minerals and then need to refine them. The ones that do this efficiently will be the most profitable investments.
Does China Control the Rare Earth Minerals Market?
Back in 2010 China exported about 97% of all rare earth minerals consumed by the tech industry. Today that percentage has fallen significantly as other nations are ramping up efforts at mining and extraction. As of 2018 China’s share of global rare earth mineral exports was 46.3% with the USA, Austria, and Malaysia at in the 9% range, Japan exporting 7%, and the rest of the world making up the remaining 23%. Making good bets on strategic mineral investments will require finding the companies doing business in this sector and assessing their ability to make a healthy profit.
Global Rare Earth Supply Chains
An extensive article in China Power reviews the status of global rare earth mineral supply chains.
As China’s economy has developed over the last several decades, its leaders have sought to transform the country into a key player in strategically important industries. Toward this end, Beijing has established China as the dominant global supplier of rare earths, a collection of 17 minerals that are indispensable to the manufacturing of smartphones, electric vehicles, military weapon systems, and countless other advanced technologies.
The degree to which China has leveraged their position at the top of the supply chain for these minerals is what has worried the West and, in fact, countries across the globe. The Defense sector is especially concerned about relying on China for minerals that are essential to its high tech weapons arsenal.
Potential Strategic Mineral Investments
A US mining operation highlighted in the China Power article is the Mountain Pass Mine. They are the primary US rare earth producer. However, they have routinely sent their production to China for processing! That will change in 2021 as Mp Materials (MP on the NYSE) sets up a refining operation at the mine. MP currently trades for $31.80 a share which is up from $9.60 when it first traded in January of 2020 and which is down from its high of $45.99 in March of 2021.
Investments in Lithium Mining
In our article about lithium mining investment issues we noted that mining and processing of lithium for high tech batteries is a similar issue for the USA versus China. As we noted, the USA has sources of lithium via mining operations and brine extraction. In the coming decade and beyond we expect to see successively larger projects to mine and process lithium as well as rare earth minerals in the USA.
Strategic Mineral Investments – Slideshare Version
How Often Should You Rebalance an Investment Portfolio?
The stock market continues to climb and bonds remain in the limbo of low interest rates. There is a tendency for an investment portfolio to get out of balance in this environment. How often should you rebalance in investment portfolio? And, for that matter, why should you aim for a balanced portfolio instead of simply aiming for the best-performing investments?
Rationale for Balancing an Investment Portfolio
Investors balance their investment portfolios in order to balance the potential for return on their investments and the risk associated with those investments. The traditional approach is to invest primarily in stocks when you are young and starting out and to pivot towards more bonds, treasuries, and CDs as you approach retirement. An investor in their twenties may have 90% stocks and 10% bonds while someone in their forties might go with 70% and 30%. Traditionally, someone near or in retirement may have half or more of their portfolio in bonds. While the US stock market has historically returned as much as 10% a year on the average, there have been long periods when the market has slumped and remained down for years. The rationale for balancing an investment portfolio is not to get caught during a market crash and slump with no means of support while you wait for the market to recover.
Do You Really Need to Balance a Portfolio?
Warren Buffett has said something to the effect that people only balance their portfolio because they don’t know how to apply the concept of intrinsic value to pick the right stocks over the long term. That having been said, markets still slump and having a part of your investments in cash equivalents helps you avoid having to sell good stocks to live during retirement because the market crashed. Buffett’s suggestion in regard to those who do not have time or expertise to choose and follow the right stocks is to invest regularly in an ETF that tracks the S&P 500. This approach does indeed help avoid the problem of picking the wrong stocks but not the issue of being stuck 100% in stocks when the market crashes.
How Often Should You Rebalance an Investment Portfolio?
If you are going to follow the traditional recipe for allocating investments to stocks and bonds you will rebalance when it is time to change the mix as you get older and when the portfolio gets out of balance because either stocks or bonds have gotten ahead of the percent of the portfolio that you have chosen. Because the market and interest rates fluctuate normally, it is not a good idea to fuss over this issue every month. But, rather take a look and make changes on a yearly basis.
What Is the Best Method for Rebalancing an Investment Portfolio?
A good reason for holding off on rebalancing every time that the percentage varies a bit is that you would need sell your winners and buy new stocks or bonds to re-achieve balance. The best way to get back into balance is to adjust your purchases of stocks or bonds. If you are way ahead on your stock percentage as many investors are today it is time to invest in bonds, CDs, or treasuries until you have returned to the balance that you desire. One can simply use the dollar cost averaging route with stocks or interest bearing investments for this task.
What Is the Rule of 110?
If you are wondering just how much of your investment portfolio should be in stocks versus bonds, treasuries, or CDs, considering using the rule of 110. Take your age and subtract it from 110. If you are 30-years-old the rule of 110 will tell you to put 80% of your portfolio into stocks. If you are 60-years-old the rule of 110 will tell you to allocate 50% to stocks and 50% to interest-bearing investments. Investors have used this approach for decades. It is still in use because it keeps your portfolio from being top heavy with stocks at the end of a bull market when the risk of crash is high. And, it gets you back into stocks as a bear market is bottoming out and you can find bargain stocks for the next bull market.
How Often Should You Rebalance and Investment Portfolio? – Slideshare Version
How Often Should You Rebalance an Investment Portfolio? – DOC
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How to Profit From the Growth of Solar Energy
The United States Department of Energy has just published their “blueprint” for a huge increase in the use of solar power in the USA from 4% to 45% of the total energy budget. This got us wondering how to profit from the growth of solar energy over the next years and decades. The work necessary to achieve this goal by 2050 would include doubling the rate of installation of solar energy facilities yearly for four years and then again by 2030. To achieve this goal would require an expansion of the electric grid as well. Along with their solar plans the administration wants to increase the number of offshore wind turbines from a handful to hundreds.
Investing in Cheap Solar Panels and More
As noted in a New York Times article about the Biden solar energy plans, solar panels have become cheaper in recent years.
The Energy Department said its calculations showed that solar panels had fallen so much in cost that they could produce 40 percent of the country’s electricity by 2035, enough to power all American homes and 45 percent by 2050.
Getting there will mean trillions of dollars in investments by homeowners, businesses and the government. The electric grid, built for hulking coal, natural gas and nuclear power plants, would have to be almost completely remade with the addition of batteries, transmission lines and other technologies that can soak up electricity when the sun is shining and to send it from one corner of the country to another.
This is the part that got us to thinking about how to profit from the growth of solar energy. China currently produces about eighty percent of the world’s solar panels. Due to tariff issues and concerns about an evolving trade war, Asian manufacturers are moving manufacturing operations into the USA. Five of the leaders are these:
LG Solar
Panasonic
Jinko Solar
Hanwa Q Cells
Sun Power
Sun Power is a US-based company listed on the NASDAQ (SPWR) and currently priced at $21.60 a share.
Investing in Lithium Batteries to Store Solar Energy
The drawback to relying on solar energy is that there is no power generation during the night. Thus a system that relies on solar needs to have a backup system. This can include wind, hydro, nuclear, and fossil fuels. It can also include batteries that store power during the day and release it at night. In our article about lithium mining investment issues we noted that China currently has the corner on the market for lithium mining and lithium battery production despite the fact that there is plenty of lithium to mine in the Western Hemisphere and specifically in the USA. And, the USA and Europe are both ramping up to produce more lithium batteries that will not be subject to supply chain issues with another pandemic or trade war with China. The biggest lithium battery manufacturers in the USA are these:
Panasonic Energy of North America
LG Chem Michigan Inc.
A123 Systems LLC
EnerSys
Samsung SDI Co. Ltd
EnerSys trades on the NYSE and the current stock price is $75.75.
Investing in companies that make lithium batteries instead of solar panels gives you the advantage of having a foot in solar and wind power as well as the huge surge in electric cars on the horizon.
Clean Energy Payment Plan
One of ways that the Biden administration will encourage electric utilities to allow home solar production into the electric grid is by providing tax credits via the Clean Energy Payment Plan. As noted in the Times article, electric utilities would rather build solar farms where they can control everything than allow homes and businesses to connect to their electric grids. The government hopes to make both things happen with incentives like the Clean Energy Payment Plan.
Investing in Raw Materials for an Expanded Electric Grid
Bringing solar up to the level that the government wants it to be over the next years will require employing and training tens of thousands of workers and will increase the need for aluminum, silicon, steel and glass. One could profit from this surge in demand in commodities by trading commodity futures or by investing in companies that mine, refine, and produce the necessary materials. US-based steel companies include the following:
Nucor, NYSE, NUE, $105.34
US Steel, NYSE, X, $23.57
ArcelorMittal SA, NYSE, MT, $31.93
As we noted in our article about the best investments in solar energy, there are many ways to invest in solar power. With the administration’s push to massively increase solar output in the USA, this subject just moved up on your list of investments to investigate in search of long term profits.
How to Profit From the Growth of Solar Energy – Slideshare Version
How to Profit From the Growth of Solar Energy – DOC
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Investing in Commodities
A common argument for investing in commodities is that doing so allows an investor to diversify a portfolio that consists solely of stocks and bonds. The most highly traded commodities are crude oil, coffee, natural gas, gold, wheat, cotton, corn, and sugar in that order. Commodity futures trading requires a special set of skills and is not what we are talking about when we look at whether investing in commodities is something that you should do to diversify your investment portfolio.
How to Invest in Commodities
There are five basic ways to invest in commodities. You can buy and hold commodities like precious metals as a hedge against inflation or buy and sell over the short term for profit. And, you can invest in ETFs that track commodities like gold which is a more flexible approach than buying and storing gold bullion. Or, you can invest in commodity producers. For example, when the price of gold goes up shares of gold mining stocks commonly go up faster. And, while the most-traded commodity is crude oil there are big oil stocks to invest in. And, like with commodities themselves there are ETFs that track commodity producers like the oil sector or mining stocks.
Investing in Commodities Via Futures
Professional traders trade commodity futures. It is a high reward and high risk trading arena and it is not investing. What some investors choose to do is put money into ETFs or ETNs that track an index which tracks commodity futures. One such index is the Bloomberg Commodity Index. The index tracks contracts on the following commodity futures.
| Energy | Grains | Industrial Metals | Precious Metals | Softs | Livestock |
| WTI Crude | Corn | COMEX Copper | Gold | Sugar | Live Cattle |
| Natural Gas | Soybeans | LME Aluminum | Silver | Coffee | Lean Hogs |
| Brent Crude | Soybean Meal | LME Zinc | Cotton | ||
| RBOB Gasoline | Chicago Wheat | LME Nickel | |||
| Low Sulphur Gas Oil | Soybean Oil | ||||
| ULS Diesel | Kansas HRW Wheat |
The index is set up so that no single commodity can be more than fifteen percent of the total and no set of derived commodities can be more than twenty-five percent. And, no sector can be more than a third of the index.
The DJP is an ETN that tracks the Bloomberg Commodity Index. Because it covers 23 different commodities it smooths out some of the volatility of individual commodity futures. Nevertheless, it has lots of ups and downs. And, over the years it has not been a good place to park money for the long term.
On the other hand, if one had invested in this ETN when the Covid-19 market crash bottomed out, they would have doubled their money by September of 2021. Thus, this investing route works better for short term, in and out, investments.
Why Invest in Commodities?
The point of investing is first of all to preserve your purchasing power and secondly to increase it. Many investors add gold bullion or a gold ETF to their portfolio to counter the effects of inflation. While it makes sense to buy and store gold over the years, that does not work with live cattle, sugar, coffee, or crude oil, all of which have “shelf lives.” “Hard assets” like gold, silver, platinum, or palladium offer inflation protection and tend to move in value contrary to bonds and stocks. Thus, these investments are promoted as ways to diversify portfolio risk. What is not mentioned in that argument is real estate fulfills much of the function and can provide you with a place to live or rent out for profit while also going up in value with inflation.
Investing in Commodities – Slideshare Version
Chinese Real Estate and the Next Financial Crisis
The 2008 Financial Crisis and Great Recession started with the mortgage crisis in the USA. Subprime mortgages exploded over the first decade of the 21st century. When “subprime borrowers” were unable to pay and started to default the results in the financial system brought down banks and investment houses. The crisis spread across the globe. Today we are concerned about Chinese real estate and the next financial crisis.
Evergrande and the Chinese Debt Crisis
The Japan Times has a thoughtful piece about how China’s economy is threatened about the debt problems of Evergrande, a huge real estate developer that is in trouble.
Every once in a while a company grows so big and messy that governments fear what would happen to the broader economy if it were to fail. In China, Evergrande, a sprawling real estate developer, is that company. Evergrande has the distinction of being the world’s most debt-saddled property developer and has been on life support for months. A steady drumbeat of bad news in the recent weeks has accelerated what many experts warn is inevitable: failure.
Evergrande, like many Chinese companies, relied on heavy borrowing, the belief that the Chinese economy would steadily grow, and the belief that the government would bail them out if they got in trouble. As China’s debt has grown, the government is cracking down on this behavior. Today it is very possible that Evergrande will not get the sort of bailout that it needs. The ripple effects of this company going under could be substantial for the Chinese economy and for foreign investors who have profited from lending to Chinese companies.
Panic from investors and homebuyers could spill over into the property market and hit prices, affecting household wealth and confidence. It could also shake global financial markets and make it harder for other Chinese companies to continue to finance their businesses with foreign investment. Writing in The Financial Times last week, billionaire investor George Soros warned that an Evergrande default could cause China’s economy to crash.
Chen Zhiwu, a professor of finance at the University of Hong Kong, said a failure could result in a credit crunch for the entire economy as financial institutions become more risk averse. An Evergrande failure, he added, was “not good news to the financial system or the overall economy.”
Debt and the Future of the Chinese Economy
Fortune writes that debt will be a bigger problem than demographics for the Chinese economy going forward. They note that as China ages there will be fewer workers to pay off more and more debt.
Total debt in China represents at least 280% of China’s GDP, according to government figures. If China’s future GDP growth requires the same level of credit growth as it has in the past, then China’s debt-to-GDP ratio must rise to somewhere between 400% and 500%: an unprecedented level of debt, especially for a developing country.
Adjusting for a declining working population makes the numbers even worse. As the working population declines by 0.5% to 0.6% a year, the amount of debt per worker rises by an additional 2% to 3% of GDP every year.
Their point is that China’s debt and growth model is no longer tenable and the time they have to fix the situation is shrinking as the number of workers declines.
Chinese Real Estate and the Next Financial Crisis
Every financial crisis has two aspects, the basic problem or problems at its core and the single issue that ignites the crisis. Rising inflation made the ever-increasing debt in the housing market in the USA unbearable. The collapse of a giant real estate developer in China could likewise be the last straw for an over-extended real estate market in China. Investors have lots of things to worry about including the persistence of Covid, extreme weather, the political dangers of investing in China, and now, an increasingly unstable Chinese real estate market whose collapse could spread economic chaos far and wide.
Chinese Real Estate and the Next Financial Crisis – Slideshare Version