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Profitable Investing Tips has been a member since April 20th 2008, and has created 313 posts from scratch.

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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.

What Will Your Investments Be Worth in Five Years - Effects of Inflation
Effects of Inflation

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.

What Will Your Investments Be Worth in Five Years - Intrinsic Stock Value
Stock Market Price vs Intrinsic Stock Value

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?
The Ice-free Rim of Greenland Where Mining Could Take Place

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.

how can you invest in greenland - the five eyes
Greenland Minerals Are A Defense and Security Issue

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

How Can You Invest in Greenland? – PDF

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.

Fifteen Percent Multinational Tax and Your Investments
Fifteen Percent Multinational Tax and Your Investments

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 – DOC

Fifteen Percent Multinational Tax and Your Investments – PDF

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.

Stagflation Investment Strategies

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

Stagfaltion Investment Strategies- DOC

Stagfaltion Investment Strategies – PDF

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.

How Dangerous Is Inflation for Your Investments
Loss of Purchasing Power From 1% Versus 5% Inflation

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!

How Dangerous Is Inflation for Your Investments? – Slideshare Version

How Dangerous Is Inflation for Your Investments? – DOC

How Dangerous Is Inflation for Your Investments? – PDF

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