As noted in a recent CNN business article, investors are “holding their noses” and buying stocks because “there is no alternative.”

TINA (There Is No Alternative) has become a popular mantra on Wall Street. It explains why stocks are near record highs despite concerns about trade tensions with China and what’s expected to be another round of lackluster corporate earnings next month.

Not even a huge surge in crude prices Monday following an attack on Saudi oil facilities over the weekend was enough to dampen investor enthusiasm all that much. The Dow fell a little more than 150 points, or about 0.6%, Monday. That’s a pretty tame drop, especially when you consider that the blue chip average had gained for the prior eight trading days.

It appears that investors are holding their noses and buying stocks because of the TINA trade. With the Federal Reserve expected to cut short-term interest rates again at its meeting this week, stocks could get another boost.

We recently wrote about investment risks related to the inverted yield curve. While an inverted yield curve is a reliable predictor of a coming recession and market correction or crash, it also tells bond investors that interest rates on bonds will remain low for years to come. While the prospect of lower interest rates for years to come makes bond investing seem less attractive to many investors it also makes stocks more attractive to others. For those who see stocks and bonds as their only investment choices, the TINA (There Is No Alternative) view to investing makes sense. However, from our viewpoint, this is a short-sighted defensive posture that is full of risk.

What Are Your Investment Alternatives?

When many folks think of investing, they think of stocks, bonds, and cash. There are alternatives. Some are so-called alternative investments like real estate, commodities, derivatives contracts, managed futures, hedge funds, and arts/antiquities. When choosing alternative investments, the same principles of intrinsic value should be applied to make your choices as to investing in stocks. Other “investments” that make a lot of sense are paying down your credit card balance or paying ahead on your mortgage if you have a locked-in high rate.

Real Estate Investments

Your first real estate investment should be your home. The mortgage interest rate deduction makes this an attractive investment for anyone. And, over the years, you will not only pay less on your mortgage than if you are paying rent but will also have a home to live in free and clear of debt in the end. For most Americans, their home is their greatest financial asset when they reach retirement.

Second homes can be a good real estate investment as well. However, recent changes in the tax law have taken away the mortgage interest deduction on second homes. Thus, any investment in a second home, vacation home, other property will need to stand on its own merits.

Alternative Investments in REITs

According to Investopedia, REITs (Real Estate Investment Trusts) allow investors to “buy shares in commercial real estate portfolios.” They then receive income from a collection of properties such as apartment complexes, health care facilities, hotels, data centers, energy pipelines, cell towers, warehouses, and even timberland. There are equity REITs, mortgage REITs, and hybrid REITs. The Investopedia article has useful descriptions of each of these alternative investments.

Commodity Investing: Gold

Unless you have the background and expertise to predict changes in the live cattle, pork belly, wheat, corn, or soybean markets, these investments are best left to the folks with the skills, experience, and resources to do this sort of trading. However, many investors choose to invest in gold as a hedge against inflation or as a bet on the market taking a downturn. Some investors choose to purchase gold bullion as bars or coins and store the gold themselves in a safe deposit box. Those who choose to purchase substantial quantities can find insured gold deposit facilities. Gold mining stocks often go up in value faster than gold in a bull market and Gold ETFs allow one to participate in an upward swing of gold and get out in a timely manner. We have written at length about the benefits and risks of long term gold investing.

Hedge Funds as Alternative Investments

Hedge funds attempt to multiply the profits of normal market movements through “hedging” strategies like holding both long and short positions in markets. These alternative investments are commonly in stocks. When you invest in a hedge fund you trust the skill and timing of the fund operators to make you a profit in excess of what your own market investing would provide.

Practical Investment Alternatives to Today’s Stock and Bond Markets

There are basic and safe ways to invest outside of the stock market and bond market and there are risky ways. Paying down your credit cards, paying ahead on your home mortgage, or investing in a well-managed REIT are practical ways to invest outside of the stock market. If you have money that you want to invest for the long term and are willing to wait, practical alternatives include US farmland and offshore investments in developing economies.

And, many smart long term investors are perfectly happy with investments that do not lose any money, such as long term bonds, Treasuries, and CDs at your local bank. This may not be a bad approach when you are unsure where the stock market is headed and if another Financial Crisis is around the corner!

Investments in China

For the average investor, the best ways to invest in China are through a mutual fund or other stock fund that holds Chinese assets or by purchasing ADRs. You don’t need to speak Mandarin or deal with a foreign stock market and can let someone with the time and expertise pick the individual stocks. But, if you want to pick and choose the right individual stocks, you can buy ADRs of large Chinese companies who provide financial reports on a par with what US companies provide when they are listed on the US stock exchanges. In regard to our concern about safe investments in China, here is where our focus is. Investor Place looks at 3 Chinese stocks which they say you should buy and hold. Their article not only offers three stocks that may be safe investments with high returns over the years and therefore safe investments for retirement. They also give us some insight into the current state of the Chinese economy what the future holds for investing in China.

To say that Chinese stocks have been a roller coaster over the last year would be an understatement. Already, China has seen slower growth as it shifted from being a solely manufacturing-based economy to one based on services/consumerism. But with the trade war, Chinese stocks have been hit even harder, only to bounce back as a deal with the United States seemed to be within grasp.

Then, President Trump tweeted. With no deal in sight, tariffs rising and even lower growth on the horizon, Chinese stocks have continued to sink over the last week or so.

But this could be an interesting opportunity for long-term investors. China continues to dominate on the world stage and is arguably one of the most important economies. And while a deal may not be in sight today, there’s a good chance that one will be ironed out eventually. Meanwhile, with its huge and growing consumer base, domestic growth continues despite various trade pressures. In the end, Chinese stocks could be a wonderful long-term play. And the recent hiccups have provided a “reset” in valuations ripe for the picking.

At this point, we are looking for safe investments in China and investments with high return. As China’s foreign sales level off or are rolled back due to trade war and cybersecurity issues, they have a huge internal market to develop and that may well be where to invest in China. And, in that regard, the first Investor Place choice fits right in.

Investing in Alibaba

Alibaba is generally thought of as the Chinese Amazon.com. They serve as a marketplace for selling products online but do not hold any inventory. As such, they may be more similar to eBay. Either way, Alibaba is a huge and growing company in the huge and expanding Chinese market. And, like Google, Alibaba is not resting on its laurels but reinvesting its profits in a variety of other businesses such as social media, cloud computing, mobile devices, and peer-to-peer lending.

In our article, Is There a Safe Fifty-year Investment, we noted that companies like AT&T, General Motors, Coca Cola, Kodak, and others were uniquely positioned to provide products and services to the growing US economy over much of the twentieth century. Their level of success and even dominance did not last forever, but it lasted for a long, long time. This is a good way to look at Alibaba. They are positioned very well in a very large and growing market. Their wide range of virtually recession-resistant products and services protects them again be totally devastated by a prolonged or permanent trade war.

Are there safe investments in China today? Yes, and Alibaba seems to be one.

Investing in Baidu

Baidu is often referred to as the Chinese Google. They control 80% of internet searches in China. Like Google, they make billions of dollars a year on selling ads. And, like Alphabet, Google’s parent company, Baidu has diversified into other tech areas such as autonomous vehicles, artificial intelligence, and video with its iQiyi subsidiary. Baidu’s growth is based on still-expanding use of the internet in China and not on exports to saturated and increasingly trade-protected North American and European markets.

Are there safe investments in China? Baidu is one and will likely be for a long time.

Investing in Ctrip.com

This is not a big company but rather a normal company that is well-positioned in a growing niche market. They run accommodation and travel booking sites. Airlines, hotels, cruises, and others use Ctrip.com to list their unsold services. This is an extremely low-overhead business in a growing market. As China shifts to a consumer-driven economy and focuses more on internal growth, this company has the potential to keep expanding the Chinese travel more and more. The risk of investing long term in these folks, like the rest, is that this is a business that competitors can mimic and take market share.

Safe Investments for Beginners in Chinese Stocks

Beginners at investing should typically stick with investments that they know and investment vehicles that protect them against undue risk. In regard to risks of investing in China, ADR’s of companies doing business solely in China, like Alibaba, Baidu, and Ctrip.com are a good idea. At this point, we prefer the few stocks mentioned because of their Chinese consumer focus. Our concern about Chinese tech companies and exporters is that the trade war with the US is not going to end soon and may spread to involve other nations. China has grown fast and is getting to a point where it wants to display regional and global dominance. This will meet resistance across the globe and make much of China’s export-driven growth slow even more.

Chinese Debt and Investment Safety in China

Much has been made of China’s increasing debt at a time when their economy is cooling off. Comparisons to Japan thirty years ago are appropriate and China seems to be concerned about following the same path into economic stagnation. There has been money flowing out of China for years is wealth investors there have been hedging their bets. Chinese banks and exporters in heavy industry are at substantial risk of a hard landing due to a debt collapse and loss of external markets. However, China has $3.25 trillion dollars in cash reserves which will provide a cushion if needed. It should be noted, however, that they had nearly $4 trillion in reserves just four years ago.

To sum up, there are safe investments in China, safe investments for seniors and safe investments for beginners. The first trick will be to invest in companies you can track. This means investing via ADRs. And, the second is to pick companies with a strong consumer focus in the still-expanding Chinese economy.

Panic Buying of Silver in 1979 to 1980

The boom and bust of silver prices is remembered as Silver Thursday, March 27, 1980. Silver was trading at around $6 an ounce in early 1979 and as the brothers purchased increasingly larger amounts of silver on margin, the price rose to $49.45 by January 18, 1980. By that time the three Hunt brothers controlled a third of all silver on earth that was not in government hands!

Our friend commented on how people were taking money out of their bank accounts to buy silver as the price went up. Specifically, when the plumber came out to fix a leaky pipe at our friend’s home, the plumber confessed that he had “invested” his life savings of $30,000 in silver bullion so that he could retire soon.

The sad fact of the matter for our friend’s plumber is that the COMEX tightened margin requirements with Silver Rule 7 and when the price of silver fell ever so slightly, the Hunts did not have the cash to meet their margin call of $100,000,000. They had to sell at huge losses and the price of silver fell by half in just four days. Silver traded at $15 an ounce by June of 1982 and at $6.46 in January of 1993.

Needless to say the plumber lost a large portion of his life savings.

Panic Buying of Bitcoin

Our friend is now well into retirement and living in Latin America. He met a realtor in the coffee growing and mountainous region of Colombia when looking at property there. This was in December of 2017. While Bitcoin had started the year at $900, it was approaching $20,000 and everyone wanted to know how to join in the profits. The realtor admitted that she had emptied her bank account and bought Bitcoin at $15,000. She was so pleased that her investment had gone up right away and that her Bitcoins (3 of them) were worth $19,000 each! She, like the plumber two generations before, envisioned an early and comfortable retirement.

Our friend used his best Spanish in trying to relate the story of the plumber, the Hunt Brothers, and the boom and bust of silver. The lady kept talking about how anyone with any sense should be buying Bitcoin right now (¡Ahora Mismo!).

Bitcoin peaked on December 17, 2017 at $19,783.06 and by December 22 was selling for $13,800. By February 5, 2018 you could buy a Bitcoin for $6,300 and by Halloween the cryptocurrency had stabilized at $6,300.

Our friend has not had any further contact with the realtor but suspects that any plans for an early retirement have been put aside indefinitely.

Panic Buying of Investments Is a Bad Sign

The twin demons of investing are fear and greed. Warren Buffett has often been quoted to the effect that the time to buy is when everyone is afraid and selling their investments and the time to sell is when everyone is buying in a panic. The point is that stocks, real estate, commodities, Bitcoin, and the rest all overshoot their fundamental or intrinsic value when investors imitate lemmings and march in large herds to their doom. This works both in bull and bear markets. And, because the memories of some investors are as short as those of the lemmings, it happens again and again and again.

Panic Buying of Investments Today

CNBC writes that panic buying is likely to drive up stock prices in the near term.

Stocks could get a short-term boost as fear of missing out on gains leads more investors to plow more money into the U.S. equity market, analysts said.

The S&P 500 rose more than 2 percent last week, posting its seventh weekly gain in the last eight. The surge in stocks comes as investors increasingly bet China and the U.S. will strike a trade deal in the near future. It also follows the Federal Reserve signaling it will be patient in tightening monetary policy.

The rationale of smart investors who are buying stocks today is probably that the trade war will averted at the last minute and that the stock market will resume its upward climb as the Fed backs off from its interest rate increases. Unfortunately, as we wrote recently, we could win the trade war and lose on investments.

What is important to note in the CNBC article is that they project a “short-term boost” and not necessarily a resumption of a strong and sustained bull market. In this regard panic buying of investments is a bad sign. Buying shares of companies like Apple, Amazon, or Microsoft today should not be compared to buying silver when the Hunts were cornering the market or when everyone went crazy about Bitcoin. Nevertheless, there are real concerns about the economy, both local and global, and particularly in over-grown and debt-heavy areas like China.

The Trump tax cut was, in the end, a bust for hiring and investment and will have added another trillion dollars to an already-huge US national debt. There may be hope for investment offshore in places like Brazil simply because they were hit so badly when commodity prices collapsed that they have room to recover and because they are still a developing nation with lots of infrastructure needs.

Take-Home Lesson about Panic Buying of Investments

The bottom line of this trip down memory lane is that panic is not a viable investment strategy. Whether you are scared that your investments will lose value or that you are missing out on an opportunity, jumping the gun and selling or buying in response to a moment of panic is a bad idea. Panic buying of investments is a bad sign for the markets because this usually leads to an overshoot in prices which will then correct, sometimes greatly. Then the latecomers to an investment will suffer all of the damage.

As we repeatedly advise our readers, doing routine fundamental analysis of your investments or investment opportunities is where to start. There are certainly times when investment opportunities arise and moving quickly is the only way to make a profit. But, smart investors limit their scope of investing to what they know and pass on getting into investments that they do not understand and where they cannot adequately assess the likelihood of future profits from increasing cash flow.

Panic Buying of Investments Is a Bad Sign PPT

Win the Trade War and Lose on Your Investments

An article in Market Watch caught our eye. They note that a trade-war win might not be a victory for the stock market!

Sometimes losing can pay dividends in unexpected ways, and that seems particularly true in the case of stocks and trade.

For the past five decades, the U.S. stock market has comparatively outperformed when the trade deficit widened and vice versa, suggesting that even if the U.S. emerges victorious from its trade war with China, investors may have few reasons to rejoice.

At face value, it may seem counterintuitive, but for the U.S., which relies on trade to fuel its economic juggernaut, a deficit can actually be a sign that all is well.

They provide a graph that demonstrates how this has worked since 1970.

(Market Watch)

How Will a Trade War Win Relate to the Stock Market?

We have no reason to dispute the figures provided by Market Watch. It would indeed appear that when the trade deficit goes up that the stock market rises too. And the opposite seems also to be true, at least for the last half of a century. But, a relationship does not prove cause and effect.

In the Market Watch article they note that when the rest of the world is doing well economically and the U.S.A. is not doing so well, US exports may rise but US imports will fall off because people have less money and buy less. So, the balance of trade is better but the stock market suffers. And, when the USA is doing well economically, people buy more foreign products and the balance of trade worsens. Thus the balance of trade worsens but the stock market goes up.

The point is that in the past both the stock market and the U.S.A. balance of payments have been driven by consumer spending in the U.S.A. albeit in different directions. Will this be the case with a new trade deal?

What Kind of Trade Deal Can We Expect?

Many believe that as pressure mounts on both sides to make a deal, that a deal will happen, but it will not be as comprehensive as the U.S.A. wants or needs. Both China and the U.S.A. see trade, intellectual property, and control of whole economic sectors as existential issues. Thus both sides want more than the other can give. This especially applies to the Chinese Communist Party which fears for its survival if it gives up its heavy-handed control of the Chinese economy and Chinese society. Thus, there will likely be a deal and continued wrangling over issues into the distant future. And, to the extent that a trade deal results in a better balance of payments for the U.S.A. that may not be a good thing for your investments. But, the reasons might be different than what Market Watch describes.

A bone of contention on the US side is that China makes promises regarding access to its markets and protection of intellectual property and does not follow through. The US negotiators want to build in automatic increases in tariffs that will kick in when the Chinese continue with their old tricks of promising and not delivering.

It could be that higher tariffs on Chinese goods may become a permanent part of the equation. Either Trump will raise tariffs because there is no deal or tariffs will be triggered by non-compliance on the Chinese side.

Tariffs and the Balance of Trade

Tariffs by themselves do not affect the balance of trade. Rather, the consumer’s choice to pick another product due to the high tariff-added cost of a foreign product my result in purchasing from a domestic producer. That is the ideal solution for the U.S.A. if it wants to bring more manufacturing back into the USA. However, the Chinese have taken over whole sections of industry. For example, 70% of electronic production capacity is now in China. The bad end result of high tariffs for US consumers is that they simply pay more for imports from China because nobody else is producing what the consumer wants! When that happens, it raises prices for consumers in the USA but does not help the balance of payments. And, because consumer dollars are now going to pay for tariffs, it hurts the economy as well. If that turns out to be the case, there will no longer be a better stock market when people are buying more foreign products.

What Can You Do?

One can always hope for the best, but smart investors will look for better opportunities. Those opportunities may lie offshore from the USA. Then the issue is how to find value investments offshore. We recently wrote about investing offshore in Brazil and in our most recent article about job cutbacks in China we mentioned using foreign direct investment data from the World Bank as a guide to where offshore to invest.

On the other hand, if the China give ground and really let US and other foreign companies into the Chinese market and if they really turn around and protect intellectual property, and if they finally loosen controls on private industry, there could be an economic boom in China that would benefit any number of US multinationals. But, while you are waiting for an outcome of trade talks, a little re-balancing of your portfolio to include a few offshore stocks might well be in order.

Win the Trade War and Lose on Your Investments PPT

Source: Macro Trends

This graph of 70 years of oil prices shows the fall from $111 oil in June of 2014 to oil selling for less than $40 by the end of the year. As income from oil and other commodity exports fell, Brazil’s economy went into decline from which it is just now starting to recover. The reason to consider investment in Brazil today has to with the new conservative government. It will be friendlier to and more closely allied with the USA, and more open for foreign investment.

US Relations with Brazil

Senator Marco Rubio wrote a piece published on the CNN website. Rubio says the US should go big on Brazil.

On New Year’s Day, President Jair Bolsonaro was inaugurated in Brazil, ushering in a new era in Brazilian politics that marks a dramatic departure from the leftist, anti-American governments of Luiz Inácio Lula da Silva and Dilma Rousseff. The new Bolsonaro government has already indicated it seeks an even closer security and economic relationship with the United States.

The senator notes that closer cooperation in areas from space exploration to protection of intellectual property rights are already in the works. Foreign direct investment is likely to increase in Brazil as investors see a government friendlier to foreign investment.

Direct Foreign Investment in Brazil

The World Bank tracks direct foreign investment year by year and country by country. Brazil took a hit after commodities fell in 2014 and the situation there was compounded by social and political turmoil.

Source: Deloitte

So, why would you want to invest offshore in Brazil based on this data? We have often commented that a good investment strategy is to follow the smart money. Folks with billions of dollars to invest have the resources to spot and take advantage of emerging investment opportunities. Financial services and the food and beverage industry are favorites of many investors.  As the graph shows, direct foreign investment bottomed out in 2018 and is expected to rise in the coming years.

How Could You Invest in Brazil?

We assume that you do not have a few billion dollars laying around for investment purposes and that you probably do not speak Portuguese or have an English speaking stock broker ready to pick up the phone in São Paulo and place your orders on the Bovespa stock exchange. But, in order to invest in companies in Brazil, you can buy American Depositary Receipts in the USA. These instruments trade in the USA and level 3 ADRs are subject to the same reporting requirement as US companies.

Investopedia discusses American Depositary Receipts.

American Depositary Receipts (ADRs) are stocks that trade in the U.S. but represent a specified number of shares in a foreign corporation. Like regular stocks, ADRs are bought and sold on U.S. markets. They also trade in U.S. dollars and clear through U.S. settlement systems allowing ADR investors to avoid transacting in a foreign currency. 

The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost-effective way to buy shares in a foreign company. They save money by reducing administrative costs and avoiding foreign taxes on each transaction. Foreign entities like ADRs because they allow non-U.S. companies to gain more U.S. exposure, allowing them to tap into the wealthy U.S. equities markets.

There are companies in Brazil that list as ADRs on US exchanges. You can find a complete list of Brazilian ADRs at TopForeignStocks.com. Twenty-eight of these are listed on the New York Stock Exchange and are subject to NYSE financial disclosure requirements. There are also 45 that trade over the counter and provide less financial information.

The stocks in the NYSE list include the aerospace and defense company, Embraer, several large banks, a number of electric companies in a country where hydroelectric power is dominant, and Petroleo Brasileiro-Petrobras, the Brazilian oil and gas giant.

The trick will be to determine which of these will be the most likely to prosper as Brazil’s economy improves. Using the financial information provided for level 3 ADRs, investors will be able to do their own fundamental analysis of these stocks.

Investment in Brazil and Monetary Exchange Rates

If you do not invest directly in Brazil you will not need to convert US dollars to the Brazilian real (currently = 27 cents). However, the valuation of ADRs will be affected by the exchange rate. As a point of reference, a real was worth 44 cents before oil took a nosedive in 2014 and has been as low as 24 cents. As such the currency seems to have bottomed out and will likely appreciate in value versus the dollar as US interest rates level off and the Brazilian economy surges.

Brazil Selling Off Assets of State Owned Companies

An interesting bit of news from NASDAQ is that in order to reduce their national debt, Brazil is looking at selling assets of several of its state-owned companies. These include subsidiaries of the state oil company, banks, and insurance companies. Those interested in investing in Brazil during its economic recovery may want to watch this story as they search for buying opportunities.

Why Would You Want to Invest Offshore in Brazil PPT