If you didn’t see Warren Buffett’s Op/Ed piece in the New York Times yesterday, here’s the link here’s the link. Buffett is calling on Congress to make the hard choices when the economy gets back on track.
It should be obvious that at some point in the future, inflation will become a concern. Some of the solution rests with Ben Bernanke and the Fed. They must reverse expansive monetary policy.
But perhaps the bigger challenge is for Congress; it will need to reduce spending and adopt policies that will bring the U.S. government debt in line.
If you’re like me, you’re skeptical. Congress has rarely shown the kind of "tough love" that will be needed. And as Buffett points out, failure to get our national books in order will be the equivalent of a silent tax (inflation) on us, the taxpayer. And even worse, America will start to lose its "…reputation for financial integrity…" as Buffett puts it.
*****Right now, deflation is still the major threat to the U.S. economy. Savings are on the rise, prices are weak, wages are down, and unemployment is rising. This is all a direct consequence of the massive wealth destruction that occurred in the wake of the financial crisis.
At some point, prices and employment will reach a balance point and growth will resume. It’s at that point that inflation becomes a threat.
But it should be obvious that some are preparing for the threat of inflation now. After all, can we really trust Congress to make the hard choices? Have our elected officials on Capitol Hill ever demonstrated this ability?
Just look at oil prices. Demand is at 20 year lows. There’s more oil in storage than there’s been in decades. Most analysts have no idea when demand for oil will increase. And yet oil prices are stubborn around the $70 level.
Just imagine what will happen to oil prices when demand does return? Ralph Kramden’s "To the moon, Alice!" seems about right. And it won’t be just oil. Gold, copper, silver, nickel, zinc – all commodities will move much higher to account for the weakening purchasing power of the U.S. dollar.
Investors can sit back and hope that Congress does the right thing to protect their wealth. Or, investors can start buying the assets that will increase their wealth when Congress ultimately fails to act. For more on buying commodity stocks to protect your wealth from inflation, click here.
*****It’s Newsletter Advisors Wednesday. Please enjoy the following interview with Nathan Slaughter of ETF Authority. >>>>>>>
It’s Wednesday and that means it’s once again time to pull up a chair and speak with one of America’s leading investment experts. This week we have Nathan Slaughter from ETF Authority. Nathan’s developed a long and successful track record that pulls from his many years of experience with AXA/Equitable Advisors and Morgan Keegan. Today Nathan’s sharing with us his unique strategies for profitable ETF (exchange traded fund) investing.
Ian: ETFs are still relatively unknown to individual investors despite their rapid growth and strong performance. Can you explain what ETFs are and how they work?
Nathan: ETFs are baskets of stocks, bonds or other securities that are divided up into many "shares" that you can buy and sell at any time during the trading day. They’re simple and transparent investment vehicles. They started off as plain-vanilla vehicles designed to track stock indexes. But over the past 15 years they’ve blossomed into a wide-ranging universe of securities covering hundreds of exotic indexes, industry sectors, commodities and foreign markets.
Whenever you buy an ETF, you’re basically investing in the performance of an underlying bundle of securities – usually those representing a particular index or sector. Just as closed-end funds don’t always trade at a price that precisely reflects the value of the underlying assets in each share of the portfolio, it’s also possible for an ETF to trade at a premium or a discount to its actual worth.
Ian: How are ETFs different from mutual funds? And what are the advantages of using an ETF over a mutual fund?
Nathan: Everything a mutual fund can do, an ETF can do better. Let me explain: unlike traditional mutual and index funds, ETFs have no front- or back-end loads. And because they’re not actively managed, most ETFs have minimal expense ratios, making them much more affordable than most other diversified investment vehicles. Plus, most mutual funds have minimum investment requirements, making them impractical for some smaller investors. By contrast, investors can purchase as little as one share of the ETF of their choice.
Here’s another difference. Whereas traditional mutual funds are only priced at the end of the day, ETFs can be bought and sold at any time throughout the trading day. Many have average daily trading volumes in the hundreds of thousands – and in some cases millions – of shares per day, making them liquid.
And then there are the tax-advantages. In a traditional mutual fund, managers are typically forced to sell off portfolio assets in order to meet redemptions. This typically triggers capital gains taxes, to which all shareholders are exposed. By contrast, the buying and selling of shares on the open market has no impact on an ETF’s tax liability, and those that choose to redeem their ETFs are paid in shares of stock rather than in cash. This minimizes an ETF’s tax burden because it doesn’t have to sell shares – and therefore potentially realize taxable capital gains – to obtain cash to return to investors. Furthermore, those who redeem their ETFs are paid with the lowest-cost-basis shares in the fund, which increases the cost basis for the remaining holdings, thereby minimizing the ETF’s capital gains exposure.
Ian: How can investors use ETFs to make money in today’s market?
Nathan: There’s an ETF suitable for nearly every type of investor. If you’re an income investor, instead of buying one or two high-yielding stocks, these vehicles let you invest in a concentrated basket of high-yielders.
One of my favorites is Vanguard High Dividend (NYSE:VYM)
. Including distributions, VYM has returned +28% since I recommended it to my ETF Authority
readers six months ago.
You can also use ETFs to capture big gains being delivered by specific sectors. I call these "sector" investors. Instead of buying individual hit-or-miss stocks, or entering into dangerous futures contracts, you can buy a single ETF and watch your net worth rise as fast as the price of a barrel of oil. Or if you think oil is going to drop, you can short the whole sector, using what are called "inverse" ETFs.
For growth investors, ETFs are attractive because they let you easily tap into fast-growing foreign markets like Brazil, Russia, India, and China. Take China, for example. It’s the fastest-growing economy in the world. It’s growing at a rate of +6.5% this year, while the U.S. economy is projected to shrink -3.2%. One of my favorite ways to latch onto that growth is with the China Fund (NYSE:CHN)
. This ETF invests in smaller entrepreneurial Chinese companies with trustworthy management and above average growth potential. The China Fund has been the top performing fund in the region over the past 10 years – and it’s already up +38% since I recommended this pick to my ETF Authority
readers in May.
American investors couldn’t touch these foreign markets a few years ago. But thanks to the introduction of several new internationally-focused ETFs, it’s now easy to flit from market to market, feasting on the upward swing of each. And in most cases, buying foreign-focused ETFs like the China Fund are as easy as buying any other security listed on the NYSE or Dow.
Ian: How do you rate an ETF?
I’ve developed my own rating system. I combine five technical and fundamental measures into this proprietary system. My objective is to uncover ETFs with the highest potential and lowest risk. I crunch the numbers on every ETF I review — considering performance and relative returns, fees and expenses, volatility and tax efficiency… and then I grade each one from 1 to 5. If it’s a 1, 2, or 3 I throw it away. I typically recommend 4s and 5s to my ETF Authority
subscribers. There’s a lot of work that goes into tracking down a solid ETF. I do the heavy lifting for my readers and publish my top recommendations every month.
Ian: Is there an ETF class that’s suitable for today’s volatile market?
Yes. If current market conditions make you nervous, but you don’t want to leave your cash in a savings account earning next to nothing, then convertible bonds are an ideal solution. I profiled these in my August issue of The ETF Authority
. The reason why they’re so attractive right now is because they typically capture two-thirds of the market’s upside with only one-third of its downside exposure. I don’t know of another kind of security with those kinds of odds. A convertible ETF I’m considering is Calamos Global Total Return (NYSE: CGO)
. CGO is overseen by the best convertible manager in the business and has beaten its category rivals in every year of its existence.
Nathan, thanks so much for sharing your strategies and your top ETF recommendations with Daily Profit readers.
If you’re interested in finding out more about how to make ETFs a profitable part of your portfolio and about Nathan’s proven system, click HERE