Simit Patel

As we recently discussed, the US is heading towards a depression, and given the nature of the proposed bailouts as well as restrictions on short selling, it seems as though the depression will be inflationary. The most notable characteristic of an inflationary depression is currency devaluation.

If that's the case, how can traders preserve their wealth? Below are 8 ETFs traders should consider looking into to prepare for an inflationary depression:

Foreign Bond ETFs. There are a number of foreign bond ETFs -- FAX, FAM, EDF, among others -- are also appealing to many seeking to diversify outside the US. In addition to providing stable income returns that bonds offer, they also allow for protection against dollar devaluation.

VEU. This fund seeks to replicate an index of 2,200 stocks in 47 countries outside the US. Because of its diversity, it is viewed as a great way to hedge against systemic risk in the United States. It is, however, down 10.08% this year.

FXE. The FXE ETF tracks the Euro. As regional currencies tend to proliferate, the Euro may be a particularly effective hedge against the US dollar. It is up 9.68% thus far this year.

GLD. This fund seeks to reflect the performance of gold bullion, less the Trust's expenses. At the time of this writing, GLD is up 10.98% this year, and 28.12% over the past three years. Given gold's status as a safe haven that preserves value, this ETF can help hedge against dollar devaluation.

GDX. This ETF invests in publicly traded companies involved primarily in mining for gold and silver. Currency devaluation increases demand for precious metals, which in turn increases demand for mining businesses.

SLV. While gold tends to be the primary precious metal of choice to hedge against currency devaluation, silver is often viewed as a backup store of wealth as well. The greater the US dollar devaluation, the more likely demand for silver will rise. Thus far, SLV is up 19.28% this year.

USO. In recent history, oil and the US dollar have been inversely correlated; as such, dollar devaluation is widely regarded as the primary cause of higher oil prices. This presents an opportunity to invest in oil to hedge against dollar devaluation. The USO ETF seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. USO is up 49.47% thus far this year.

DBC. A depression tends to result in a flight from financial assets to commodities. We've seen early signs of this in the United States, with food and gas prices rising. The DBC ETF invests in a portfolio of exchange-traded futures on the commodities comprising the index, or the index commodities. The index commodities are light, sweet crude oil, heating oil, aluminum, gold, corn and wheat. Thus far, the DBC ETF is up 42.84% this year.

kkpatel1924

Simit, great picks man......

I have been investing in and out of FAX for the last 3 years, and it is as steady as a rock that just keeps on laying eggs every year. It has a consistent 6% (give or take) dividends that it pays regularly. Recently with the global market correction, it took a hit and bounced right back.

There are picks in here that are very good, and it comes at a great time. David had recommend FXE and UUP to me when I was searching for ways to get the money out of US$......

I will look into the rest, but one that I really like to play with these days is DUG (2x short Oil), which is kind of the mirror image of USO on steroids (2x short). As soon as we get the recent high in oil, it is time to play DUG again (IMHO).

Keep the messages coming Simit......

Thanks.

Kenny Patel

Tekmnd

Thanks Simit
I will be looking into some of these. I am moving my 401k money out of money market funds as soon as I feel the bailout rally is over (assuming we have one), and I like some of your suggestions.
Also looking into putting some into DXD, which is a double short of the DOW.

Tek

Simit Patel

Glad you guys are finding this useful. I'll be adding some more evidence for this argument, exploring counter-arguments, and elaborating as well.

Of course questions, additional insight, skepticism, etc are most welcome.

Tekmnd

I decided to work on this a bit this weekend, since I am not expecting the bailout rally to last long (couple of days at most I am predicting).

I am leaning toward putting my 401K into 60% cash (for now), and 40% in-

INDEX:
DXD DOW Short
SH Short SP500
EWV Japan Short

Precious Metals:
DBP Precious Metals

Commodities:
DBC light, sweet crude oil, heating oil, aluminum, gold, corn and wheat

Money:
UDN Dollar Short

Industrial Short:
SIJ Industrial Short

Consumer Short:
SZK Consumer Goods Short

Questions, comments, or advice welcome
Tek

Simit Patel

hey Tek,

Thanks for sharing, looks interesting. I'm not entirely familiar with everything you've listed but they seem to be riding many of the key economic factors I think we're seeing -- namely dollar devaluation and commodity bull market.

One note of caution I would add is that when shorting dollar denominated assets (DJIA, ETFs in particular) I think we could see a scenario in which things will get so hyperinflated that the relative value of those assets will decline but the nominal value of those assets will appreciate. If you go short you could get the worst of both worlds.

Let me give you an example.

Let's say you short a given stock at $10. Let's say we enter a very inflationary scenario where the dollar drops by 25%. Let's say this causes the price of everything to rise. Prices will likely not rise equally though; some stuff will rise more than others. So let's say commodities rise by 30% but the stock you bought rises by 15%. In this scenario, you're losing both ways: the dollar devaluation hits you, but since the nominal value of the market went up, you lose on the short trade as well (even though relative to everything in the economy the stock actually went down in value, which was the economic logic behind the trade).

I hope that makes sense.

I do not think that scenario is going to happen. But I think it is something to be cautious of, so I just wanted to mention it.

Other factors to keep an eye on are price caps. For instance, you may have heard about the current gas shortages in the United States. This naturally would produce a rise in gas prices, though price caps laws are preventing that. In the run up on oil prices we saw this past summer, many people were calling for limits on oil speculators.

Anyway, these are just some factors to consider. Overall I agree with your logic. Though I think it is important be wary of these potential issues, and perhaps things to consider when deciding how you want to weigh your portfolio as well as when you are managing it.