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One of the most interesting article I read in the last months was from Charles Munger (vice chairman of Berkshire Hathaway).

Here is a link: http://www.slate.com/id/2245328/pagenum/all/

I would be interested to hear what others think could be an investment strategy to benefit (or protect oneself) from such a scenario described in the article.

Basically, the point of the article is that the US is at the verge of "twin shocks":

  1. increase of oil/coal prices
  2. decrease of exports (due to competition)

which will lead to a recurring deficit that could amount to 30% of US GDP.

My thinking so far is: either the US treasuries will go down in value (because over time nobody will believe the US can repay in 30 years), or the US dollar will decrease vs other currencies. Somehow I can't quite get my head clear on what will happen.

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So, I've read the article in question, "Basically, It's Over". Here's my opinion:

I respect Charlie Munger but I think his parable misses the mark. If he's trying to convince the average person (or at least the average Slate-reading person) that America is overspending and headed for trouble, the parable could have been told better. I wasn't sure how to follow some of the analogies he was making, and didn't experience the clear "aha" I was hoping for.

Nevertheless, I agree with his point of view, which I see as: In the long run, the United States is going to have serious difficulty in supporting its debt habit, energy consumption habit, and its currency.

In terms of an investment strategy to protect oneself, here are some thoughts. These don't constitute a complete strategy, but are some points to consider as part of an overall strategy:

  1. If the U.S. is going to continue amassing debt fast, it would stand to reason it will become a worse credit risk, requiring it to pay higher interest rates on its debt. Long-term treasury bonds would decline as rates increase, and so wouldn't be a great place to be invested today.

  2. In order to pay the mounting debt and debt servicing costs, the U.S. will continue to run the printing presses, to inflate itself out of debt. This increase in the money supply will put downward pressure on the U.S. dollar relative to the currencies of better-run economies. U.S. cash and short-term treasuries might not be a great place to be invested today. Hedge with inflation-indexed bonds (e.g. TIPS) or the bonds of stronger major economies – but diversify; don't just pick one.

  3. If you agree that energy prices are headed higher, especially relative to U.S. dollars, then a good sector to invest a portion of one's portfolio would be world energy producing companies. (Send some of your money over to Canada, we have lots of oil and we're right next door :-)

Anybody who has already been practicing broad, global diversification is already reasonably protected. Clearly, "diversification" across just U.S. stocks and bonds is not enough.

Finally: I don't underestimate the ability of the U.S. to get out of this rut. U.S. history has impressed upon me (as a Canadian) two things in particular: it is highly capable of both innovating and of overcoming challenges. I'm keeping a small part of my portfolio invested in strong U.S. companies that are proven innovators – not of the "financial"-innovation variety – and with global reach.

  • +1 I think you are right about your points 1,2,3. I don't underestimate the ability of the U.S. to get out of the debt problem. But I also don't overestimate it :) I am puzzled. It's a gigantic problem especially when jobs are missing. – tucson Mar 4 '10 at 11:51

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