August 14, 2012

Investing During the Great American Decline

America’s reign as a world superpower is approaching a juncture last seen by the Soviet Union 20+ years ago and we may be living through the great American decline.

The seams holding this great union together are fraying from the constant stress on America’s economic and social fabric. For decades the country has been stretched beyond its means, paying for extravagant wars and lifestyles with the exorbitant privilege of petrodollar hegemony.

Just like the Soviet Union kept its facade intact for decades, America has maintained its illusion of wealth. But the prosperity we see at an aggregate level quickly crumbles once one looks beneath the surface.
The world’s richest nation is poorer than ever:
  • 25% of workers earn less than $22,000
  • 20.5 million Americans have incomes less than $9,500 per year
  • 20% of Americans control 84% of the country’s wealth
  • Almost 15% of the US population uses food stamps
  • Those on fixed incomes – e.g. pensioners – must contend with 10year US Treasury yields near 1.63%
  • The proportion of middle class in America has declined from 61% in 1971 to 51% today.
  • Since 2000, the median income for America’s middle class has fallen from $72,956 to $69,487
  • Median net worth for the middle class fell 28 percent over the last decade, from $129,000 in 2001 to $93,000, wiping out two decades of gains
(Sources: Paul Craig Roberts, USDA, Bloomberg, Bloomberg Weekly)

I could go on and on…but by now you should see how America’s aggregate wealth is growing while America’s insides are rotting.

While America’s middle class - the glue that holds society together – shrank over the decades, the country’s leaders borrowed and wasted increasing amounts to finance wars, to defeat communism, to fight terrorism and to bail out the banking system.

At the same time, America’s rich got richer as labor was sold out in the name of globalization. Despite the dismantling of the middle class wage, credit expansion maintained a mass consumption base for the products of capitalism – McMansions, second cars, iPods and other non-necessities.
Today, studying hard and earning a decent wage no longer provides the American dream. To create wealth in today’s world, one must understand how to play the game.

This is why many bankers, hedge fund managers and politicians are despised. To understand the game is to profit from it and these segments of society have mastered the game. They understand that to become part of the 1% one should rely less on labor income and learn to make money work. These folks own businesses and manipulate the corporate ladder. But the easiest way for average people to play the game is to avoid debt, save and invest…invest often, invest cheaply and invest for the long-haul. To invest is to become an owner of capital and it is the owners of capital that have historically accumulated wealth at the expense of laborers.

This is not a judgment call. But to profit from the labor you provide day-in-day-out you must own that labor. In my opinion, the best way to own the fruits of labor is to live with an income surplus (admittedly, this takes discipline) and invest that surplus in dividend paying investments. A few examples include:
  • SPDR S&P Dividend ETF (SDY)
  • SPDR S&P International Dividend ETF (DWX)
  • Powershares Dividend Achievers Portfolio Fund (PFM)
  • Powershares International Dividend Achievers Portfolio Fund (PID)
  • iShares Dow Jones Select Dividend Index Fund (DVY)
  • iShares Dow Jones International Select Dividend Index Fund (IDV)
But beware. Growing income and wealth disparity will eventually cause the system to break down. The same tensions generating wealth for the 1% and stretching America’s middle classes apart could eventually lead to a sudden overhaul of the system, either by dollar devaluation, interest rate spikes, civil war or some other unforeseen event.

If one is to take advantage of the system by becoming an owner of capital (i.e. an investor) appropriate precautions against the great American decline are warranted. For this reason, many investors own some precious metals, short-dollar investments or non-US investments. Some examples include:
  • streetTRACKS Gold Shares ETF (GLD)
  • iShares Silver Trust Fund (SLV)
  • ETFS Physical Swiss Gold Shares ETF (SGOL)
  • ETFS Physical Asian Gold Shares (AGOL)
  • ETFS Precious Metals Basket Trust ETF (GLTR)
  • ETFS Physical Silver Shares ETF (SIVR)
  • PowerShares DB Gold Fund (DGL)
  • PowerShares DB US Dollar Index Bearish Fund (UDN)
  • iShares MSCI EAFE Index Fund (EFA)
  • Europe Pacific ETF (VEA)
We may be living through the great American decline but that doesn’t mean we should simply accept our fate. Beat the system by participating in the system.