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Hyperinflation Protection Portfolio

The Hyperinflation Protection Portfolio is certainly aggressive!   Monday we discussed Jacob’s aggressive portfolio, but he was at least a little hedged.  Jacob’s sister Becka only goes one speed…FAST.  As a matter of fact, she met her husband Gary at the race track.   They’ve talked a lot with Jacob and believe very strongly in the economic themes (such as Dollar devaluation & hyperinflation) that he has researched so well, but they don’t understand why he wants to diversify a brokerage account so much.  Gary believes, “When you know the way, go full speed ahead!”

Give this high speed duo an endless variety of investment choices and they’re going to choose funds with no looking back as long as they feel adamant about which ways the markets are going to go.  They don’t want to watch the markets every day, so they too want a portfolio that only needs to be rebalanced and not constantly fiddled with.  And they’re absolutely certain that at least severe inflation and perhaps hyperinflation is coming.

With this mindset firmly entrenched Gary and Becka designed the “There’s No Way We’re Wrong, and We’re Going to Profit!” Portfolio.  Will it work?  Or will it go up in flames?  Only time will tell, but there’s one thing for sure, they will get there fast!

Do Gary and Becka seem incredibly stupid to be so aggressive?  There’s actually a method to their madness and they might not be quite as foolish as they seem.  They actually have a large percentage of their holdings totally outside the world of Wall Street. They have 30% of their holdings in whole life cash value and another 30% in physical gold and silver in their possession.  Thus, they feel like they can be ultra-aggressive with their brokerage account.  Gary knows that you can run a race car hard as long as you have spare tires to put on when the old ones surely burn off.  Their brokerage account is the high octane portion of their holdings and he has spare money he can add to the account if they’re wrong about hyperinflation and the market shows them a lot of losses and they feel that it’s lead to incredible opportunities to establish lower average entry points or new positions.

Let’s look at what they did select to invest in within this brokerage account:

35% in Gold & Silver Miners

10% in a Short US Treasuries Fund

15% in Emerging Markets Stocks

10% in a Short Fund

10% in Agriculture Oriented Stocks

10% in Energy Oriented Stocks

10% in Diversified Global Resource Companies

Gary and Becka have very similar reasons for investing into Gold & Silver Miners funds, the emerging market bond fund, the bearish fund, the agricultural producer fund, the oil producer fund, and the commodities producer fund.  You can see that they chose to focus on fewer funds in some of these categories and because they are focusing more on aggressive sectors, they are taking bigger positions in them as a strong bet on hyperinflation.

This means that they will see much greater appreciation if Jacob and they are correct about what is going to happen in the economy and markets, but also means that if they are wrong, they will probably see much bigger losses because they have made such a pronounced gamble on these sectors.  It’s hard to say for sure what would happen in more of a choppy/see saw market, but Jacob would probably do better there too.

One other big difference between their portfolios is that Gary and Becka have decided to take a short position against long term US Treasuries.  Jacob likes the idea but he’s afraid it’s too early for this speculation to pay off.  Gary knows that it’s quite possible that the US Dollar could start losing considerable value very quickly and that this could mean he’s too late if he’s not in early and as everyone knows, Gary likes to be their first!

The short treasury position is one that is sure to make a tremendous profit whenever interest rates start rising.  And it’s a certainty that at some point they will be much higher than they are today.  However, when will this trend begin?

The Federal Reserve has let the world know in no uncertain terms, that they are willing to continue printing money to buy down interest rates (by buying US Treasuries primarily).  It’s conceivable that the 30 year interest rate could fall from the 4% it was at the time Gary was looking at this, to as low as 2%.  If such a thing were to happen, the short treasury trade, would suffer immensely before it ever saw the appreciation they hoped for.

On the other hand, if the world decided one day that they no longer felt comfortable holding their wealth in US Treasuries (where over 60% of the world’s currency reserves are currently held), the interest rates demanded at US Treasury auctions could balloon higher quickly.  Gary and Becka are willing to be early in order to not miss the trade that they believe will define this generation.

This is Part 4 in a series on Real Life Examples of Portfolio Management.  You can read the previous posts at: Pt 1, Pt 2, & Pt 3.  We just finished a series on the different types of investors which you might want to check out at the following links:  Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, & Pt 6.

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