Sunday, May 6, 2012

Do Our Politicians Need to Visit the Debt Advisory Centre?

In the coming years, the U.S. will be struggling with debt to the point where it will devour a substantial proportion of disposable income and personal wealth, leading to a sharp decline in overall economic output.
At the moment, we are seeing the warning signs in Europe as three members of the 17-country Eurozone experience serious government debt management issues - Greece, Ireland and Portugal.  All three have already needed to be bailed out (Greece twice), while other economic powerhouses such as Spain, Italy, France and even the United Kingdom have needed the national-equivalent of calling the debt advisory hotline.  The result has been painful austerity programs, similar to the types of plans consumers are put on when undergoing debt loan consolidation plans.
One good thing to come from this is that the world has finally woken up to a serious debt habit, something we've long denied—similar to how a gambler denies he has a problem.  There's no question about it, 2012 is going to be a pivotal year.  And the question remains, where should you invest your money?

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Should You Hold Bonds?

We are facing two risks.  First, central banks around the world are working hard to manage their interest rate exposure on government debt.  This is proving harder as their measures only work to increase the risk inflation.  This is leading many investors to move away from debt issuances and into equities.
The second risk is a shift in power from central bankers to the markets.  Like the pure natural force of water, the markets will flood the trading floors with unwanted debt securities, leaving governments scrambling to prop up the value of their debt and keep their interest rates low. It's already happening in Portugal, Spain, Italy and other EU countries and could be on it's way to the U.S.
History has shown that few nations have ever paid off their debts, preferring to inflate their way out of them. It's unlikely to be any different this time. The savvy investor will move away from debt-based securities and opt for inflation hedges such as equity products, precious metals, and commodities.  In addition, investors must become more comfortable with the emerging BRICS (Brazil, Russia, India, China, South Africa).  These economies have shown tremendous resilience.  The recent accords they've struck to begin trading in their own currencies could all but eliminate the U.S. dollar as the world's reserve currency.

Shower Me In Debt

If you must bathe in debt, you don't have to take a bath. Few countries better-positioned to compete in this global debt crisis than Canada. No longer can Canada be viewed as the spoilt, deficit-ridden, debt-bloated country of the 1990's.  It can compete with the world's best, and leverage the growth in the developing Asian market like no other.
While Canada future is not a slam dunk, it's increasingly interconnected economic agenda makes it a credible investment-friendly landscape for investors interested in capitalizing on natural resource plays. Canada's emergence as an energy superpower means it also has the ability to support the widest array of world-class non-resource sectors such as banking and financial services, consumer and manufacturing, communications, and electronics.
While America was the cheapest and best-performing market in the world in stock market terms during 2011, hold onto your seats as Canada's train beings to depart from the station.  If you need to add debt to your portfolios, consider Canadian denominated debt.

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