The Easiest Way to Beat Inflation

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I've never been an alarmist. I spend far more time talking about promising investment opportunities than spouting financial doom and gloom. But there's a real debt crisis brewing in the United States, and turning a blind eye to the problem won't make it go away.

An endless cycle
Years ago, I nearly sank my fishing boat when a huge wave cascaded over the bow and water poured in. The added weight made the boat ride a bit lower, which made it easier for the next wave to crash in, which then added more weight... Without bilge pumps and a sturdy bucket, I could have been up to my ears in water and swimming in minutes.
 
Debt works in much the same way. You miss a credit card payment, and interest rates are jacked up, which puts you deeper in the hole, which hurts your credit standing and leads to more rate hikes. It's a vicious cycle that can put cash-strapped borrowers underwater faster than you can say "charge it."
 
The United States is still borrowing cheap. For now. But I think it's only a matter of time before China and other foreign lenders demand higher interest rates on their loans to the U.S. government. The risks are becoming greater, and paltry Treasury bills yielding around 3% are still well below normal.
 
According to the U.S. Treasury, our national debt is currently at just over $13 trillion . Even with rates near record lows, servicing the interest payments on the debt is still one of the government's biggest annual expenses. In fact, we can't cover them entirely -- let alone chip away at principal . The Congressional Budget Office (CBO) has projected that overdue interest payments will add $4.8 trillion to the national debt in the next decade alone.
 
Right now, we're staying afloat by issuing new debt to pay off maturing debt. That's like using a Visa card to pay for your MasterCard bill. But the amount we owe MasterCard is snowballing larger by the hour -- and Visa is about to raise its rates.
 
What happens to investors then? Let's just say you'll want to have some of your portfolio safely in a life raft before it's too late.

A sure-fire way to beat inflation
For starters, the first place I'd look to protect my money is in commodities. When inflation hits, prices for everything from food to medicine to cars will increase and erode the purchasing power of your hard-earned dollars. So, why not convert those dollars into something that will rise with the tide?

One of the surest, time-tested axioms is that inflation weakens the dollar. And a weak dollar strengthens the appeal of gold and oil -- particularly in the eyes of foreign investors. That's because many commodities and precious metals like crude oil and gold are denominated in dollars -- meaning their value will increase as the greenback crumbles.

If you'll recall the last time the dollar took a serious tumble, crude oil shot to record levels above $150 a barrel. And anyone who lived through the stagflation of the 1970s is acutely aware of the miserable environment it can create for investors. But those were great times for commodities.

We could be headed down that road again…

A well-rounded play
Instead of recommending a single energy or commodity stock, I'm telling my StreetAuthority Market Advisor readers to keep their eye on funds like the Jefferies Global Commodity Equity ( CRBQ ) ETF . There are others out there, but I like this one in particular.

This fund has a global, 150-stock portfolio providing plenty of exposure to energy and precious metals through holdings like ConocoPhillips ( COP ) and Goldcorp ( GG ) , as well other top holdings that will benefit from inflation, like fertilizer giant Potash ( POT ) and farm equipment maker Deere ( DE ) . But that's just the beginning. There are also natural gas, silver, coal, copper, nickel and aluminum plays in the portfolio as well.

Action to Take --> Only time will tell whether we can dig ourselves out from this debt hole before it buries us. Even then, we won't escape unscathed.

In the meantime, a clicking global economy will lend further support to commodities. CRBQ was launched last September, so this fund is a relatively new option. But I think the timing is fortuitous. The more checks Congress writes, the brighter the outlook for this well-rounded fund.


-- Nathan Slaughter

Nathan Slaughter's previous experience includes tenures at AXA/Equitable Advisors and Morgan Keegan. In addition, he's earned Series 6, 7, 63, & 65 certifications. Read more...


Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

StreetAuthority


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Basics , Commodities , ETFs , Investing Ideas

Referenced Stocks: COP , CRBQ , DE , GG , POT

Nathan Slaughter

Nathan Slaughter

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