Selecting the Dominant Theme:

Money Supply, Real Assets, and Global Growth

by William Hecht | September 25, 2009

If you’ve ever planned a trek into a wilderness area, you should have had the experience of reviewing a map or consulting your guide about what to do if lost. Usually, there’s one major theme:

“Head South and you’ll hit the river, then work your way back upstream to the road.”

“Get to high ground and you will see the Mountain; head for that and you will eventually run into the border fence. Follow that left or West ‘til you come to the first crossing.”

Each investment environment—and they can all have the qualities of a wilderness (okay, there might be some bears, I said it), should have at least one guiding theme and if you can’t find one then you’re in cash or t-bills.

The current economic environment is characterized by several trends, each of which suggests Real Assets as a core theme.

Liquidity has been shown to be indispensible in the minds of policymakers: the first signs of economic weakness constitute a crisis and generate a panic call for liquidity. Despite the decreasing utility of new liquidity injections due to debt service, the printing has to continue in the U.S. and concomitantly on a global basis because we are joined at the monetary hip to our trading partners.
Global monetary growth should equal or exceed 10% per annum over the foreseeable future to accommodate the growth “fix” in the developed world and the urgency of the growth in emerging markets. This doesn’t immediately suggest a focus on one currency as for our purposes; paper money globally will increase in supply and lose value relative to real assets, though clearly current account flows for trade favor the BRIC type currencies or resource exporters.
Real Assets: property, commodities, raw materials, metals, will benefit from the increasing supply of paper money (based on the premise in point #2 at the rate of at least 10% per year). Add to this the effects of global infrastructure building and the general lag for supply to catch up, and you have a category that will benefit whether we manage to push prices up through demand or through the printing press effect against the lack of adequate demand.

Of course, the next big question concerns how to get this exposure in the most effective way. There are ETFs that own beneficial real assets, and you can certainly own the equities that should participate in real asset price gains. Here’s a list of ideas:

I have been buying BCF, a closed-end BlackRock fund that overwrites part of a portfolio broken into three parts: energy, raw materials, and precious metals. It pays a nice dividend, too, for now. Fees high, but it does a lot for one position.
Emerging markets usually give you good exposure to real assets indirectly as well, though it pays to check the premium you’re paying on the vehicle as many benchmarks there have nearly doubled off the lows. You also get more $US dollar downside exposure—which you may or may not want or need.
Some property holdings that don’t represent too much leverage or where prices have reverted to the mean would work.
Metals are compelling as stores of value, but perhaps best played through the equities.
Commodity index funds are likely to perform commensurate with money supply expansion (10% my estimate).
If you are a pro, you might look at shorting the long or intermediate bonds, as they will respond to the reality that they are priced in terms of what amounts to a wasting asset for the foreseeable future.

Not every environment has a ruling theme, and for anyone managing money, there’s comfort in the conviction that you have a plan and a map, or at least know enough about the lay of the land to know what to do if you take a wrong turn.

Bill Hecht is an Associate Professor of Finance at Western International University in Phoenix, AZ and is an Investment Consultant for LegalACE.com in Scottsdale. His views do not reflect those of either Western International University or LegalACE, LLC. He can be reached at w.hecht@cox.net .

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