Aftershock Awakening Phase I

by Robert Wiedemer
A Newsmax Media Publication

w w w. A f t e r s h o c k I n v e s t o r R e p o r t . c o m

The Aftershock

A Publication of Newsmax & Moneynews

INVESTOR REPORT
Phase 1 Special Report

Bob Wiedemer, Editor

18 Smart Investments to Survive and Thrive in the Aftershock

Aftershock Awakening Roadmap Phase 1 Special Report:

By Robert Wiedemer and the Aftershock Investment Team recovered or done anything even close. Stocks are up, at least temporarily, because our Federal Reserve went full-time into the business of making bond income fall to zero. The publicly stated goal, which Fed Chief Ben Bernanke has made clear in numerous speeches and publicly available papers, is to trick you into thinking things are better. Its a simple con, and like all great frauds it works because you want to believe. The game works like this: The Fed tells the Treasury it should issue new debt. The Fed then prints mountains of new dollars to buy the debt. Like magic, interest rates stay extraordinarily low. But thats only half of the picture. Low rates mean U.S. debt pays nearly nothing in terms of income, less than inflation in the case of long bonds. Yet most people especially individual investor retirees but also big pension funds and retirement plans need income to survive. They have to eat, right? Squeezed out of their bond income, savers put money at risk. They bought stocks. Boom! Theres your recovery, cooked up to order. Its a craven strategy, akin to something out of Dickens. Of course, the economy hasnt changed one whit. Employment isnt any better. Construction is stuck in low gear. Manufacturing is weak. Nobody borrows, nobody spends. But stocks are up, so things must be better, right? And we go on dreaming. The same Federal Reserve that denied the possibility of a crash today continues to deny reality at every turn.

ou may have heard this saying, considered by some to be a curse: May you live in interesting times. The years since the credit crisis have certainly been interesting. Not many people saw the housing bubble getting set to pop. In fact, plenty of people at the very top of our economic house of cards flatly denied the possibility. Denial didnt really work out for them, did it? (Oh, theyre still in charge, but with greatly diminished moral authority). Once the housing crash was under way, the credit crisis came hard on its heels. Then we saw things I truly never, ever thought could happen in our supposedly free U.S. economy. Taxpayer bailouts of global banks, even of foreign firms. Government ownership of enormous, flagship manufacturers. Gilded names of Wall Street belly up and sinking fast. Even safe money wasnt safe. Fearing for their wealth, investors around the world sold everything in a blink and hid their cash in U.S. bonds and, to a lesser extent, foreign currencies and other hard assets. Like a slow-motion tsunami, its still going on. It all seems completely unbelievable now, doesnt it? Like a bad dream you shake off and forget.The problem is, were still dreaming. Yes, the stock market recovered, in the sense that the Dow didnt stay below half of its all-time high. Three years on, investors who didnt panic at the bottom have been made nearly whole, for the moment. But thats not because the economy has

to tell you in the following pages is not about taking action today or tomorrow. It is about being By printing up all of this new money, the ready to act and knowing what to do when the government hasnt solved any of our real bubbles are revealed to the deluded masses of problems. They simply transferred the bubble from ordinary investors. side of the balance sheet to the other. I suppose, in the darkest hours of the credit It will happen. Yes, denial will continue until the last possible moment. Then, like the housing crash and the banking Money Supply Headed Up, Up, Up crisis, the truth will become painfully $11,000 Shaded areas indicate US recessions evident to all. Panic will set in, and $10,000 investors will quickly act on the new $9,000 reality as the biggest bubbles of all $8,000 resoundingly pop. $7,000 Being prepared starts with $6,000 keeping things simple. When the $5,000 government debt and U.S. dollar $4,000 bubbles burst well again see volatile $3,000 financial markets and an unstable $2,000 economy. On top of that will come $1,000 1980 1985 1990 1995 2000 2005 2010 2015 aggressive inflation, such as we The supply of dollars, thanks to massive Federal Reserve printing, has been relentless. havent seen in decades.

Zombie Economy

Billions of USD

Fed Chief Ben Bernanke claims that lack of inflation means little demand for all this new cash. Nevertheless, they are out there, fuel for an eventual inflation wildfire.

SOURCE: Board of Governors of the Federal Reserve System

crisis, the leadership in Washington felt compelled to save jobs and salvage what they could. But the net effect has been to zombify the economy: dead banks, stumbling construction, weak retail, millions out of work. There is no exit, except for a real recovery. But there is no real recovery hovering just beneath our fake one. Its fake all the way down. Meanwhile, new bubbles grow a massive bubble in U.S. government debt and another huge one in the U.S. dollar. Once again, the con works because we want to believe. Thats how bubbles start and grow, bit by bit. Were only human. We want good news and good times, not sacrifice and suffering. So we all participate in this mass delusion, up to and including those at the very top of our government and economic power structure, the folks who supposedly know better. Theres an endgame coming. The truly smart money knows that it is not a matter of what will happen, but when. Being prepared is the key. Much of what I have
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There is no precedent in living memory for this type of American catastrophe. Most of Wall Street is unprepared for it. Washington didnt see the last crisis coming, and they ignored obvious facts until well after it was too late to change course. For the individual investor, however, there is an exit: Your personal path to safety revolves around five specific types of investments that have shown an ability to grow in times of crisis, and grow in large part because of crisis. At some point, inflation and interest rates will rise, investor confidence will wane, and the dollar will fall far enough that buying U.S. debt becomes unattractive. Our Treasury auctions will fail for lack of buyers, an event that will force a new, even more spectacularly massive Fed intervention to purchase our bonds. The money supply, in trader lingo, will go parabolic it will zoom straight upward. Relatively quickly, such massive purchases become unfeasible. Our government wont be able to borrow any more. We will hit the fiscal credit limit and the massive public debt bubble will pop. How much can the federal government borrow before this happens? In a presentation we made
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Ignoring Facts

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to the World Bank, we asked the audience what they thought the governments credit limit might be: $10 trillion to $15 trillion, $15 trillion to $20 trillion, or $20 trillion to $25 trillion. Almost half of the respondents said $15 trillion to $20 trillion, and a third voted for $20 trillion to $25 trillion. Were already in that neighborhood, at $16 trillion and counting. No one can predict a number with any precision because the governments actual credit limit will depend on future investor psychology. However, we agree with our World Bank audience that our credit limit will be in the $15 trillion to $25 trillion range, most likely closer to $25 trillion. If interest rates dont rise too much, then we wont hit our credit limit for some years. The laughably unlikely alternative is explosive economic growth at home, such that $16 trillion as a percentage of our GDP actually shrinks. Thats not going to happen in a very large, mature economy with an aging population. If our analysis is right and interest rates do increase significantly, we will move slowly toward our credit limit over the next two to three years then rapidly approach our credit limit within three to five years.

Rush to Safety

At that point, the dollar and the government debt bubbles will, finally, burst. Everything, and I do mean everything, will be in play. You will be well served at that time to have made the right moves early enough to protect what you have and, if you move in a timely manner, even to gain on the huge rush to safety that will follow. That means doing several key things at the right time: Exit all adjustable-rate mortgages. Either convert them to fixed loans or pay them off. Avoid long bonds. When rates spike, these immediately lose value. Buy gold. There is still much more growth ahead for hard assets, especially gold. Limit your exposure to equities. This will be hard to do for most people, but most common stocks will be high risk in short order. Stay away from real estate other than your primary residence with a fixed-rate loan. Be ready to deploy cash selectively into
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exchange-traded funds (ETFs) that take advantage of the quick moves in the market ahead. The balance of this report is about exactly how you should be investing during the years ahead. I will be explaining several different asset classes and approaches to the market. The order is not important. What matters is getting your own head clear as to why you would buy them and under what circumstances you would later sell. For most investors, that takes work. The buy and hold cult of equities is a strong one with a long history. The notion that bonds are safe without exception also will be hard to break. (I explain bond risk in detail later in this report.) Most investors trust this two-step approach implicitly. A big part of the work ahead will be to disabuse you of the mistaken view that owning securities is the same as being secure. Nothing could be further from the truth, as well all soon learn. Huge numbers of people couldnt believe their homes might lose value to the point of being worth less than their mortgage balance. Yet here we are, with millions of homes underwater, never to break even in our lifetimes. That should give you a clear idea of what could happen to your retirement once the Aftershock hits. You will own the same stocks and bonds, yes,

About Bob Wiedemer

Robert Wiedemer is a managing director of Absolute Investment Management, an investment advisory firm. He is the author of the New York Times and Wall Street Journal best-seller Aftershock, with more than 700,000 copies sold, and the Wall Street Journal follow-up best-seller, The Aftershock Investor. Wiedemer predicted the latest downturn in the economy in his landmark 2006 book, Americas Bubble Economy, which Kiplingers chose as one of the best business books of that year. A regular speaker to hedge fund captains and elite international investors, Wiedemer is often quoted in the financial press, including in The Wall Street Journal, Financial Times, Dow Jones Newswires, Barrons, Reuters, The Associated Press and others. He is a frequent commentator on CNBC and Fox Business Network. Wiedemer holds an MBA from the University of Wisconsin in Madison.

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but like all those underwater homes, your lifelong investments literally will be worth less than you paid for them and remain so for the rest of your natural life. No recovery, no do over, no bailout.

The Aftershock Investment Portfolio

20%  Gold and Precious Metal-Related Investments 20% Commodities (Food, Energy) 20% Short-Term Bond Funds 20% Dividend Stocks 10% Foreign Currencies 10% Options (as explained in Aftershock Awakening, Phase Two)

Gold: A Bedrock Asset

The first asset class I want to discuss is gold, both the metal and gold mining companies. In both cases, I would advise you to buy them using ETFs. In addition, you can buy individual gold mining stocks from time to time if so moved. The Aftershock Investment Portfolio 10% Options (as explained in Aftershock Awakening, Phase Two)
Foreign Currencies

10%

Gold and Precious MetalRelated Investments

20%

Dividend Stocks Short-Term Bond Funds

20%

Commodities

20%

20%

Golds critics like to talk about its unreliable performance. But they tend to cherry-pick shortterm periods to make their case. If you look out over a given year, gold hasnt necessarily done that well compared to, say, stocks. Not horribly, just not better. But widen the scope to five years and gold blows stocks away. An ETF I like a lot, the SPDR Gold Trust (GLD), returned 94 percent from 2008 to 2012. The Dow Jones Industrial Average is slightly negative over the period. Take it out 10 years and the comparison gets silly, with gold up 259 percent against just 56 percent for the Dow. The reason why is the U.S. dollar. In terms of the Consumer Price Index (CPI), the buck is down 22 percent from a decade ago. Simply put, $1 in 2002 is worth 78 cents today. In inflation-adjusted terms, your gain from the Dow stocks would compensate you pretty well for that decline in purchasing power. After all, its up by 56 percent compared to your 22 percent loss in dollardenominated purchasing power. Nevertheless, gold creamed the Dow. By holding gold, you would have gotten the protection of a 259 percent gain compared to a 22 percent drop in the dollar, a huge bump up in terms of real wealth. When the Aftershock comes, stocks will crumble along with the greenback. Gold will be one of the assets people turn to as a haven. Yes, the U.S. dollar has ruled the monetary world since the end of World War II. Once that ends, however, the collapse will make certain foreign currencies and, by extension, key precious metals suddenly more valuable to own if you buy them in time.

Most financial advisors tell you to stick to mostly stocks and some bonds and thats it. The coming investment reality will demand a far different approach, including hard assets, currencies, specific bond positions and safe income stocks.
SOURCE: The Aftershock Investor Report

Physical Gold

I like owning miners through ETFs because of the low fees and ease of buying. Owning ETFs gives you instant diversification, since you are buying not one or two but dozens of great companies. Yet there are some good individual miners to consider, at the right price point.
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World governments are preparing for this inevitable outcome. Most of golds supposed bull run over the past few years has been on buying from the worlds various central banks. The banks had been net sellers of gold for years. That trend now has reversed in a permanent way. Do you think China will be interested in our debt once the bubble pops? Or in the dollar? Japan? Both of these countries are already drowning in greenbacks they dont want. Even without their help, the price of gold has
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with gold investing. Beyond that base position, $200 you can extend your physical $180 holdings with ETFs. I mentioned $160 earlier an ETF I like that tracks $140 the price of gold metal, the SPDR Gold Trust (GLD). Another good $120 one is iShares Gold Trust (IAU). $100 Both of these funds work the $80 same way. They buy physical gold $60 and store it, then issue certificates, 2008 2009 2010 2011 2012 2013 which are claims on the actual The SPDR Gold Trust ETF, which trades under the ticker symbol GLD, has been an inverted mirror of the economy at large. As a holder of physical gold, its performance reflects investor gold. distrust of traditional stocks and bonds. Billionaire hedge fund SOURCE: Yahoo! Inc. masters such as George Soros and John Paulson both heavily use been soaring. If you recall, it was selling at $36 an exactly these ETFs for their gold positions. These ounce in 1970. Even as late as 2001 you could buy funds are liquid, cheap to own and trade, and it at $271. Soon after, a steady climb began to the provide what you want: exposure to gold metal. price levels you see today. Golds Hidden Weapon If you want to own gold coins, I see no reason Finally, consider topping off your gold position why not. Building a base position in the form of with gold mining stocks. You can own a broad physical gold can be very reassuring, something selection of large-cap miners through Market you can do on dips over a period of months. Vectors Gold Miners ETF (GDX). These will Decide first how much physical gold you want to be the biggest, most widely held gold mining control, perhaps as a small slice of your 20 percent companies, firms that work in multiple countries total gold holdings, and stick to it. and in multiple currencies. Have a safe place to store your gold, such Thats the hidden weapon in owning gold as a bank safety deposit box. Unless you own a mining and resource stocks. Most gold miners commercial-grade safe, its best not to keep gold are not located in the United States but in foreign at home. Make sure that someone else you trust countries whose currencies are viewed as antiknows how to get into the safe or can access your bank deposit box in the event of your death. Gold coins you plan Market Vectors Gold Miners ETF (GDX) to never sell can be a great way to $70 leave behind wealth to your heirs, $60 for instance. $50 Be sure to buy easily traded, widely accepted coins, such as $40 American Eagles, Canadian Maple $30 Leafs or South AfricansKrugerrands. (The premiums for each can vary. $20 Do your homework and buy from $10 a reputable dealer you meet with 2008 2009 2010 2011 2012 2013 One way to play gold in the Aftershock is via gold mining companies, the largest of which face to face.) Remember, you are are captured by the Market Vectors Gold Miners ETF, under the ticker symbol GDX. While primarily interested in future not a direct proxy for gold metal, the companies held by GDX are good barometers of gold investor interest. convertibility. Coin collecting is a SOURCE: Yahoo! Inc. great hobby, but dont confuse it SPDR Gold Trust ETF (GLD)
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dollar investments, largely because of their domestic mining sector. Australia and Canada, for instance, issue their own dollars, so earnings from mining in those countries come back to you after being converted into U.S. dollars. You get the bump up from the favorable currency exchange, from a rising stock price on the mine itself, and from appreciation in the underlying metal an investing trifecta! Another good candidate is Market Vectors Junior Gold Miners ETF (GDXJ), the small-cap version of the same fund. It holds a broad variety of the more aggressive junior mines. Its a more volatile fund, but like small cap stocks these smaller miners sometimes do much better than the bigger, slower-moving global mining outfits. As for individual mining stocks, one I particularly like is Agnico-Eagle Mines (AEM). This is a Canadian company, one of the industry heavyweights. It has operations in Canada, Mexico and Finland, and explores at home in Canada, in Europe, across Latin America, and also in the United States. It has five mines and owns 10% percent interests in them, meaning they dont share the output with co-investors, a common practice with smaller, less-capitalized operations. Agnico is big. It has a market cap of $8.7 billion and no problem getting financing to expand when it finds new resources. It also isnt shy about flexing its muscles and buying up smaller producers with promising properties. Another, similar investment is Eldorado Gold (EGO). It has a similar market cap and runs mines in Turkey, China, Greece, and Brazil. Its development arm includes mines and exploration taking place in China, Turkey, Brazil, and in the U.S. state of Nevada. It prides itself on being a low-cost producer, a good strategy when gold was selling below $300, for sure. But low cost also means the upside on rising gold is that much better when the metals price takes off. Finally, Im a fan of Newmont Mining (NEM), a U.S. miner that is diversified all over the globe. It has operating segments on every major continent and nearly 99 million ounces of probable gold reserves. Like other large caps, it doesnt hesitate to buy up junior miners for their potential, as Newmont did in buying Fronteer Gold in 2011.
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Newmont also mines copper, an industrial metal that has been on a trajectory similar to gold in the past few years. When the Aftershock hits, you are likely to see demand for industrial metals decline, but dont expect that to last. China and India will quickly return to growth, giving us both the upside from copper growth demand and protection from a declining dollar in gold.

History Lessons by the Pound

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In the gold section above, I spoke a bit about the concept of the anti-dollar investment strategy. Youll find that logic repeating throughout my communications to you, and for a simple reason: The U.S. dollar is a bubble. Once that bubble pops, lots of things will start to happen quickly. One effect, naturally, will be a flight from the dollar into other currencies. Defenders of the status quo like to talk about how unlikely it is that people will sell their dollars, as if there werent enough places to put their wealth. Im sure the holders of the British pound felt the same way. The pound sterling was, for many years, the worlds major reserve currency. Given the extent of the British Empire and its fearsome naval power, trading in the pound made a lot of sense. The United Kingdom built itself into a global power during the 18th and 19th centuries largely by conquering far-flung foreign lands and controlling their exports. Much of the resulting wealth ended up in the vaults of the monarchy, providing the U.K. with world-beating reserves. That helped shore up the pound as the hard currency of choice for international trade, a regime that seemed it would last millennia. What changed? First, the United States created its own central bank, the U.S. Federal Reserve, in 1913. Two World Wars intervened, destroying much of the industrial capacity of Europe in the process. From the rubble, America emerged as the sole global economy wealthy enough and organized enough to pick up the pieces. For instance, we financed the Marshall Plan to rebuild Europe after World War II. Still, at the end of the Second World War the pound sterling remained central to trade. Thirtyfive countries or colonies were pegged to the

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pound and held sterling reserves. PowerShares DB Agriculture Fund (DBA) Roughly 87 percent of global foreign $45 exchange reserves were in sterling. $40 Ten years after the war, however, the pound had dropped in value by $35 30 percent, a shocking change. The major economic powers agreed at the $30 end of the war to establish a global $25 foreign exchange system that hinged more heavily on the dollar. The pound $20 sterlings role in foreign currency 2007 2008 2009 2010 2011 2012 2013 reserves went on a steady decline, As a counterweight to ordinary investments, there are few assets comparable to food. People can live without many discretionary purchases, but they must eat. You can see from well above 50 percent in 1950 to the 2008 panic out of stocks in the spike in this chart of PowerShares DB Agriculture single digits by 1982. Fund ETF (DBA). SOURCE: Yahoo! Inc. Could that happen to the U.S. dollar? Absolutely. It might not happen tomorrow or next year, but As currencies become unstable, the tendency is it could happen easily and quite quickly. Once for major investors to push capital into exactly foreign holders of dollars get spooked about these commodities to hide out until markets inflation, they will move to protect their remaining right themselves. wealth. The U.S. dollar is likely to remain a reserve Building Your Arsenal currency, it just wont have the stature that it Usually, its the dollar that traders worry enjoys today. about most. If the dollars decline seems to be A Perfect Hedge accelerating, traders will move cash hard and fast Heres the thing about being the worlds into food and energy. They will shoot first and ask reserve currency: People use it as tool to buy and questions later. sell real assets, such as food and energy. Evey Thats why its vital to understand how to buy wonder why the rest of the world puts up with and own agriculture and energy investments in pricing oil and food in U.S. dollars? Because they a cost-efficient manner. As part of your arsenal believe it is stable, first of all. And because the against a declining greenback, they are hard to daily trading price of any commodity is slippery beat, largely because of the reflex among traders enough without having to calculate it in several to buy these hard assets when the dollar falls. currencies at the same time. One way to own that kind of protection is to For instance, if Brazil wants to sell oil (or buy a broadly diversified agriculture ETF. One soybeans or sugar) to India, how does it go about that I have used for years is PowerShares DB doing that? By figuring out the value of its own Agriculture Fund (DBA). This ETF is designed currency, the real, against the rupee, then working to track the benchmark DJ-UBS Agriculture Index. on the commodity bids? Of course not. Both It buys commodities such as cattle, cocoa, coffee, countries agree to use the U.S. dollar and then corn, cotton, hogs, soybeans, sugar, and wheat. work solely on setting the price of the commodity Over the past few years, youll find that the DBA fund has lost ground against stocks. But in question. When the dollar begins its permanent thats really not the comparison to make. Its more slide, stability is gone. Trade has to continue, so revealing to look at how it did during the 2008 countries will quickly move to a stable alternative. credit crisis. In October 2007, as the panic set in, A strong secondary effect of the dollars the DBA fund went parabolic nearly straight up sudden slip will be increased buying of hard as the big investment banks began to collapse. assets. People do not need dollars (or euros, or This move was not in reaction to stocks yuan) to survive. They do need food and energy.
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or even to the economy. After all, a declining economy generally means less consumption, not more. Rather, the move to agriculture was in reaction to fear for the dollar itself. It was about this time that the major bank bailouts began and the Fed first acted to prime the pump, so to speak, by guaranteeing bank deposits and working with global central banks to halt the panic. The dollars flowed freely from government, so traders ran into commodities to hide. DBA stayed aloft for nearly a year, then finally came back to a normal trading range by October 2009. It began another interesting move upward in the middle of 2010, as the Fed began its quantitative easing programs that is, more money printing in earnest. The lesson here is pretty simple: More dollars into the system means a declining value for the greenback. One way to protect that value is to buy a hard asset of indisputable worth. Since pretty much everyone eats food, thats where the wealth runs to hide when the dollar is threatened by the powers that be.

forcing oil higher. Its a pain the neck, for sure. But you dont have to be a victim. I advise owning a position in the PowerShares DB Energy Fund (DBE) ETF. This fund tracks an index of futures in oil, gasoline, and natural gas in an effort to capture some of the upside in the entire energy sector. As an ETF, it gives us instant diversification into a complex and hard-to-trade market and at a very low price. If you look back at its performance compared to the DBA agriculture fund, you see a similar spike in late 2007 and on into 2008. Did the world suddenly need more gasoline and heating oil? Nope, what you see there is entirely panic-driven trades as the worlds wealthy looked for ways to get away from the dollar. Thats why people often refer to commodities as hedge investments. They tend to do well when traditional assets are on the ropes. Thats why we need to understand them and be ready to own them when the Aftershock comes.

The third part of our five-point portfolio is Power Plays foreign currencies. I realize that many of you Another nifty hiding place for global wealth is will be a bit hesitant to consider this avenue of energy. It only makes sense, of course. Oil is traded investing, but used judiciously, it will protect you nearly universally in dollars. If the dollar loses from exactly the kind of impossible decline that value, the worlds oil producers begin to demand is likely to occur in the Aftershock. higher per-barrel prices to compensate. Being How impossible? Well, consider that most mostly in a cartel (the OPEC countries), they can investors today still believe wholeheartedly in a do that by decreasing supply at the right moment, simplistic mix of stocks and bonds. It has been baseline finance thinking for decades: You own stocks for appreciation and PowerShares DB Energy Fund (DBE) ETF $45 bonds for protection. Many advisers suggest an age-based calculation, such $40 as subtracting your age from 100, then investing the difference in stocks and the $35 rest in bonds. $30 For a 60-year-old, that would mean owning 40 percent stocks and the rest in $25 bonds. Easy, right? As you will learn soon $20 enough, its exactly this kind of cookie2007 2008 2009 2010 2011 2012 2013 cutter approach that will get most people Oil and energy are great places to hide when traditional investment go sour, as we into deep, deep trouble down the road. clearly see here with the PowerShares DB Energy Fund (DBE) ETF. Since oil and other Problem is, both bonds and stocks are energy assets are traded globally in dollars, any assault on the greenbacks value results in higher prices for fossil fuels. set to do the unthinkable decline in SOURCE: Yahoo! Inc. unison. As the Aftershock hits, stocks will
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Devalued Paper

fall dramatically, much like they did during the credit crisis a few years back. As inflation ramps up, though, bonds too will drop in price. Once bond prices slip, there simply will be no buyers out there for the trillions in devalued paper investors own today. You might say, well, I can just hold it to maturity and get my money back. Except that inflation will speed up, too. The dismal return you see today on 30-year Treasurys will be overwhelmed by the loss of purchasing power. You will get your dollars back, but greatly devalued by runaway inflation. Some of the pressure on fixed income might push folks into stocks. But the Aftershock also will create a recessionary wave that will hit all of the major economies more or less at once. There will be no hiding place, least of all in cash. Thats the fundamental problem. Even contrarian traders who might be comfortable going to cash in a panic will find that inflation is eating their cash position alive. They, too, will lose ground. The flight from the dollar will result in an overnight spike for alternatives gold, as I discuss above, as well as commodities such as agriculture and energy. But it will also spark renewed interest in the currencies of nations in far less dire straits.

Looking Abroad

Many of these countries enjoy hard currencies as a result of sheer reputation: Switzerland, for instance, with its rock-ribbed, conservative banking culture. But others benefit from being exporters of in-demand commodities, such as metals, energy, agricultural goods, and forestry products. Thats why you see so much interest in the Australian dollar (all that mining) and in the Canadian dollar, or loonie. Canada is an interesting case. These days it is enjoying near parity with the U.S. dollar. That wasnt always the case. In fact, go back 10 years and youll find the Canadian buck was worth about 60 cents to the dollar. Simply put, if you owned loonies then and just held them, you got a 40 percent return over the decade. Not a startling investment, but indicative of a trend. That trend is important to us because it reflects the general approval of the world marketplace of
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how the Canadians have managed their economy over the last 10 years, and its broad disapproval of the United States in comparison. Now, a stronger loonie creates problems for Canada, making it harder for exporters who want to sell into the huge U.S. market things like logs, minerals, and food products. By the same token, a stronger loonie makes U.S. food and manufactured imports cheaper for Canadians, which helps increase their standard of living. The reason to be worried now is our Feds commitment to virtually endless dollar printing. As long as the Federal Reserve continues to ease, the loonie comes off looking like a safe haven in comparison. When the Aftershock arrives, you can expect a very strong, very sustained move into the Canadian dollar to result. One way to own exposure to the loonie at a minimal cost is through CurrencyShares Canadian Dollar Trust (FXC), a simple ETF that owns Canadian dollars, much like our gold ETFs physically own gold. Now, if you live near Canada you could just as simply exchange dollars for loonies and keep them in a safety deposit box. But you would pay some stiff conversion fees and pay again when you need U.S. dollars to spend. So an ETF is a simpler, more liquid way to buy protection. Owning a single countrys currency, however close and familiar, might feel to you like a risk. I like the loonie, but I understand the concern. So an alternative is to buy an ETF that invests in several hard currencies at once, such as the Powershares DB G10 Currency Harvest Fund (DBV). This fund does something a bit trickier than most. It exploits what is known as the carry trade. In simple terms, it attempts to profit when foreign exchange investors move money from countries with low interest rates toward countries with high interest rates. The fund tracks an index that is built from at least six of the 10 following places: the United States, the European Union (euro), Japan, Canada, Switzerland, Britain, Australia, New Zealand, Norway, and Sweden. The way this works for us is that the funds managers will exploit the very high degree of rate divergence that will happen once the U.S. interest rate begins its climb. It does so in the massive,
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highly liquid environment of the global currency trade. As investors, we need not worry about exactly how to perform such a complex trade. We need only be ready to buy this fund before U.S. rates head permanently upward. Remember, the point here is not to make a killing overnight but to outperform inflation, thus protecting our wealth. Its keeping our powder dry to fight another day.

Understanding Bond Risk

Now, Ive spent a fair amount of time talking about the dangers of bonds. But let me be clear: The problem is long bonds, not short-term debt. Any federally issued debt you hold now maturing in 10 years or longer is going to deliver a nasty blow once the Aftershock sets in. Own Cash Flows The problem is not getting your money back, Finally, I know I have discussed the risk of its inflation. It works like this: If you own a bond, owning stocks in the Aftershock, but there is one the price of the bond is a mirror-image reflection class of stock that you should consider for part of of the yield. A high-yielding bond has a low price your trading portfolio going forward: blue-chip and a low-yielding one has a high price. dividend stocks. Its counterintuitive, but the reason is risk. A The moment to buy these is once the stock country that must borrow does so by offering up crunch is under way. The reason why is because its good name. If investors trust it, there will be a strong, long-term dividend payers have a track line of folks trying to lend money. The borrower record of generating income in nearly all markets, can pretty much dictate how much it will pay (low even catastrophic collapses. They generate cash yield) and competition to place the debt drives up flows we will want to own at the right price. the bonds value (high price). You might have noticed that, despite the On the contrary, a borrower with a bad recession, corporate America is doing just fine. reputation will find few takers. It will have to pay Earnings for many are strong and companies sit more in yield for the same line of credit and have on literally trillions of dollars in cash. That is in a harder time placing the debt. Its bond thus will cost the lender less to buy (low price) and pay a higher income stream (high Wal-Mart Stores, Inc. (WMT) $80 yield) to compensate for the risk of not $75 being paid back. $70 Right now, U.S. long debt is quite $65 expensive. Thats because of the Fed, $60 which is buying most of the new debt $55 being issued. It is cheating by crowding $50 out other buyers in order to drive $45 down yield. At some point, though, our $40 Treasury will find no buyers at all. The 2008 2009 2010 2011 2012 2013 Fed will swoop in to buy everything it The weakened global economy held down demand for shares of global retailer Wal-Mart. While the economy is no better (and could easily turn worse from here), can and then the jig is up. They wont demand for safe income has pushed up shares of the dividend-paying giant. be able to print enough to buy all the SOURCE: Yahoo! Inc. bonds we will be forced to issue to pay
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the interest we owe, never mind the principal. Rates will skyrocket. Conversely, bond prices on long-dated debt will fall. If you own long bonds, inflation alone will eat up any possible gain from its tiny fixed yield, and you will find absolutely no buyers for your old, low-yielding U.S. debt. Like an underwater home, it will be fundamentally worthless. However, there are bonds worth buying. Short U.S. debt will be safe, in comparison. It wont yield much but the demand for safe havens will mean a rush into the short end of the market. You could also buy and hold Treasury Inflation Protected Securities (TIPS), which are designed to keep pace with inflation. But buy them early, since demand can and will push the price negative.

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large part because Americas companies are far more global than in the past. They make money everywhere, not just at home. In previous times they would be busy deploying that cash into new investment opportunities. But the recovery has been extraordinarily weak, so this time they are giving money back to shareholders hand over fist, either through dividend increases and special dividends or share buybacks, which have the effect of supporting a strong dividend. The kinds of companies you should seek out, then, are dividend payers with long track records of maintaining and raising dividends. These are companies that are likely to survive even a serious economic decline at home either because they sell a product that is recession-proof, or because they have foreign income, or both.

Dividend Strength

One such company is Wal-Mart Stores (WMT). I dont think I need to explain their business model to you, but you should know what few realize about the company: Its a world-beater. It operates in 26 countries now and seems to notch a new foreign acquisition every few months or so. The dividend on Wal-Mart is solid, if unspectacular. Nevertheless, purchased at a prudent price point, it offers several layers of protection from the Aftershock. Stock prices in general are likely to drop as the bloom comes off the rose. This is a good time to pounce on dividend-paying stocks, since their respective yields will skyrocket in comparison to prices. Soon after, bond investors will pour into dividend stocks for the income replacement, pushing dividend stock prices back up. You win two ways, having captured the lower price level (buying income cheaply) and then appreciation on the rebound. Sound interesting yet? Another great play along these lines is McDonalds (MCD). Talk about a global company. These are the folks who essentially turned franchising into a science. McDonalds management will not rest until there are golden arches on every street corner in the world. There are other companies worth a close look. Not too many years ago, most stock buyers would have shied away from AT&T (T), considering it too big, too clumsy, too retro a stock to take seriously.
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I completely disagree. The 1996 deregulation of the telecom industry might have been the end of the old Ma Bell, but it certainly wasnt the end of AT&T. It managed to reformulate as a cutting-edge wireless and pay TV provider, all the while shedding the more heavily regulated portions of its legacy businesses. Theres not a lot of room at the top of the telecom heap. New technologies and creative destruction run rampant. Yet AT&T has managed to turn turmoil into opportunity, again and again. A better than 5 percent yield isnt hurting business, and I expect the company to stay strong on dividends into the future as well as offer the prospect of growth in new areas of communications as each becomes viable. Finally, a lot of people love the idea of earning a strong dividend, but they also want a stock that can appreciate. Its hard to find the best of both worlds in any market, least of all a stock market as rocky as the one weve experienced over the past year. But I have a good candidate. The stock is Abbott Laboratories (ABT). Investors tend to look at pharma stocks and think sleepy trade or they buy them because they believe theres growth, eventually, in the aging populations of the United States and Europe. And theyre right, but Abbott could see growth both now and someday as well. Its a big firm, selling products into 150 countries. But only a third of sales come from the United States. Another third is from developed foreign economies, such as Canada, Western Europe, Japan, and Australia. And a full 40 percent comes from emerging market countries, which can be quite a boost as those economies grow into middle-class drug consumers. Actually, its important to note, at the start of 2013, the company split into two. The new split-off firm is called Abbvie (ABBV) and it came out of the gates with a 40-cent-per-quarter dividend. Its focus is on biotech while Abbott Labs stayed on traditional, diversified pharma, diagnostics, and nutrition products. Abbott has been a dividend leader and a great performer within the context of the S&P 500, and I expect that to continue. Whats more, its the kind
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2013 The Aftershock Investor Report. All Rights Reserved. The Aftershock Investor Report is a monthly publication of Newsmax Media, Inc., and Newsmax.com. It is published for $99 per year and is offered online and in print through Newsmax.com and Moneynews.com. For rights and permissions, contact the publisher at P.O. Box 20989, West Palm Beach, Florida 33416. To contact The Aftershock Investor Report, send e-mail to: customerservice@newsmax.com. Subscription/Customer Service contact (888) 7667542 or customerservice@newsmax.com. Send e-mail address changes to customerservice@newsmax.com. Chief Executive Officer CHRISTOPHER RUDDY Financial Publisher AARON DeHOOG Senior Financial Editor BOB WIEDEMER Editor MICHAEL BERG Art/Production Director PHIL ARON

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of stock people stick with in good times and bad. People will give up a lot of things before theyll skip medications they need, so expect continued dividend strength here, not just in Abbott but in both companies. If you would rather not buy single common stocks in such an unpredictable market, one way to grab the top of the dividend stock market is to buy into an ETF such as PowerShares Dividend Achievers Portfolio (PFM). This fund owns an array of well-known blue chip stocks that have maintained their dividend streams for at least 10 years, including IBM, Chevron, Procter & Gamble, Johnson & Johnson, ExxonMobil, Coke, Wal-Mart, and others.

Your Action Plan

DISCLAIMER: This publication is intended solely for informational purposes and as a source of data and other information for you to evaluate in making investment decisions. We suggest that you consult with your financial adviser or other financial professional before making any investment. The information in this publication is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy, sell, or trade in any commodities, securities, or other financial instruments discussed. Information is obtained from public sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this letter be construed as an express or implied promise, guarantee or implication by or from The Aftershock Investor Report, or any of its officers, directors, employees, affiliates, or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Some recommended trades may (and probably will) involve commodities, securities, or other instruments held by our officers, affiliates, editors, writers, or employees, and investment decisions by such persons may be inconsistent with or even contradictory to the discussion or recommendation in The Aftershock Investor Report. Past results are no indication of future performance. All investments are subject to risk, including the possibility of the complete loss of any money invested. You should consider such risks prior to making any investment decisions. Copyright 2013 The Aftershock Investor Report. See a Full Disclaimer as well as a list of stocks that the Senior Financial Editor currently owns by going to theaftershockinvestor.com. 12

I hope this report has helped open your eyes to opportunities that lie beyond the typical stocks and bonds mix that so many financial advisers push on us. Remember, brokers get commissions for your trading activity. The more the better, in their view. The whole business model revolves around constant, pointless trading activity. Thats part of the reason (just part) that I often recommend Aftershock Investors use ETFs over individual stocks. Most of the major brokerages offer them. They are liquid and easy to buy and sell. They are tax-efficient in a way that a common stock simply cannot be. And, importantly, they are inexpensive. ETF fees are normally a tiny fraction of, say, mutual fund fees, and you can buy and sell many of them commission-free as well. Not surprisingly, you never hear about them from your broker because his or her living depends on those commissions. That said, whether stock, ETF or other financial instruments, the most important thing is to take proactive steps with regard to your savings, investments, and finances. Dont make the mistake so many others are making just waiting idly with blind faith in the markets and the world leadership currently at the helm, assuming everything might just work out all right. Thats a very nice, comforting thought but a very dangerous one as well. o

Robert Wiedemer

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