Investment

So, I've decided to invest a portion of my meager savings / worldy possessions. There's really no excuse to be keeping my money in cash, especially with inflation potentially on the horizon. So the question is where.

Intellectually, I know index funds are the best bet, and that confirmation bias in an over-determined world means that you can construct logic for many plausible but incorrect investments. But I spend too much time reading about economic trends (for no particular reason, just find it interesting) to not want to put that to use. And by avoiding the especially dumb investment approaches (buy-sell rapidly, follow hot money, etc.) hopefully I can not lose money. So all of these are "buy and hold" plans.

None of this is particularly new / remarkably insightful, and any comments would be appreciated...

Economic hypothesis:
1. USD faces a long term decline roughly in line with the decline of the US's relative importance in the world. There is also a decent chance that the US will not get a handle on its serious structural deficits (the healthcare bill doesn't help here).

Therefore reserve bank holdings will diversify away from the dollar, etc. etc. However, this will take a long time, and certainly does not preclude the dollar from strengthening in the short/medium term. The US still has deeper capital markets than anyone else; the mooted alternatives to USD do not have a history of unified democratic rule of law; it's not in anyone's interest to have a rapid dollar depreciation.

2. In the near future, US is better placed than EU coming out of the recession. Rationale: Virtues of the anglo-saxon system (fire fast, hire fast); more favorable demographics (stronger population growth / younger worker base); greater transparency on bank losses (european banks have made proportionally much lower markdowns on subprime losses); more liberal reserve bank policies (risks inflation, but should goose growth)

3. Inflation is a real risk in the US (if economy picks up) and the fed will have a hard time putting the brakes on unless we have an unusually strong V-shaped recovery. We'd need to put interest rates up in the midst of an uneven recovery and high unemployment...the Krugman's of the world would be screaming bloody murder and 1933 all over again.
--This contributes to the risk of dollar decline, and doesn't lead to a specific investment, but is one of the reasons I am investing in assets rather than leaving my money in cash.

4. World demand for commodities will continue to grow as the RotW develops, although prices may not go up. The commodity bulls tend to have a stupidly static view of the world, whereby extrapolating present demand shows that it will exceed current supply trends, therefore prices must rise. This misses two key points: For almost all commodities (oil being somewhat an exception), increased prices reduce demand; likewise, they increase supply. And for most products there is plenty of room for increased supply -- this is especially true of agricultural products, where increased production in Russia (where farm land is something like 25% of what it was in the Soviet peak) and Africa (where yields languish at 1/4 or less of first-world norms) can easily meet future demand.

5. Private sector in emerging markets is key source of growth in future; there is an explosion of middle-class demand happening everywhere from China to Ghana to Brazil. In the US and Europe diminishing returns to wealth have set in; we don't buy much more as we increase our GDP per capita, but that's not true in the developing world.

Therefore, I plan to:
1. Invest in US companies with strong potential for sales to the middle/upper classes of developing countries. The US is very good at branding / selling to the bourgeois. E.g., Starbucks, Disney, Coca-Cola, McDonalds.

I'm not investing directly in emerging markets because a) stock market prices have been increasing scarily quickly in the developing world (although it's exaggerated by the dollar's slide); b) any given country could tank due to political instability; c) weak US dollar makes foreign buys expensive at the moment (while part of this will be recaptured over time by the dollar's continued gradual decline, I can get the same benefit by buying US companies with good sales abroad.

2. Short-sell the Euro. It has over-strengthened because of the US's loose monetary policy and because Asian countries are holding the currencies up, forcing any slide to occur against the EUR. This bet could go sour if the US is engulfed in the maelstrom of inflation, but, assuming that that doesn't happen, the USD should recover against the EUR somewhat as the US comes out of recession faster (enabling it to raise interest rates while the EUR stays put or decreases rates) and over time Asian countries let their currency appreciate against the dollar to combat domestic asset price bubbles.

3. Bet on increased volume demand for commodities by investing a) in transport (shipping companies look relatively cheap; I'm sure there are many other options); b) in commodity sellers like Alcoa.

4. Potentially bet on cocao prices. Sales are concentrated in Ghana, Cote d'Ivoire and Indonesia. Ghana's currency will strengthen over the next few years as they start pumping oil. It's neighbor is a basketcase, and Indonesia is a potential basketcase (sorry Matt). Demand will grow over time (see emerging markets middle class point). Supply also takes a long time to respond to increased demand because trees take several years to start bearing significant numbers of beans (5-6 at min), and most of the trees in Ghana are already at the tail end of their useful lifespans but farmers are reluctant to replant while they are still getting some yields. My main concerns: Have the high current prices (not at 07/08 peak, but not far below that) already priced in these risks? And this goes against my long-run view that commodity prices won't appreciate dramatically.


As a side note, and this doesn't feed into any of my investments, I suspect that when I'm older we'll have to learn how to live in a deflationary world. Demographics have turned around much faster than expected and world population will start falling ~2050. Therefore the only source of incremental demand will be more extravagant consumption (eating meat vs. grains, etc.) rather than simply having more people to buy things. In other words, the world will look a lot more like Japan and commodity prices will fall dramatically.