Investing in Domestic vs Foreign Markets in a Volatile Economy

Until recently the domestic stock market seemed to be doing fairly well. It was making new highs on a fairly regular basis. Much of this was an illusion. In real dollars, adding the real rate of inflation, the market has actually been pretty flat for a number of years.

With Alan Greenspan and now Ben Bernanke pumping funny money into the system as quickly as possible, the market has been able to retain the illusion of success. Now that the housing bubble has burst, the consequences are just beginning to be felt in our economy. The stock market will feel it more as time passes. All of the games the Fed and the government are playing are not going to stop it.

Giving away money for Americans to spend is not going to change the depth of the recession, which most Americans are feeling right now. Lowering the interest rates may give the market a boost of euphoria but in the long run it will just make things worse, especially for those responsible Americans who are trying to save.

First let’s talk about investing in the US stock market. Regardless of what is happening in the US economy, it is always possible to make money in the stock market. When we hear about the depression, we tend to think about people jumping out of windows. What we don’t hear about are the people who made tons of money in the stock market during the depression.

There are two things you can do to make money in the stock market during a depressed economic cycle. One is to cherry pick stocks that will not be affected by the bad economy. Some sectors will actually go up as the broad market is taking a downturn.

For example, energy and commodities are in a bull market. Investing in energy stocks, oil, gas, uranium, and alternative fuels can be very lucrative. Investing in food, livestock, base metals, and precious metals can also make you some good money. (Silver has passed $20/ounce and gold is threatening $1,000/ounce.

The other option is to bet against specific stocks. Those who saw the housing bubble coming were able to short some of the big real estate, house-building, or lending companies and made a bundle.

Foreign markets are also fairly volatile right now. Whether we like it or not, the global economy means that when the US sneezes, Japan can catch a cold. Nevertheless, many foreign markets are strongly outperforming the US.

Because picking individual foreign stocks can be even more daunting than choosing US stocks, it might be a good idea to look into foreign mutual funds and/or foreign exchange traded funds. Not only will you presumably have an expert choosing the stocks, but you will have your money diversified in a number of different stocks and possibly even different countries in the same fund.

Go to any of the big fund companies, like Fidelity, Vanguard, and others and see what they have to offer. Another way to profit on the weakening of the US economy, especially the weakening of the US dollar, is through the purchase of foreign currencies.

This is also a volatile play. One good place to go for currency plays and many other foreign options is Everbank ( At Everbank you can buy just about any foreign currency you want. You can buy currencies in the form of CDs. You can invest in precious metals or in commodities in general through CDs and other vehicles.

I have purchased individual currencies with Everbank. I have purchased CDs in different countries. Essentially, you invest a certain amount of money in Australia, for example. You will be paid a certain rate of interest by the country. If the dollar goes down against that country’s currency, you will not only be paid interest but you will also gain from the appreciation of the foreign currency. Currently, I have a three-year commodities CD. Regardless of what happens with commodities, I will get my principal back at the end of three years. If commodities go up, as they have, I will make a good gain.

So you can make money by cherry-picking US stocks or by betting against them. You can make money in foreign markets through ETFs or mutual funds or by buying foreign currencies. Hot of the press for early March 2008: Brazil has just passed China as an emerging economy. A lot of institutional money will now start pouring into Brazil. Check it out!