Evaluating Lifeboats

There is a joke that if a Disney cruise ship needs to be evacuated the first two people into the lifeboats are Mickey Mouse and Donald Duck. This way they will be present to greet passengers as they board the lifeboats. If the U.S. economy needs to be evacuated will George W. Bush and Barack Obama be there to greet us? After ten years of these two throwing significant monetary and fiscal stimulus at the economy, only to produce a 26% decline in the S&P 500, you begin to look around for lifeboats, and who's in them already.

U.S. Treasuries are one lifeboat into which many have climbed, including last week the Federal Reserve. So many people have jumped in this lifeboat that it appears to float more on a bubble that any intrinsic sturdiness of its own. Maybe it's just the swimmer in me, but when I start seeing strange characters filling up a lifeboat I start considering other options, like swimming for it.

Another popular lifeboat is high dividend yields on rock solid companies in stable industries. So you start sifting through industries like utilities and healthcare for open seats in sturdy lifeboats that should ride through a storm. Fears in this strategy include the size of the impending storm and the design of the lifeboat. Names like National Grid, (NYSE: NGG), Novartis AG (NYSE: NVS) and Sanofi-Aventis SA (NYSE: SNY).

Of course worried investors like boarding a strong reserve currency, historically the U.S. dollar. Given that I am currently 100% in U.S. dollar cash, it has been a painfully obvious choice for someone avoiding risk. From my perspective, I would like to move a fairly large percentage of my investments away from the U.S. dollar when fear is at its highest, which likely builds into October, in my view. My reason is a belief that the monetary and fiscal policies of this country, combined with a 30+ year history of increasingly marginal investment decisions, likely undermines the strength of the U.S. currency over the next 5-10 years. Currencies like the Yen, Euro are obvious for their size, but I am also considering the Pound, Canadian Dollar, Chinese Yuan and baskets of South American and East Asian currencies.

The bottom line is investors should expect flights to safety over the next couple months. If you move now to these lifeboats you can use the strengthening "safe" investments to launch into investments likely to outperform.