By Andrew Snyder, Editor, Taipan Publishing GroupThere is little doubt we are in the midst of an economic recovery here in the United States. But don't let the optimism fade into blind bliss. There are several dangerous catalysts circling the globe.
Any one of them could knock us to our knees.
Here at home, stock prices are ticking higher, corporate earnings are rising and the unemployment level is slowly shrinking. We have not yet reached our pre-recession highs, but the data show we are on our way.
That is not the case everywhere on the planet. The ripples from the 2008 meltdown continue to circulate across the planet. Eventually, they will reach our shores once again. As an investor, you need to be aware of the risks that threaten to cut our recovery short.
Fortunately, the dangers that lie ahead are clear and easy to track. Even better, by taking action now, you can protect yourself from the looming global crisis and, better yet, profit from it.
The European EpicenterOne of the most dangerous economic variables for 2011 is the volatile debt issue in Europe. While you or your business may not have direct ties with Europe, if sovereign nations fall into this debt-fueled monetary void, it will not be long until everything is affected. It is one thing for a bank to fail, it is an entirely different and much more dire situation when a country or, worse yet, a continent goes belly-up.
This chart compiled by CNBC helps illustrate how large of a problem we face if a country like Spain or Portugal enters a full-on financial crisis:
One of the first moves institutional investors (the pension funds and banks with billions on the line) make whenever Europe shows signs of trouble is they get into American dollars. Whether they are buying Treasury bonds from Uncle Sam or converting their euro cash to greenbacks to stuff into the bank, the ultra-safe American currency is the asset of choice.
That means if the euro begins to sink, the dollar will rise.
There are all sorts of ways to play a rising dollar, from buying funds that focus on Treasury notes to directly playing the stocks affected by a strong domestic currency. The simplest and most effective way to play the dollar's appreciation, however, is through a dollar-centric exchange-traded fund (ETF).
A popular ETF like PowerShares DB US Dollar Index Bullish (UUP:NYSE) is a straightforward and easy way to take advantage of the skittish global economy's flight toward safe assets, like the American dollar.
While it will not give you the kind of price appreciation of a high-flying small-cap stock, it will offer security and peace of mind when the world's economy begins to shutter.
The chart below clearly shows the ETF moves in near-perfect negative correlation to the overall stock market. In other words, when the bears take over Wall Street, the bulls rush into the American dollar and the ETFs that track it.
The Pain of InflationIf the European financial crisis were the planet's only worry, we would be in fine shape. Thanks to ETFs and savvy investing, we can hedge away just about all of our risk. Unfortunately, there are plenty of other problems out there.
After governments across the globe dumped trillions of dollars into their economies in the name of stimulus, inflation is a major concern. Here at home, it threatens to erode the value of everything from our bank accounts to our fixed-income investments.
That is, unless we take action.
The classic definition of inflation is too much money chasing too few goods. This disruption to the supply-versus-demand equilibrium forces prices of goods higher.
So where does all of this extra money come from? Simple. Governments.
Here in the United States, the government is forcing massive amounts of money into the economy through reduced taxes, stimulus programs and, the most direct way, buying Treasury bonds on the open market.
So far, inflation rates have remained relatively tame. But that is changing fast. Energy prices are rising. Gold hit record highs. And, most telling, rising commodity prices have made their way to the manufacturing sector.
The proof comes from Alcoa's (AA:NYSE) Q4 2010 earnings report. Thanks to a surge in aluminum prices, the company swung from a loss of $277 million during the corresponding year-ago period, to a profit of $258 million during the last three months of 2010.
More notably, the company's CEO Klaus Kleinfeld recognized what is driving prices higher. "When the market is turning into more demand than supply," he said, "there is a chance to see inflation coming back in."
Not AloneIt would be one thing if it were just the United States pouring money into its economy, but with tens of trillions of dollars in so-called stimulus coming from all corners of the globe, there is more than a "chance" of inflation. It's a certainty.
Unless you want to see your wealth clobbered over the next 12 to 18 months, you need to take action.
There are two surefire ways to protect yourself from the pain of runaway inflation. The first is the simplest. Buy gold. As investors across the planet brace for the nasty effects of inflation, the precious metal will continue to climb in value.
While getting your hands on a chunk of bullion or a handful of gold coins will get the job done nicely, the method decreases liquidity and, besides that, who wants to worry about storing an expensive nugget of gold at home?
The simplest way to get the job done is to buy shares of SPDR Gold Shares (GLD:NYSE), a popular ETF designed to replicate the moves of gold prices.
I have already mentioned the name of another great way to protect your portfolio from inflation, Alcoa.
As a company that is involved in every process of producing a key commodity, from mining the aluminum from the ground to processing it into a product used by a plethora of industries, Alcoa is a surefire inflation hedge.
As commodity prices rise, aluminum's value will climb in kind. That means the value of the products Alcoa sells will increase, while its cost of production remains static. In other words, inflation is a margin booster for this company.
Better yet, Alcoa offers currency diversification as well. With operations spread across the globe, it will remain stable and predictable. In fact, its foreign exposure is what helps make the stock one of the most appealing on the Street. In its most recent operations forecast, the company predicted revenue growth in China of 15% and 24% in Latin America.
Again, as economic growth heats up and inflation kicks into overdrive, Alcoa will be a winner. I recommend you put shares of the company (AA:NYSE) into your portfolio immediately.
Food ShortagesAs you can figure, an across-the-board surge in prices is bad news for consumers not fortunate enough to see their incomes rise in kind. It is especially worrisome as we see the surge from the commodities market affect food prices.
According to a recent report from the United Nation's Food and Agriculture Organization (FAO), the world is in danger of a "food price shock." It uses a spike in its food price index as evidence. The index, which tracks a wide variety of food prices, spiked to 214.7 points in late 2010, up from the previous record high of 213.5 set in June of 2008, a period filled with food-related riots.
While rioting will not do anybody any good as inflation sends food prices higher, investing in a company like Monsanto (MON:NYSE)will. The Missouri-based agricultural giant has two core business segments, seeds and agricultural productivity.
Both are highly valuable services when the world needs more food at lower prices.
This three-month stock chart helps to illustrate what happens to the value of the company when inflation and food shortages begin to make the news:
American investors are becoming complacent. Volatility has dropped. And many folks are overlooking the multiple threats that remain just over the horizon. If just one of these market-disrupting forces is realized, investors that did not seek an appropriate hedge will be in serious trouble.
Take advantage of their mistakes and buy shares of the four stocks detailed in this report. When global risks become reality, you will be glad you did.