In our opinion the U.S. economic ship of state is in danger of sinking. As the problems with her hull are structural, current efforts by government officials and central bankers to plug up the holes will make it difficult to keep her afloat. Though we remain hopeful that she may one day be returned to a sea-worthy condition, there is nothing collectively that we can do to alter her fate, or that of the millions of Americans ignorantly dancing the night away on her decks. However, individually we can take defensive action to protect ourselves and our families by getting off the ship. In our opinion the lifeboat of choice is a carefully selected portfolio of relatively conservative*, high-dividend paying, non-U.S. export dependent, foreign equities.

Such investments provide three potential sources of protection. 1. They pay good dividends, many of which qualify for the lower dividend tax currently in effect. 2. More importantly, as these dividends are paid in currencies other than the U.S. dollar, their value will rise as the dollar falls, as will the principal value of the underlying shares. 3. They provide the potential for true capital gains, as the shares themselves may appreciate in terms of their local currencies.

As a result of these three separate and distinct sources of current income and capital gains, the U.S. dollar need not be falling for a portfolio of foreign stocks to produce positive returns. However, it is during a potential dollar crisis that such portfolios will be of the greatest value. Since no one can be certain when the inevitable dollar collapse will occur, it is better to be prepared. When it comes to getting out of the dollar there are only two possible ways to do it: either too early or too late. At Euro Pacific we choose the former. Though the dollar will predictably experience several counter-trend rallies along its downward path we feel that it does not make sense to attempt to trade them. It would be the equivalent of leaving the safety of your lifeboat, hoping for one last dance aboard a doomed ship before it sinks. As a result of our buy and hold strategy, during those time periods when the U.S. dollar is rising in value, or when global stock markets are in decline, our portfolios will lose value. Though such declines will be partially offset by dividends, investors unwilling to assume short-term volatility as a trade off for absolute long-term performance should not implement this strategy. (For a more in depth discussion of this strategy please download our free report "The Collapsing Dollar: The Powerful case for Investing in Foreign Equities.")

Also, it is important not to confuse a desire not to go down with a sinking ship with patriotism. Such "patriots" who stand on the deck saluting the flag as the ship sinks will likely be of little assistance to other survivors left treading water. Only by attempting to position ourselves safely aboard sea-worthy lifeboats now will we be able to participate in any future rescue efforts. Protecting our wealth today should allow us to repatriate it tomorrow, thus enabling us to help rebuild a viable American economy.

*The most important step for investors to take when determining which investments qualify as being conservative is to first determine exactly what one is attempting to "conserve." If one's goal is simply to conserve the number of dollars one owns, then there are several domestic investments that will satisfy that simple criteria. However, what good is it to conserve dollars, if the dollars themselves do not conserve their purchasing power? After all, we do not want dollars for their intrinsic value; we want them for the goods and services they can buy. However, based on current U.S. monetary and fiscal policy, the many structural imbalances underlying the U.S. economy, and the potential monetization of massive funded and unfunded federal liabilities, the purchasing power of the dollar is likely to diminish substantially over time.

A truly conservative investor seeks to conserve the purchasing power of his portfolio, not merely the nominal dollar value of his holdings. At one time, when the dollar was sound and Americans produced the goods they consumed, this goal was readily accomplished with certain types of dollar-based investments. However, like the song says; "The times they are a changing." Anyone wishing to be truly conservative must therefore be prepared to change with them.

If preserving purchasing power is the goal, we are convinced that the investments best able to achieve this goal can only be found beyond American borders. However, most stocks are not conservative, and neither are most currencies. The challenge is to choose the currencies that are most likely to conserve their purchasing power, based on objective economic and political criteria, and then to invest in conservative stocks denominated in those currencies -- those that might be thought of as being for "widows and orphans" for citizens of the countries in which they are domiciled. However, "conservative stocks" are not without risk. They are merely believed to be less risky than typical stocks or those thought to be aggressive or speculative.

In 2004, former Treasury Secretary Robert Rubin predicted that if foreigners viewed America's budget and current account deficits as being unsustainable, confidence in our financial instruments could crack causing the dollar to fall sharply. In fact, during that same year, former Fed Chairman Paul Volcker predicted an 80% probability that the U.S. dollar would collapse within five years (a relatively short time horizon in the investment world). Conservative investors who take these two former government officials' warnings seriously have little choice but to seek safety abroad.

All investment strategies contain various elements of risk.  No guarantees, either expressed or implied, are made that the strategy outlined above will perform as it is intended.  Investors in foreign stocks can lose principal due to a variety of risk factors, including currency risk, political risk, systemic risk, and company specific risks.   Also the economic assumptions inherent in the formation of this strategy may in fact be incorrect, thereby adversely affecting the performance of the recommendations.  Furthermore the fact that these strategies have preformed so well in the past does not assure similar results in the future.  Clients and prospective clients are advised to carefully consider these risks prior to investing.