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Skousen's Terrorist Portfolio
05/21/2004 12:00 am EST
Economist Mark Skousen is editor of Forecasts & Strategies, teaches at Columbia Business School, and is the author of The Making of Modern Economics. Here, he discusses his Terrorism Portfolio, designed to protect investors from geopolitical risks.
"The Map That Predicted the Terrorist Attacks is published annually by the Heritage Foundation and the Wall Street Journal. I first saw this world map a month after the terrible events of September 11, 2001. For our workshop today, we would like to highlight the map for 2004, along with a comparison of this map in 2001:
"First let me discuss the original 2001 map. It had first appeared a few months before 9/11, but nobody paid any attention. The map colors each country according to their degrees of economic freedom. Countries that are considered ‘free’ are colored blue, those that are ‘mostly free’ are green, those that are ‘mostly unfree’ are yellow, and those that are ‘repressed’ appear in red. Heritage uses ten criteria to determine the level of economic freedom, including such factors as taxation, size of government, business regulation, free trade, and inflation. The 2001 map showed several distinct patterns:
"In 2001, only a dozen countries were painted blue, including the US, England, Switzerland, Australia, New Zealand, Singapore, and Hong Kong. The map confirmed Milton Friedman's statement, ‘Freedom is a rare and delicate flower.' Most of Europe and the Americas (including Canada) were in the green category. These countries are known for big government and a large welfare state. Meanwhile, most of Africa, the former Soviet Union, and Asia were in the yellow category. But I view this optimistically, as most of Asia would have been 'red' 30 years ago.
"Finally, red is mostly the Middle East. The message is clear: closed societies are breeding grounds for intolerance, fanaticism, and violence, even terrorism. This map also teaches an important lesson: After the US leaves Iraq and the Middle East, if the countries in this region are still in the red category, we have made no progress. Of the three freedoms—political, religious, and economic— probably a commercially open society, including free trade and foreign investment, will help the most in raising the standard of living in the Middle East, providing the region with hope, financially and economically.
"Three years later, what does the 2004 map tell us? There have been some positive changes: Canada and Chile are now in the blue category. So is Sweden, which has privatized and cut corporate taxes, and now qualifies for the blue category. Mongolia, sandwiched between Russia and China, is now in the green (mostly free) category, even though it is run by the Communist Party. I lectured there late last year and was amazed at the interest in free-market economics. I was treated like a rock star, as 3,000 students showed up at the largest palace in the capital to hear me. However, there are some setbacks. Argentina is now yellow and Venezuela, which is run by a Castro-like Marxist, is now red. And the Middle East is still largely in the red. We still have a lot of work cut out for us if we are to achieve stability and prosperity in this vital region of geopolitics.
"From an investor's standpoint, how do you protect yourself from a major terrorist attack? A few years ago I created the Anti-Terrorist Portfolio to do just that. So far it's been a success. Last year, the portfolio advanced 34%. We don't know what the international terrorist groups are up to these days and we feel it is better to be prepared in advance for the unexpected. Besides, you might just make some money. There are five mutual funds in the Anti-Terrorist Portfolio to protect our assets against the financial results of a future terrorist attack or major war in the Middle East. Here are the five funds in the portfolio:
PIMCO Real Return Fund (PRTNX): This fund invests in Treasury Inflation-Protected Securities (TIPS).
Oppenheimer Real Asset Fund (QRANX): Commodity prices could go up a lot more in the years to come.
Tocqueville Gold (TGLDX): Gold and silver are in a bull market, and the Tocqueville Fund owns both, including bullion coins.
Fidelity Select Defense Fund (FSDAX): I expect defense stocks to continue to perform extremely well in this bull market.
Masters 100 Fund (MOFQX ): This is a unique fund that seeks out the top 100 best stock pickers in the country, and invests in what they buy. It has beaten the S&P 500 in every quarter (except one) since inception at half the risk. It's a remarkable revolutionary new investment vehicle— my top fund pick.
"One note of caution: Not all of the funds listed above will perform equally at all times. For example, during a stock-market crash, the defense stocks will likely fall with the rest of the market. So will the Masters 100 Fund, and perhaps even some gold stocks. However, the PIMCO treasury securities and the Oppenheimer commodity index are likely to rise. Good luck!"
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