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Debt ceiling drama

A political stand-off over the debt ceiling has been raging since Republicans regained control of the House of Representatives in the 2022 midterm elections.

President Joe Biden beseeched Congress not to hold the item hostage, suggesting a default could be “calamitous”.

His warnings hit deaf ears in the case of opposing Republicans, who are using their votes on an extension as leverage to seek spending cuts.

The Treasury can use “extraordinary measures” in the coming months to cover its many financial obligations, including Social Security and Medicare disbursements, but these emergency funds are limited.

At the end of the day, the U.S. simply must borrow more money, as it has done many times before.

Monopoly money

Congress has set the limit for federal borrowing since 1917, raising it over time as government spending and borrowing needs have increased.

“The U.S. Treas. Sec. has admitted the only way to avoid a default on the National Debt is to raise the #DebtCeiling so the Govt. can borrow from new lenders to repay existing lenders,” Schiff, CEO and chief global strategist at Euro Pacific Capital, tweeted on Jan. 16. “This amounts to an official admission that the U.S. is running the world's largest Ponzi scheme.”

In his podcast, Schiff claimed the U.S. government is in a doom spiral where it cannot pay its current lenders back, so it borrows from new lenders over and over again.

“Why do people willingly participate? It’s because they don’t realize it’s a Ponzi scheme,” Schiff says. “They think they’re going to get paid back. When they realize they’re going to be paid back in monopoly money, they’re not going to want to lend.

“In fact, they’re not going to want to hold on to these Treasuries and the only buyer is going to be the Federal Reserve. And that’s when the printing press is going to overdrive and the dollar is going to fall through the floor.”

As Congress fights over the debt ceiling extension, U.S. credit rating and financial markets are at risk - but here are three assets that Schiff likes as hedges against economic volatility.

Gold

Schiff has long been a fan of the yellow metal.

“The problem with the dollar is it has no intrinsic value,” he once said. “Gold will store its value, and you'll always be able to buy more food with your gold."

As always, he’s putting his money where his mouth is.

Read more: Chances are good you're overpaying for home insurance. Here's how to spend less on peace of mind

Euro Pacific Asset Management’s latest 13F filing shows that as of Dec. 31, Schiff’s company held 1.68 million shares of Barrick Gold (GOLD), 430,083 shares of Agnico Eagle Mines (AEM), and 316,367 shares of Newmont (NEM).

In fact, Barrick was the firm’s top holding, representing 6.7% of its portfolio. Agnico and Newmont were the second and fifth-largest holdings, respectively.

Gold can’t be printed out of thin air like fiat money, and its safe-haven status means demand typically increases during times of uncertainty.

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Recession-proof income stocks

Dividend stocks offer investors a great way to earn a passive income stream, but some can also be used as a hedge against recessions.

Case in point: The third-largest holding at Euro Pacific is cigarette giant British American Tobacco (BTI), accounting for 5.0% of the portfolio.

The maker of Kent and Dunhill cigarettes pays quarterly dividends of 70 cents per share, giving the stock an attractive annual yield of 7.4%.

Schiff’s fund also owns over 157,128 shares of Philip Morris International (PM), another tobacco king with a dividend yield of 5.1%. The Marlboro cigarette producer is Euro Pacific’s fourth-largest holding with a portfolio weighting of 3.6%.

The demand for cigarettes is highly inelastic, meaning large price changes only induce small changes in demand — and that demand is largely immune to economic shocks.

If you’re comfortable with investing in so-called sin stocks, British American and Philip Morris might be worth researching further.

Those looking to take control of their investments should certainly explore online trading platforms. The best sites offer resources and tools to help investors make informed decisions as they build and manage their investment portfolios.

Agriculture

When it comes to playing defense, there’s one recession-proof sector that shouldn’t be overlooked: agriculture.

It’s simple. Whatever happens, people still need to eat.

Schiff doesn’t talk about agriculture as much as precious metals, but Euro Pacific does own 122,759 shares of fertilizer producer Nutrien (NTR).

As one of the world’s largest providers of crop inputs and services, Nutrien is positioned solidly even if the economy enters a major downturn. In 2022, the company generated record net earnings of $7.7 billion.

Nutrien shares went up about 4.78% in 2022, in stark contrast to the S&P 500’s return of -19.44%.

Given the uncertainties facing the economy, investing in agriculture could give risk-averse investors peace of mind.

— with files from Jing Pan

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A better way to hedge?

Of course, those aren't the only three assets that provide protection benefits.

Amid hot inflation and the uncertain economy, moguls are still finding ways to effectively invest their millions outside of the stock market.

Prime commercial real estate, for example, has outperformed the S&P 500 over a 25-year period. With the help of new platforms, these kinds of opportunities are now available to retail investors. Not just the ultra rich.

With a single investment, investors can own institutional-quality properties leased by brands like CVS, Kroger and Walmart — and collect stable grocery store-anchored income on a quarterly basis.

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About the Author

Bethan Moorcraft

Bethan Moorcraft

Reporter

Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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