Caught Between a Rock and a Hard Spot
Current market and economic conditions are similar to the early 70s. Following a long bull in the equity market and strong economic expansion, the market has collapsed and the economy is in retraction. Recession nears. Yet there is a difference. The U.S. dollar has remained strong. In the early 70s it crashed. This bothers me. Let me explain why…
The U.S. dollar has remained strong despite fundamentals that suggest it should weaken. The U.S. Trade deficit is a record $455 billion for the past year. Even worse the current account is in deficit, $434 billion for the past year. The interest rate differential between the dollar and the Euro which has kept the buck up is gone (the 3 month dollar bond rate was 6.04% last year, the Euro 3.77%. Now the dollar is 4.64% and the Euro is 4.77%).
So what will happened to the dollar? I asked eClub advisor Anglo-Irish Bank and here was their reply.
“The market received and was disappointed by the Federal Reserve Board cut in interest rates of 0.50% last week. The view continues to be that there are more cuts to come, probably involving an unusual move in rates between meetings, at some point in April.
The upshot of all this is that the existing range extremities have not been breached and as such we will remain in these ranges, with day to day moves shaped by the equity markets. An important thing to remember is that the market is not, and has not been all year, risk averse. If and when the market turns risk averse the US Dollar will not be the beneficiary.”
The upshot is the dollar is caught between a rock and a hard spot. With a crashing economy, the Fed must lower interest rates. These lowered rates drive foreign investors out of the dollar which adds downward pressure. Weakness in the dollar adds to the trade deficit and current account which adds even more downwards pressure.
So what will happen if the dollar falls. What can one do to cash in on this weakness.
I asked another eclub advisor, Jyske Bank and here is an extract from their reply.
Here is information about calculated currency risks using leveraged investment. We have more than 40,000 international clients outside Denmark and have been doing international private banking for nearly 40 years.
It is easy to open an account, just fill out the application form and mail it to us with a copy of your passport and a cheque or wire the funds to the bank with your address. We have accounts in 27 different currencies, After the Euro is complete this will be 17 currencies. We also deal in high yielding bonds, mutual funds and stocks.
The examples below are only recommended for a small part of your funds, i.e. 10%-15%. This is a high risk strategy and market changes can reduce performance and result in loss.
The Invest Loan
Borrow Low – Deposit High as described by Gary Scott is an excellent investment program for investors who are ready to take calculated risks to obtain a higher yield on a part of their investments. Currency fluctuations might effect the annual yield in a positive or a negative direction. Currency diversification is one of the methods to minimise the risk.
The invest-loan is based on 5 years period, but can be terminated at any time as an investor wishes.
One example is a 2 times leverage as follows:
USD 100,000 invested in a USD Bond, 6.510% Ford, A1 rated USD 100,000 loan in CHF at 5.000% invested, at 17.125% Polish Zloty Account USD 100,000 loan in JPY at 1.750% invested, at 9.875% Iceland Kroner account USD 297,000 invested at average yield at 11.170% = USD 34.175 * USD 200,000 50% CHF/50% JPY loan at 3.375% = USD 6.750 Net annual yield USD 27.425or 27% of your USD 100,000 initial investment. * The USD 297.000 is calculated after deduction of 1,00% up-front fee.
The minimum amount is USD 15,000 and you may borrow up to four times that amount. We recommend to start with at least USD 25.000.
The loan rates below are valid until June 14th, 2001:
CHF JPY EUR SGD (Singapore) Loan USD 150,000 - 699, 000 5.000% 1.750% 6.375% 4.125% USD 700,000 - up 4.750% 1.500% 6.125% 3.875%The deposit rates below are adjusted each month: ---------------------------------------------------------------------------- PLN 17.125& Polish Zloty ZAR 9,125% South African Rand NOK 6,500% Norwegian Kroner SKK 6,500% Slovakian Kurona GBP 4.875% British Pound USD 4.500% US Dollars ISK 9.875% Iceland KronerHere are bond yields that can currently be obtained.USD 6,519% US Bonds (Ford) 2004 AUD 5.640% Australia - Toyota 2003 NZD 6.610% New Zealand (Deutsche Bank) 2003 ZAR 12,070% South Afr. Rand/Rabo Bank 2010 USD 12,530% Argentina BB rated 2003 EUR 8,970% Argentina DM rated BB 2003 MXN 18.230% Mexican Government Cetes 3 months
This list is not a recommendation from Jyske Bank – but only a list of high-yielding currencies, which will of course also result in a degree of a higher risk.
We recommend spreading the risk by diversifying your investment portfolio in several currencies, i.e. if you borrow 3 times your deposit, you invest in 3-4 different currencies.
Loan maturity: 5 years
Establishment fee 1.00% (up-front fee) of the borrowed amount.
Interest is accrued every 3 months together with an adjustment of the loan interest rate.
Flexibility: The loan account resembles a current account = on demand and your invest loan may be terminated in part or in full at any time.
Jyske Bank will assign you a personal account manager.
For bonds the brokerage fee is 0,25% of the value (min. USD 110,000) Safe-custody fee is 0.375% p.a. up to the value of USD 70,000 ” ” ” “0.250% p.a. from USD 70,000 and up.
Foreign exchange deals/spread from 0.150% to 0.300% without additional fees
We are a full-service bank with simple private banking facilities in accounts for 24 different currencies with the possibility of having a a Visa card attached to your account. Plus we can make loans to buy shares and mutual funds. Please visit our INTERNET Website : Http://WWW.jbpb.com
I will cover this tactic in detail at my upcoming International Investment & Business Course in Vancouver. For details go to courses
I will send more details about the yen-Mexican peso sandwich in a report tomorrow. Until then, good global investing!