How to Earn 43.7% in Six Months

by | Jun 1, 2001 | Archives

Questions by a reader have led to new details about the Multi-Currency Sandwich you will not want to miss.

Here is what an eClub member just wrote.

	" I do not know if you care to comment on the following, but it seems to 
me that the dollar should be falling in value, but has not done so yet.
However, I think it will fall. "I read that Italians and many Europeans are cashing in their money for
dollars before the European currencies become worthless on March 1, 2002
and they have to use the Euro. They are laundering money now so that
they do not have to explain where huge sums came from. I remember
during our occupation of Germany, we used to issue new US script from
time to time to prevent Germans from having or using our script. If
they had any script it became worthless. There are lots of reasons the
dollar may fall. Another would be if the stock market goes south or
interest rates fall. If the above is true and causes the dollar to
slide, what is the best way to profit if the dollar falls? A Sandwich
spread? Foreign stocks
(Could they tumble with US stocks?)"

Here is my reply.

Last December I wrote that the dollar was already weak when I said,

“Where to Go In a Dollar Tumble?” First let me be clear that the U.S. dollar is already tumbling as I write and there are at least three factors that could push it down 10% or more versus the euro over the upcoming months.

The first factor is that (as a 500 year old prophesy foretold) the world in the new millennium would be led by a fool. This is not a swipe at George Bush by the way.

It is fact that most U.S. leaders (Gore was the same) who will lead us into this next 1000 years made their way to power (or perhaps impotence) on the wrong footed notion that they would spend a huge U.S. surplus, to improve Social security and make Medicare & Medicaid help more people. This idea is wrong for several reasons. First more Americans are going to be poorer than anyone realizes. The U.S. savings rate is now below zero. This means that more and more Americans have ploughed their savings into stocks instead of CDs or bonds. The U.S. market has already wiped out huge amounts of savings. This means less tax collected and increased social spending.

Second, the U.S. population is rapidly becoming less healthy. USA Today (December 15 page 2A) reports that according to the National Health and Nutrition Survey, 61% of all Americans are now obese (30 pounds or more over a healthy weight). The number of adults who are obese has nearly doubled since 1970. This fact alone could destroy the Federal budget. Third, the dollar has risen steadily versus the Euro since its inception but this trend has finally reversed.

In short this means that there could be a loss of confidence in the greenback. Where to invest if this is true? Precious metals may be one place. A short in the Japanese yen may be another.”

In the Winter World Reports that one of seven ways way to make profits from currency turmoil is to borrow Japanese yen and invest in Mexican pesos when I wrote:

* Idea #5: Borrow Low-Deposit High. This is a perfect time to consider multi-currency sandwiches because a full circle has turned. In 1994 I recommended borrowing Japanese yen and investing in Mexican pesos. Investors made fortunes. Since then many such distortions have offered amazing returns (for example the Japanese yen-South Korean won sandwich earned up to 85% in one month in 1998). Now the yen-peso sandwich is attractive once more. Here is how the position currently works. You borrow yen at rates as low as 1.75% to 2.00%. Mexican peso three month government bonds yield 18%. US$100,000 worth of CDs, bonds or shares available for speculation provides collateral sufficient to borrow US$400,000 worth of yen converted to peso bonds. Here are the details:

    Amount                   Investment                 % Earns       Amount
US$100,000 Original US$ CD Used as Collateral 7.00% US$7,000
US$400,000 Mexican peso government bonds 18.00% US$72,000
-US$400,000 Yen loan 2.00% -US$ 8,000

The projected return on the US$100,000 is 71% or total earnings of US$71,000.

Investors who followed that advice have earned 35.5% in the spread difference, plus the Mexican peso has appreciated 8.2% versus the U.S. dollar. Those who entered this position last December and who liquidate now will have earned 43.7% in six months.

Should you continue or enter into this Sandwich now? The potential is less as the Cetes rate has dropped from 18% to about 11%. Mexico's economy has been hit hard. Yet Jyske bank thinks this is still a good time to hold Cetes. [ Link to Jyske Bank's web site ]

You should make your final decision based on how you feel, the type of return you want to make, how much you can afford to lose and what else you know about Mexico, the peso and the dollar. Personally, I believe in the old maxim you never go broker taking a profit. When I get a good return like this and have a nice profit, I take it. Back in the early 90s I made profits on the peso in almost exactly the same way and when the Cetes rates dropped to 10%, I cashed out the position. Not long after the peso devalued!

Check with your financial planner to see how your position should now be viewed but take a little more care than you did in this position six months ago. The profits are diminished and the risks are still there. Also, remember that these currencies techniques should be classified as speculative. Use only that portion of your investment portfolio that you can afford to lose.

Teddy Christiansen from Jyske Bank will speak at our forthcoming Inspired Investing courses, Fri.-Sun., July 27-29 & Aug. 24-26, 2001

Until next message, good global investing and business.