How to Earn 22.69% from the Dollar Falls

by | Mar 14, 2003 | Archives

Last weekend, I spoke to over 275 investors and stressed the importance of investing outside the U.S. dollar now. Here is why the dollar is likely to fall substantially and here are some places to invest for protection from this fall.

There are many problems adding downwards pressure on the U.S. dollar. The first is huge consumer debt combined with a real estate bubble. Since Wall Street crashed, the main buoys in the U.S. economy and for the U.S. dollar have been consumer confidence and spending fueled by low interest rates and rising housing prices, plus the hopes that the U.S. government would maintain a budget surplus. The surplus and confidence are now well and truly gone. With a war just around the corner, more U.S. government spending, more federal deficit and consumer confidence crashing, all that is left is the real estate boom.

Many readers have been investing into real estate and previous messages have expressed concern that this bubble is about to burst. For more information

A recent news article reinforces this concern. The Saturday, February 22, 2003 issue of Naples Daily News wrote: “Marco beach condo tower sells out in a week”. The story went on to add. “WCI Communities received reservations for 122 units valued at $240 million and took in 61 back up offers for units in the 24 story high rise to be built at Cape Marco”.

The article pointed out that WCI sold out this condo (which will be built by mid 2004) at prices averaging $1.6 million per unit and that only one of the $6 million penthouses remains unsold (two other penthouses at over $6 million were sold).

Here is why this fast sellout at such high prices could be a signal that the real estate bubble is near the top. When a market bubble is inflated, price increases rapidly shoot beyond real increases of income. These prices are way over this mark and suggestive of a bubble.

The second worry is the upcoming banking crunch. Recent messages show how Wall Street moves in cycles rising for about 20 to 25 years and then consolidating for 10 to 15 years. For more on this.

In each of the last three of these thirty-year moves there has been a bank crunch in the middle of the ten-year consolidation. This means we are just two or three years away at the most for banking problems.

Previous messages have warned about such banking crunches and how this time the problem may be at Fannie Mae and Freddie Mac. For more. go to

The March 11 USA Today article “Fed officials warning chills Fannie, Freddie” reinforces this concern as it points out that critical comments by a regional Federal Reserve Bank official drove down share prices of Fannie Mae and Freddie Mac.

If there is a bank crash, loans will become harder to attain. This will push the U.S. real estate market down. Values will fall. Borrowers will be caught with property worth less than their loans and we'll see rising mortgage defaults.

Problem #3 is that Wall Street is not done sliding yet either. Recent warnings from Warren Buffet, (who has proven to be a wise investor) express this concern. Buffet warns in his latest shareholder letter that prices remain too pricey. His report says, “despite three years of falling prices, we still find very few stocks that even mildly interest us.” This confirms Andy Kaegi's report in last Friday's message at

Kaegi pointed out that at the bottom of the 1970 bear market Dow price to earnings ratios dropped to 7. Today they are about 15. Buffet's stock strategy has been to do nothing. “Occasionally successful investing requires inactivity,” Buffet stated. Instead Buffet is buying junk bonds and his commitment in this sector has sextupled to $8.3 billion. (I recommend a bond portfolio below.)

Problem #4 (as Andy Kaegi pointed out last week) is that too many large corporations have huge pension obligations that are in shortfall. We reviewed how painful this fact can be to employees in a recent message at which told about the failure of the US Airways pension. This problem is further confirmed in the Monday March 10 article in USA Today entitled “A risky reaction to pension losses”. This article points out that about 890% of S%P 500 corporate pensions are underfunded at he end of 2002.

The article points out that many of these companies are still using calculations in the assumptions of how the pension funds at an aggressive rate of over 10%. This means that if the market does not recover these firms will have to take huge charges against either their equity or earnings. Otherwise their pensions will not be able to meet their obligations. If they fail to resolve this dilemma, then the federally funded Pension Benefit Guaranty Fund will have to kick in.

This is another problem as explained in the USA Today January 31 2003 article titled “Pension backer has $3.6 billion shortfall”. This article points out that this fund weighed down by an onslaught of corporate bankruptcies fell from a 7.7 billion surplus to a $3.6 billion shortage, the largest shortfall in its history. This does not take into account all the U.S. airlines that are certain to go into Chapter 11 in the year ahead. If more pensions default, it will be the U.S. government who picks up the slack creating even more Federal debt.

Problem #5 is Social Security and Medicare-Medicaid. These social plans are underfunded and the funding that does exist (investments in special U.S. Treasury notes) are just an added hidden burden for future tax payers. The reserves for Social Security do not represent real assets and are a way of dramatically hiding a great deal of additional federal debt.

Problem #6 is hidden deficits at state levels. President Bush's tax cuts are one of the biggest shell game in years. The Federal government has made a big huppla about reducing tax for the poor guy. While the Republicans and Democrats argue over how much more tax breaks to give, the Feds quietly reduce subsidy payments they have been making to states. This is another form of Federal cleverness, hiding reduced services by pressing them onto the states rather than making cutbacks themselves.

This has placed so much pressure on the states that (reported in a March 11 USA Today front page article) some have been forced to sell their $25 Billion tobacco settlement collections for the next decade just to finance their budget for just this year. The article gave the state of Wisconsin as an example and said the state, facing the worst fiscal crisis in its history sold 25 years of tobacco payments for $1.3 billion upfront to balance a single year's budget. You can read this article at with this windfall being spent, the states are still under pressure. USA Today's March 12 article, “States reduce services, drop many from Medicaid rolls”, says that more than a million low income Americans have lost or might lose government subsidized health care services. Medicaid makes up 20% of state spending and is the fastest growing segment only behind education. According to the article, “States unlike the Federal government cannot carry deficits and must come up with $26 billion in shortfalls by June 30. They struggle to cut programs, increase tax and borrow money to eliminate the difference between what they want to spend and the tax revenue they take in. Many of the Medicaid cuts will be invisible at first, as doctor visits are postponed and prescriptions go unfilled, experts say. But soon the cost of putting off medical care will begin to show up in the emergency rooms as they become the doctor's offices of the poor.”

Problem #7 is the war in Iraq. The difference between this economic drain and the comparable Viet Nam war of the 70s is that the U.S. will win. The cost of the war will be great, but the cost of administering the peace even greater!

Finally this problem (the war) leads to concern #7 and this may be our greatest concern yet. If we look back at the waves of stock market growth over the last 100 years we see that each was fueled by some new technology that reduced the dimensions of time and space. The steam engine, telegraph, internal combustion engine, telephone, T.V. jet engine, computer and internet. Each made mankind more efficient and enhanced the global economy.

Each generation took its technology and pushed it past its economic limits, so there were a railroad stock crash, the crash of the 30s, the crash of 1968, etc. In each case the economic scenario made no sense in its existing paradigm. Then the new technology increased productivity to such an extent that each new generation was able to produce its way out of its debt.

Yet this war on terrorism which will truly create more terrorists is pushing us backwards. The USA Patriot Act and all the government rules and regulations make air travel slower, buying and producing products and services more cumbersome and less efficient. Governments are always the least efficient part of an economy and the current new laws stick the government's nose into more and more aspects of business and everyday life. This is going to carry a huge economic cost not to mention reducing quality of life.

Let's recap. Here are the concerns. The U.S. government already has a huge debt and now forecasts adding dramatically to this debt over the next decade. The war is going to cost a fortune. Wall Street still has some downwards space. The real estate bubble could burst. States are under enormous pressure and we are currently becoming less efficient.

In short the system is getting saturated with debt. Every level of the system has sold its future to such an extent that no one will be able to pay this huge deficit back.

How are such problems resolved? If there is a huge wave of increased productivity, then the debt becomes inconsequential. Everyone makes enough to have a life and still pay the debt. Without enormous increase in productivity someone has to lose a whole bunch of money. The losses have to be flushed out of the system. The way this was done in the 70s was to allow the U.S. dollar to freefall. At one time (in the 60s) a U.S dollar bought 400 Japanese yen or 4 Swiss francs. Then after the free fall, the dollar only bought 120 yen and 1.8 francs. In short anyone who held dollars lost a huge amount of their purchasing power. Along with the greenback drop comes inflation. Oil prices will rise (surprise-surprise), costs of anything imported will skyrocket.

The way to cash in on this dilemma is to simply diversify into other currencies. Below is the diversified bond portfolio given to me by Jyske Bank that I reviewed to the 275 investors who listened to me last weekend.

This portfolio is a spread into six non U.S. currencies and yields 6.4%.

US$    Currency           Investment                                       Yield     Income50K      NOK            Savings Account                                    5.13%     $2,56540K      AUD       15-12-2008 Transco PLC  Aa2/AA             105.26       5.95%     $2,38040K      EUR       14-06-Rolls Royce   Baa1/BBB+              103.06       5.59%     $2,23640K      HUF       12-06-2007  Hungary Gvt.  Aa1?AA             99.56      6.64%     $2,66540K      MXN       08-03-2007  Mexican Bonds  Baa2/BBB         100.91      9.27%     $3,70840K      NZD       15-04-2004   Int. Bk Recon   AAA/Aaa         99.8       5.79%     $2,316                                                             Total Income           $15,861

You can magnify this income by borrowing three currencies and leveraging the portfolio. For example if you started with US$50,000 and placed this into a Norwegian kroner (NOK) savings account and then borrowed US$ 200,000 (in yen, Swiss francs and U.S. dollars) from the bank holding this account and invested the $200,000 into the bonds above, you increase your profit potential to 22.695%.

Loans     Amount  Currency                                                 Interest Rate      Interest70K      CHF                                                           -2.25%       -$1,57570K      JPY                                                           -1.62%       -$1,14160K      US$                                                           -3.005       -$1,800   	                                                        Total Interest Cost -$4,416

The $4,416 subtracted from the $15,861 earned creates a profit potential of $11,345and this makes the return on the $50,0000 invested 22.69%.

This portfolio whether leveraged or not gives you an excellent diversification outside the U.S. dollar. The reason these currencies were chosen is because Norwegian kroner has weakened almost 8% (5% to the US$) against the euro in the last couple of weeks due to falling interest rates (perhaps the central bank will lower rates again today) so the kroner contains some forex risk but the current levels might represent a good entry level.

The AUD & NZD are commodity currencies which Jyske Bank believes offer good value now.

The HUF (Hungarian Florin) is expected to be a stable currency prior to EU membership.

The MEX has fallen 25% against the US and 50% against the Euro within the last 12 months and may offer an opportunity should the peso recover some of thelost ground. Plus the interest yield is quite high in today's low interest atmosphere.

In the EUR Jyske had Rolls Royce as there is a 3.5% premium above the benchmark euro interest rate.There is some risk as Rolls has been put on the rating agencies NegativeWatch list due to decrease in the aircraft industry and a big underfunded pension obligation. Jyske has taken this into account in the current yield and believes that the company offers good value.

The risks of course are that the interest rates on your borrowed currencies could rise or that the borrowed currencies could rise against the currency invested. Plus the bonds held could decrease in value if interest rates rise. And some of the lower quality bonds (such as the Mexican Government) could default. On the other hand, each of these features could increase profits as well. You would increase your profits, if borrowed currencies devalue, interest rates on the borrowed currencies fall or interest rates drop and the capital value of the bonds held increase.

If you want to know more about why the portfolio above might make sense and to understand the risks as well as the rewards contact Thomas Fischer at Jyske Bank at

In our next global investing message we'll look at other ways to get out of the U.S. dollar now.

Until then, good global investing!