The US dollar has fallen dramatically versus other major currencies for almost 40 years. In the early 1970s the greenback would buy 400 japanese yen. Now it buys barely 100. A dollar was worth four Swiss francs. Now its barely worth one franc. The dollar has even fallen badly against currencies in emerging countries such as Colombia and Brazil.
Yet upcoming huge costs of Medicaid, Medicaire and Social Security for Baby Boomers combined with economic destabilization created by the sub prime loan collapse means the US dollar will fall even more.
This currency collapse creates inflation. America’s purchasing power is being destroyed. Imported goods from gas to food cost more in dollars and since the production of almost everything requires some imported element costs are rising across the board.
One way to beat this problem and protect your savings is to be a multi currency investor. As the greenback goes down, other currencies rise. Investors who hold other currencies automatically profit from the US dollar’s fall.
Take the euro as an example. In 2001, it only took about 85 US cents to buy one euro. So to invest in a bond denominated in euro for let’s say 10,0000 euro cost about $8,500.
Today, just seven years later, it takes over US$1.55 to buy that same euro. That 10,000 euro bond is now worth $15,500 plus whatever interest it earned. A 55% profit came just from the currency rise of the euro.
Yet American authorities have made it harder over the years for Americans to invest abroad. They have placed such stringent regulations on banks that have US clients that large numbers of overseas banks no longer open accounts for Americans.
This is likely to get worse because recently a federal judge in Miami authorized the IRS to use John Doe summons to request information from overseas banks about U.S. taxpayers who may be using Swiss bank accounts to evade federal income taxes. These summons are used to obtain information about possible tax fraud by people whose identities are unknown. This is an unprecedented situation as the directs UBS, one of Switzerland’s largest banks to produce records identifying unnamed UBS accountholders in Switzerland who have accounts remain hidden from the IRS.’
This creates a horrible conflict for banks. How do they know if an account holder has hidden an an account from the IRS or not? This creates such a compliance nightmare that more overseas banks may choose to stop serving Americans…or at least stop accepting small American customers.
Fortunately there are still easy ways to invest in multi currencies.
The first is to simply buy shares in a global company…the more a company earns outside the US, the better.
General Electric for example has huge non dollar earnings in its global infrastructure business, aircraft engines and energy equipment. More than half the companies earnings come from abroad and overseas income is growing. GE’s overseas orders are huge, up 8 percent to $24 billion in the first quarter of 2008. It sells heavily in developing countries that are building their highways and industries and airline fleets. 164 of the 170 gas turbines that G.E. sold last year were outside the United States. Overseas sales are growin. American business is damping sales.
This is true of many US companies you can buy from your local stock broker. IBM, for example derives 65 percent of its revenue from overseas, operates most of its software and services business from India and moved its global procurement center, as well as most of its voice recognition technology work, to China.
The second way to be a multi currency investor is to buy a mutual fund that invests only in non dollar bonds or shares.
Take the Dodge & Cox International Stock (DODFX) Fund as an example.
This fund invests in a diversified portfolio of medium-to-large well established non-U.S. equities in at least three countries, including emerging markets. This billion dollar no load mutual fund has an average annual growth of over 24% per annum over the last five years and investors can start with as little as $2,500.
The third approach that enhances privacy, asset protection and helps investors zero in on suitable asset classes for their individual needs is to use an overseas bank or asset manager that has taken the trouble to create a system for US investors.
Jyske Bank, Denmark’s second largest bank, for example has registered a subsidiary (Jyske Global Asset Management or JGAM) with the American SEC.
This makes it easier for American investors to use the bank’s global services. This is a tax neutral situation. American account holders must report income and earnings just as they would a US account. A W9 must be submitted for those who buy American bonds or shares.
Yet beyond the tax man, investors have their assets away from many prying eyes and held in a legal system that offers asset protection. Banking may be safer as well. Denmark is ranked by Moodys as one of the safest nations in which to bank.
JGAM’s service offers portfolios for all types of investors ranging from low risk to speculative. JGAM managers meet once a month for a top down global economic analysis that looks at markets and financial conditions around the world. From this analysis, they recommend asset class allocations for each risk level. Then they select individual shares/mutual funds and Exchange traded funds (ETF) to be used in these allocations.
From this process they develop 17 portfolios ranging from low risk to speculative and with or without US dollar investments.
There are four asset types, Fixed income, Equities, Alternatives (commodities metals etc) and Cash.
Here for example are JGAM’s latest breakdowns.
Low Risk: Fixed Income 70%, Equities 20%, Alternatives 5%, Cash 5%.
Medium Risk: Fixed Income, 40%, Equities 50%, Alternatives 5%, Cash 5%.
High Risk: Fixed Income 10%, Equities 80%, Alternatives 5%, Cash 5%.
Speculative: Fixed Income 20%, Equities 60%, Alternatives 10%, Cash 10%.
Let’s look at the low risk (LR) portfolio above in more detail.
Normally Jyske would recommend that 80% to 100% of low risk portfolios are in fixed income. Due to global inflation the managers are currently suggesting a tactical shift to underweight bonds, and overweight alternatives (commodities) and cash.
Then the JGAM managers offer a list of good value shares, bonds, funds and ETFs that investors can choose.
The shares are divided into low, medium and high risk.
Here is the current share list.
Novartis AG 12.5% 5.5% 4.0%
EDF – Electricite de France 12.5% 5.5% 4.0%
Novo Nordisk 5.5% 4.0%
L’Óreal SA 5.5% 4.0%
Danske Bank 5.5% 4.0%
G4S – Group4Securicor plc 4.0%
Diageo AG 4.0%
Siemens AG 12.5% 4.0% 4.0%
Bayer AG 12.5% 4.0% 4.0%
Adidas AG 4.0% 4.0%
Carlsberg B A/S 4.0% 4.0%
NKT Holding A/S 4.0% 4.0%
Hennes & Mauritz AB 4.0% 3.5%
Gazprom 3.75% 3.5%
Petroleo Brasileiro SA – ADR 3.75% 3.5%
China Mobile 3.75% 3.5%
BHP Billiton Limited 3.75% 4.0%
Telefonica SA 3.5%
Alfa Laval AB 3.5%
NeuroSearch A/S 3.0% 2.0%
A similar process is used for bonds denominated in eleven currencies, US dollars, euro, British pounds, Australian dollar, New Zealand dollar, Russian ruble, Brazilan real, Hungarian forint, Turkish lira, Icelandic kroner and South African rand.
The bond list is extensive. Here is the JGAM bond list as of June 28, 2008.
This system allows investors to have multi currency portfolios that are custom fit to their circumstances and needs.
Now comes the interesting part about banking abroad….multi currency borrowing as well as investing.
For many investors, a multi currency portfolio is enough. However some want added leverage and Jyske’s system allows multi currency borrowing.
Jyske will accept the portfolio as collateral and lend to leverage the investments at the following interest rates, depending on the amount borrowed:
US$ 4.125% to 4.875%
Swiss franc 4.250% 5.000%
Japanese yen 2.500% 3.250%
Singapore $ 3.000% 3.750%
Jyske’s current loan recommendation is to borrow 50% Swiss francs, 30% US$ and 20% Japanese yen. At the median interest rate this creates an average loan rate of 3.58%. Such loans can have a magical impact on performance even with low risk portfolios.
Say that a low risk portfolio of $100,000 yields 5%. If $100,000 is borrowed, the portfolio now has $200,000 and at 5% earns $10,000 a year. Interest costs are $3,580, so the return on the $100,000 is bumped up to $6,420 or 6.42% instead of 5%.
If $200,000 is borrowed the $300,000 portfolio yielding 5% earns $15,000 a year with loan costs of only $7,160. That means the $100,000 now earns $7,840 or 7.84% double the yield without leverage.
When markets are rising such leverage can create spectacular profits in some of the riskier portfolios. In 2007, our Green Portfolio consisting of five environmentally oriented equities, that I created with Jyske’s help, using two times leverage, rose 266.23% in one year!
Plus in many instances a borrowed currency can lose value versus the invested assets so there is an extra forex profit.
Yet forex returns can result in losses as well. The leverage creates added risk and volatility. That same green portfolio that rose so fast, also dropped 100% in just a month during 2007 before rising again 150% in the next three months. Plus there are extra fees to think about when borrowing so always check with your banker first. Consider the added risk carefully and never leverage more than you can afford to lose.
You can get more information on Jyske Bank from Thomas Fischer, Senior Vice President at firstname.lastname@example.org
A rising global population and growing global economy creates stress on world resources and encourages inflation. The same demographic stresses also put downwards pressure on the US dollar and this creates even more inflation.
Fortunately the same technology that helps create these pressures also allows us to survive and prosper from inflation through multi currency investing.
Non US investors remain at Jyske Bank and continue to bank as they always have.
Join me with Jyske Bank at our next two International Investing and Business Made EZ courses this year.