The key to understanding multi currency investing and inflation is to understand that a shrinkage of the global economy creates deflation.
See how to determine which scenario will unfold at inflation or deflation
Here is an excerpt from that multi currency lesson.
Watch for the figures…global government debt and global economic growth or contraction.
Historically during inflation the best multi currency investments are commodities, equities and real estate. During deflation, the best are bonds, cash (T-Bills) and real estate.
During inflation leverage works best. During deflation it is nice to sit in a no debt multi currency situation.
Review each possible scenario with your financial adviser. If they assure you that they know…beware. NO one knows for sure…so adjust your portfolo to your personal circumstances and the scenario that you and your adviser agree is most likely to unfold.
Remember… statistics are sometimes obscured for political reasons at best. Even when they are transparant… they are often incorrect.
The best we can do is make a reasonable guess, keep watch and be willing to adapt.
Always look for value in distortions and trends.
There is a huge distortion growing in the trend of the US government borrowing to fix everyone’s woes. If this borrowing offsets deflation but does not create runaway inflation, the dollar is likely to drop versus currencies with higher interest rates or where the government is not so deeply in debt.
This borrowing and the US economic slow down have created the perfect storm for a currency distortion…an over strong currency…that is likely to fall….and can be borrowed at a very low interest rate
There are many similarities between the US economy and the US government’s response to the downturn with Japan’s slowdown in the early 1990s and the Japanese government’s response then. Readers made fortunes borrowing yen as they may make fortunes borrowing dollars now.
Watch especially now for ways to borrow dollars at low rates for investing in high yield, short term dollar bonds like:
Currency Bond Yield
USD 9.125 19/05/2009 SOUTH AFRICA 6.04%
USD 10.25 17/06/2013 BRAZIL REP OF 6.24%
USD 8.25 31/03/2010 RUSSIA 5.93%
This type of bond has no currency risk if leveraged in US dollars. Your only major risk is default.
Bonds denominated in euro are even more to my liking because they pay higher interest and have a potential forex gain if the dollar drops again verus the euro.
Yet this type of leveraged investment also has a chance of loss if the dollar rises verus the euro. Do not borrow more than you can afford to lose!
There is even more yield potential in bonds denominated in euro.
EUR 5.75 02/07/2010 ROMANIA 10.81%
EUR 8.5 24/09/2012 BRAZIL REP OF 7.49%
EUR 5.25 16/05/2013 SOUTH AFRICA 8.61%
These three bonds yield an average 8.97%. They represent a diversification into Europe, Latin America and Africa. If you invest $100,000 and also invest another borrowed $100,000 at 4%, your total annual return is 13.94% before any forex gains or loss.
Until next message may all your scenarios be clear.
Gary
The bonds mentioned above are from Jyske Bank’s bond list. These are indicative rates not recommendations.
To learn more about bonds like those above diversification and to check on current Jyske risk profiles, US investors should contact JGAM Thomas Fischer at fischer@jgam.com
Non US investors contact Jyske Bank Rene Mathys at mathys@jbpb.dk
Until next message good global investing.
Gary
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