More pictures of Bahia in a moment. First the excerpts from my new course on multi currency investing looks at a case study in the first chapter.
This first case study looks at how to increase profit from leverage in times of disaster and fear.
This study was developed when this course was introduced 15 years ago.
The Mexican peso had just dramatically been devalued only three days after the President of Mexico had assured investors that the peso would remain pegged to the U.S. dollar.
This is an important lesson to remember…never trust what politicians say. Good politicians are successful in swaying the masses. The masses are always wrong so avoid where politicians lead team.
That devaluation hung heavy in economic markets, but we now know that long term the drop was meaningless. The final result was that everything moved along. The world did not implode. Economic markets did not crash.
In the early 1990s the Mexican economy seemed healthy.
Inflation was dropping. The North American Free Trade Agreement
began in 1994.
Within a year after NAFTA began, Mexico faced economic disaster. On December 20, 1994, the Mexican government devalued the peso. The financial crisis that followed cut the peso’s value in half, sent inflation soaring, and set off a severe recession in Mexico.
There many economic disturbances followed by a severe political shock when
the ruling party’s presidential candidate, Luis Donaldo Colosio, was assassinated. His death heightened fears of political instability and set off a brief financial panic that coincided with a sharp drop in Mexico’s international reserves. In about four weeks, Mexico lost nearly $11 billion in reserves.
Colosio’s assassination had other effects as well. Mexican interest rates rose sharply, and the peso depreciated. For instance, much of Mexico’s government
debt was in the form of cetes, short-term bonds similar to U.S. Treasury bills, that were sold on a regular basis. Following Colosio’s assassination, the interest rate
on twenty-eight-day cetes averaged 16.4 percent in May, 1995 compared with only 9.5 percent in February.
That devaluation was not the spark that ignited a global currency crisis. Yet it provided some great profit opportunities.
That peso fall was an important factor in one of the most dramatic short term falls of the U.S. dollar ever. When this course was originally released and this case study developed, the US dollar was at an all time low versus the Japanese yen, German mark and Swiss franc.
The peso devaluation was a stark reminder that we cannot trust what any government leader tells us about currencies. The fall of the dollar warned investors that no currency can be trusted.
Plus the pesos short term fall had a long term impact on the US dollar…and much more.
When the peso collapsed, credit card interest rates soared to over 100%. Millions of middle class investors could not make their debt payments. They lost their homes, their cars, their jobs. There was protesting, even rioting in the streets. The short term future of Mexico looked grim. This increased the flood of illegal immigrants into the U.S. and has added enormously to security and social costs in America. These added costs have increased U.S. debt which is one of the main reasons for a potentially weak U.S. dollar now.
At the same time, the lower peso ruined many U.S. and Canadian industries due to lower Mexican prices caused by the peso’s fall. Take the Florida tomato growers. They tried unsuccessfully to sue Mexican tomato shippers to stop the flow of the cheap Mexican tomatoes that flooded into Florida at prices below the Florida growing costs.
The short term thinkers saw the fall of the peso as a boon to the U.S. or other nation that were able to buy Mexican goods for less. Clear thinkers saw that economies around the world had become so related that bad news caused by a currency crash in one country is bad news everywhere.
Here is how money was made during that peso drop.
In 1995 the peso drop helped push the US dollar down to 84 yen per dollar.
The yen interest rate also collapsed. You could borrow yen for 3% and less.
The falling dollar caused the US dollar prime rate skyrocketed to 9% which meant investors could buy one of the safest investments around, US dollar ten year bonds, with a yield of 7%
So imagine an investor with $100,000 to invest. If he bought those bonds 10 year treasury bonds, he earned $7,000 a year…7% per annum. That’s a great return for such a safe investment.
If that investor used those bonds to borrow $100,000 more IN YEN, his interest cost was $3,000 a year. The loan purchased $100,000 more treasury bonds that paid $7,000 a year. The investor is now earning $14,000 a year (7% in $200,000 of bonds) and after paying the $3,000 interest, has boosted income to $11,000…11% per annum. That’s really a good return on US Treasury bonds!
The best part is yet to come.
By 1998 the yen had fallen from 84 yen per dollar to 143 yen per dollar.
When the investor borrowed $100,000 in 1995 yen he borrowed 84,000,000 yen.
To pay this off in 1998 required only about $59,000 ($59,000 X 143 = 84,370,000).
There was a $41,000 forex profit in three years.The investor over those three years earned $33,000 in interest, plus $41,000 forex gain or $77,000 total gain…ie 77% in three years or 25.66% per annum in an investment on US dollar treasury bonds.
This was the classic borrow low deposit high opportunity that we continually look for. Borrow a currency that has risen dramatically and has a very low interest rate to invest in a currency that has fallen dramatically and has a very high interest rate.
Now onto Bahia Ecuador, my favorite Ecuador beach city of any size.
Here is an excerpt from our latest Ecuador Living update.
Bahia has a beautiful clean Malecón.
There are many quiet parks and yet a colorful, busy downtown
This is Ecuador’s first eco city so there is a lot of fun and clean transportation.
There is plenty of sail power as well as pedal power at the Bahia Yacht Club.
On our upcoming coastal real estate tours,we’ll see houses, lots, this great hotel with…
a wonderful art gallery. Here is one of the paintings in the gallery…all Ecuadorian art.
We’ll check out a condo in this building with a…
view like this.
Here is a closer look.
This condo is offered in the $60,000 range.
You can get the broker details and a full report on Bahia as an Ecuador Living subscriber.
Until next message good global investing and living.
Join us on an Ecuador coastal this winter.
Here is our latest group inspecting the hotel,which is one block from the Ecuador’s Pacific.
We’ll view this hotel. It has a huge front porch.
Large second floor veranda with ocean views.
Beautiful flowered front yard.
The building is really rough and needs work…but over 8,000 square feet of building. The asking price is $60,000.
Jan. 24-27 Coastal Real Estate Tour
March 16-19 Coastal Real Estate Tour
Better still join us all year in Ecuador! See our entire schedule of 27 courses, tours, mingos and expeditions we’ll conduct in 2009 and how to attend as many of them as you like FREE.
The course fee includes meeting at Quito airport (day before the
course)…transportation (by group bus) to Cotacachi and back to Quito.
Course fee does not include air are. accommodations, food or individual transportation.