See below why I show this chart again and again.
The biggest of the seven trends I have cashed in on over the past 42 years has been the declining US dollar. This chart of the greenback’s fate from the Grandfather Economic Report says it all. The buck has collapsed over the decades and anyone who has bet against it, as I have has reaped a fortune, except…
at our June North Carolina Quantum Wealth seminar we saw how sometimes such as from 1979 to 1985 the US dollar was strong. Speculators who just bet against the buck were bucked out of the profit zone. Anyone who shorted the dollar… long term… in 1979 had to wait until about 1987 before they saw it drop below the 1979 level. So we cannot just randomly bet against the dollar and expect automatic profits.
There are risks to betting against the US dollar as speculators are seeing now.
This is why at the Quantum Wealth course, I outlined seven places to invest now.
Only one of these might include speculating against the US dollar, which is #1: Multi Currency Interest Spreads.
#1: Multi Currency Interest Spreads
#2: Value Markets
#3: Emerging Markets
#5: Water Alternate Energy
#6: Truth & Cohesion
#7: Real Estate
There are several ways to speculate against the greenback. Personally I use the multi currency sandwich. I borrow dollars at low interest rates and invest the funds on dollar related currencies…. currently the New Zealand, Canadian, Australian dollars and Mexican peso.
This is a slow, partly hedged speculation versus the dollar… but forex profits are not my main goal. The interest differential is what assures my profit… if I can wait for the dollar to drop. My loan cost on dollar loans is currently below 3%. My average yield is 6.31% so I am paid about 3.31% to borrow the dollar.
Here is an example of how this works.
100K ea. MXN BONOS 10% Due 2024 117 = 8%
EUR INVT BNK AUD 6.0 2013 101.49 5.56%
EUR INVT BNK NZD 6.5 2014 104.77 5.38%
Average 6.31% + $18,930
Loan cost $ 9,000
Return $ 9,930
Plus Forex Potential
There is some new bad news to this for US investors. Regulations on overseas banks by the US have become so extensive that many non US banks will no longer accept Americans. Even Jyske Global Asset Management has had to increased its minimum account for advisory clients to $ 1 million.
The news is not all bad. Non Americans can still use this technique and Americans can also borrow low and deposit high IF they let JGAM make the portfolio decisions.
To help US investors, JGAM provide managed portfolios with a $100,000 account minimum ($200,000 if they want loans). This is compared to the minimum of 150,000 euro required for non US investors to start.
In either case these minimums are among the lowest for investment banks.
Investors with smaller amounts can best diversify through ETFs and Investment Trusts on the US and UK stock exchanges.
There is some other really good news though that we looked at in our June Quantum Wealth course.
The key to borrowing low and depositing high is to find strong currencies… with low interest rates… when their strength is not supported by economic fundamentals. Right now three currencies are in this state… the US dollar, the Swiss franc and the Japanese yen.
Jyske and JGAM (and I ) are taking advantage of this fact in their managed and discretionary portfolios.
Lars Stouge, the President of JGAM, recently sent me a full analysis of the US dollar and I have copied it here for you… so you can see why the current US dollar strength creates unusual opportunity.
Analysis on USD/EUR
14 June 2010 By Lars Stouge
Historically the US dollar (USD) has shown a down-trend against first the German D-Mark (DEM) and later the euro (EUR), periodically interrupted by significant appreciations. However, lately the USD has strengthened again moving close to its fair value. Relative prices, real bond yields and yield curve differences between the US and the eurozone explain to some extent movements in the USD.
If the business cycle in the US moves further ahead of the eurozone, it is likely that real bond yield spreads and yield curve differences will become even more favorable for US securities, increasing the demand for the USD.
In 1972 the Bretton Wood system was abandoned and the USD became a free floating currency against most major currencies including the DEM. In 1999 the DEM was substituted by the EUR when a single currency area was created in Europe, the eurozone.
The graph below shows the development in the USD since 1970 against first the DEM and later (since 1999) against the EUR, indexed with 1972 at 100. The graph slopes downwards with a total loss in the value of the USD of almost 60%. However, the down-trend was interrupted by large movements up in both 1980-85 and 1995-2001.
The Purchasing Power Parity (PPP) theory explains the long trend development in the USD. As prices in the US have risen more than in Germany and the eurozone, the US has lost purchasing power and therefore, the USD has fallen in value to compensate for the loss in the US competitive position.
The graph shows how well the estimated1 PPP explains the downward slope in the USD. When the USD index moves above the PPP-line, the USD is overvalued (i.e. too expensive compared to relative prices) and when the USD moves below the PPP-line, the USD is undervalued. At the present price level of approximately 1.20 USD per EUR we are close to parity, i.e. at fair value.
In the graph below we have taken out the PPP component of the USD by measuring the USD-index relative to the estimated PPP. The graph shows that in 1972, 1981-1986 and again in 1999-2002 the USD was overvalued. The rest of the period the USD was undervalued.
Estimated by use of simple linear regression.
Interest rates and bond yields
The deviation from PPP could be caused by spreads in (real) interest rates and (real) bond yields. When investors expect a yield or interest rate pickup on a currency, they will invest until expectations of future depreciation correspond to the yield or interest rate difference (this is called the Interest Rate Parity, IRP). Until the level of IRP has been reached investors will buy the currency with the high (real) yield or interest rate and the currency
increases in value.
We have examined how short interest rate spreads and long bond yield spreads, both in nominal and real (i.e. inflation adjusted) terms, correlate with the PPP deviation of the USD. To cut it short, the analysis shows that the real bond yield spread best explains the development. The graph is shown below. For example the overshooting USD in the beginning of the 1980’s is explained by the real bond yield spread in favor of the USD.
However, the model has its limitations. As can be seen from the last graph not all USD movements around its PPP value is explained by the real bond yield spread. For example in the beginning of the 1990’s the USD continued to depreciate to become more undervalued despite a favorable movement in the real yield spread.
Also, when the USD became overvalued up to and after year 2000 it happened without a movement in the real yield spread. There are several reasons why the model has its limitations as explained in the following.
One reason is that many other factors than the real yield spread influence a currency. Relative growth, productivity, balance of trade and payments, debt burdens and a number of other factors determines the price of a currency. However, many of the factors not considered directly in our model do indirectly have an influence, as these factors also determine relative price levels, inflation, interest rates and bond yields. Therefore, indirectly our model captures other determining factors.
Another reason why the model has its limitations is that the price of a currency today is determined by investors expectations of future real bond yields and other possible determining factors. In our simple analysis we have used actual price levels and bond yields. It is difficult to measure or estimate market expectations and only if markets are efficient and investors are rational (i.e. never make mistakes) then expectations will be fulfilled.
To sum up, one should be careful not to rely too much on a simple model as the one presented in this memo. However, even more sophisticated models also lack prediction power. Actually, in the very short run (days and weeks) analysis prove that the best prediction in the currency market is to flip a coin.
The aspect of expectations can to some extend be modeled by examining yield curves. A yield curve reflects the markets expectations of future interest rates. E.g. if the long bond yield is higher than the short interest rate it is an indication that investors expect short term interest rates to rise. Therefore, by comparing yield curves we get a measure of which currency should expect to see the largest rise in interest rates. The graph below shows the yield curve difference between the US and the eurozone plotted against the USD’s deviation from PPP.
Except from the period 1991-93 where the yield curve in the US versus the eurozone formed a temporary peak, the yield curve difference explains well the development in USD’s deviation from Purchasing Power Parity.
In 2010 the USD has strengthened to a fair value against the EUR close to 1.20 USD per EUR. We assess that the USD could become even stronger and become overvalued. This could happen if the US economy continues to move ahead of the eurozone and cause the real bond yield and the yield curve in the US to distance itself even further from the eurozone.
Short term free floating currencies move like a random walk making today’s price the best prediction of tomorrow’s price.
The phrase that jumps at me in this analysis is:
Actually, in the very short run (days and weeks) analysis prove that the best prediction in the currency market is to flip a coin.
Fundamentals and value rule the direction of currency parities. Human emotions rule the swing of currencies as parities become overbought and or oversold. When you can be paid to borrow a currency that has become strong but is not supported by fundamentals (like borrowing the Swiss franc, Japanese yen or US dollar to invest in higher yielding currencies) you can take advantage of these human emotional errors.
Join Merri and me with Thomas Fischer in Copenhagen this August or next October in North Carolina when we will update our portfolio positions.
The strong US dollar makes this the year to enjoy Europe and Thomas Fischer at Jyske just sent me this note: Gary due to the increasing US dollar, the cost for our August seminar in Copenhagen for Americans has dropped from about $2,050 to $1,700, a 15% discount. (THE COST INCLUDES MOST OF THE FOOD, TRIPS, MAKING THE CONFERENCE A GREAT BARGAIN.)
I love attending these seminars because of the great speakers.
This year speakers include will be Bjorn Lomborg known as the “Skeptical Environmentalist.” See more on Lomborg here.
Another speaker will be Jeff Rubin. Rubin was the Chief Economist for CIBC, a North American investment bank for 20 years. See more about Rubin here.
Kenneth Rogoff the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University and former Chief Economist for the International Monetary Fund is also a speaker. See more at Rogoff.
Because updating multi currency strategies is so important in today’s investing world, another speaker is Daniel Brehon, the foreign exchange strategist, for Deutsche Bank AG. Deutche Bank is Germany’s largest bank and one of the laregst banks in the world with 1,999 branches situated in 70 countries. The bank has significant regional diversification and substantial revenue streams from all the major regions of the world.
They have established strong bases in all major emerging markets, and therefore have good prospects for business growth in fast-growing economies, including the Asia-Pacific region, Central and Eastern Europe, and Latin America.
In Europe, Deutche Bank is well placed to benefit from resilient conditions in Europe and Germany in the euro zone. The bank began in the 1870s and now employs more than 80,000 people in 72 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets.
Deutsche Bank has offices in major financial centers including New York, London, Frankfurt, Paris, Moscow, Amsterdam, Toronto, São Paulo, Singapore, Hong Kong, Tokyo and Sydney. Furthermore, the bank is investing in expanding markets, such as the Middle East, Latin America, Central & Eastern Europe and Asia Pacific.
See details on how to join Merri and me at Jyske’s bi annual Copenhagen seminar here Global Wealth Management Seminar.
Some great things about the Copenhagen conference are the seminar of course…then there’s the stunning food and the wonderful visits included…This package includes: accommodation at the Copenhagen Marriott Hotel for four nights, (25-28 August) including breakfast, Reception and dinner at the bank’s Copenhagen offices, seminar fee and materials for the seminar sessions on Thursday, Friday and Saturday. full lunches on Thursday, Friday and Saturday, canal & harbour tour on Friday in the late afternoon, four-course gala dinner with entertainment and dancing on Saturday evening, and a Sunday excursion including lunch.
Merri and I always go on the excursion also to Silkebord with a drive out into the country, lovely food, picnic cruise and a chance to see the main office and the trading center. This is always our most interesting, favorite and delightful conference…and we hope you will join us there! We love the stroll along the harbor, the fresh air, wonderful meals and interesting people from all over the world.
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