Three Economic Crunches Brewing

by | May 25, 2011 | Archives

From Doom to…



There is a triple economic crunch brewing with the euro, US dollar and more… precursors to rising prices, reduced financial safety and diminished capacity to earn.



See below this currency and a salvage package that may save smart investors from the tragedies above.

Winston Churchill once wrote… “Veils of the future are lifted one by one and mortals must act from day to day.”

Unfortunately three veils are revealing themselves in very negative financial ways all at once. At the same time, we have to know what to do!

The first concern, is the massive slowdown in Europe.  Germany is strong, but England is in trouble.

A May 20, 2011 BBC article “Hard to explain how bad economic crisis is, says Cable” shows how this trend is building. Here is an excerpt.   Business Secretary Vince Cable says it has been a challenge for the government to explain to the public how bad a state the economy is in.

He told the Guardian the country was poorer because of the banking collapse and recession – and from a “squeeze” from the changing world economy.  “We have had a very, very profound crisis which is going to take a long time to dig out of,” he warned.

“We are actually a poorer country, mainly because of the banking crash, the recession that followed it and partly due to the squeeze we are now under from the changing balance of the world economy.”

He added: “Britain is no longer one of the world’s price setters. We take our prices from international commodity markets driven by China and India.

“That is something we have got to live with and adjust to. It is painful. It is a challenge to us in government to explain it. The political class as a whole is not preparing the public for how massive the problem is.”

“We had the complete collapse of a model based on consumer spending, a housing bubble, an overweight banking system – three banks, each of them with a balance sheet larger than the British economy.”

“It was a disaster waiting to happen and it did happen. It has done profound damage and it is damage that is going to last a long time.”

This problem could not come at a worse time because as explained by Jyske Global Asset Management investment team which pointed out last week in its market update that inflation is now biting England at 4.5% right when the IMF is in trouble.

The update said: In the United Kingdom, inflation accelerated more than expected in April with consumer prices up 4.5% versus an increase of 4% in previous month. Despite that the rising inflation is well above the 2% target, the Bank of England decided not to stem inflation by hiking interest rates.

This is added concern to a dire European scenario. outlined in excerpts of a May 23, 2011 article in the New York Times by Landon Thomas Jr.”In Europe, Rifts Widen Over Greece” says: LONDON — Fissures among Europe’s currency partners are becoming even deeper and more widespread than was previously evident, raising new doubts about whether the group can resolve the regional debt crisis that has simmered for more than a year.

Is There Any Hope for Greece? Would leaving the euro zone be a sound option for Greece?

Gloomy investors on Monday drove down Europe’s stock indexes by about 2 percent, while the euro fell nearly 1 percent against the dollar, touching a two-month low.

Meanwhile, yields rose on 10-year Spanish and Italian bonds, reflecting a market perception that the risks are rising that those two indebted nations might be following the downward spiral of Greece. Greek 10-year bonds reached a record 16.8 percent as investors demanded a high premium for holding them.

On Wall Street, major stock indexes were also down more than 1 percent, in part over the uncertainties in Europe.

The markets seem to reflect the growing discord within the 17-member euro zone currency union, barely a year after European governments came together with a 750 billion euro ($1 trillion) safety net for debtor-nation members. Tensions also remain over whether to restructure Greece’s debt and force bondholders to take losses.

It is clear that the bailout package and the austerity terms imposed on Greece have deepened its recession and added to its already substantial debt burden. The debate now is whether making more cuts and recharging a program to privatize many formerly government-run agencies and social services in Greece will be enough to persuade a reluctant Europe to lend the country another 60 billion euros.

“It looks like a real unraveling — everyone is taking their own position and as a result cooperation has become an impossibility,” said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso.

Struggling countries like Spain and Italy fret that any Greek failure on spending cuts might cause investors to conclude that those two countries have no better growth prospects than Greece — even as their own austerity programs cause social and political unrest.

On Monday, the bond market seemed to fulfill Spain and Italy’s worst fears about being lumped in with Greece’s as a poor investment risk and the perception that the cuts meant to ease those countries’ debts will instead mire them deeper in recession.

Southern countries, he said, are afraid of contagion from Greece’s woes. “But history shows us that you cannot cut deficits in the midst of a recession.”

For Spain, devastating local election losses on Sunday by the governing Socialist Party created worries that Madrid’s plan to cut its budget deficit might founder. It had planned to reduce the deficit to 6 percent of gross domestic product this year in the face of a 20 percent unemployment rate.

These political and economic events (inflation in England, turmoil in the IMF and French political confusion) are bad enough, but they could not come at a worse time because of the third crunch.

Here is the second crunch: President Obama plans to funnel billions of dollars in economic aid to Egypt and Tunisia right when the US government currently cannot pay its bills as it hit its $14.294 trillion debt ceiling last week.

Everyone knows that US debt will be difficult to pay under any circumstances… but now America is legally unable to borrow more.  Currently the US is only failing to meet its own pension obligations so an external default has not been declared …yet,  but Congress only has 11-weeks to gets its act in gear to avoid a default.

If Congress fails to reach a deficit-reduction agreement so it can raise the amount of money the nation can borrow, the default could trigger a financial crisis, sending interest rates soaring, which would make it harder for everyone, families and businesses to borrow.

The U.S. government hasn’t defaulted on its debt in modern history and a default would throw the value of U.S. Treasury securities, long considered one of the world’s safest investments into question.  A negative economic impact would be felt globally.

So where does one invest?  Bonds? Not in the US.  Yields are lower than inflation.

Real estate is great… longer term… but where should one focus, right now?

Do US stocks look good? Do not let this chart of the S & P 500 from fool you because the overbought US stock market is the third crunch!

equity market charts

The US stock market has been rising, but note carefully how a head & shoulders pattern has formed since 2000.

See below in this explanation from Investopedia why it is an indicator of upcoming disaster.

equity market charts

The “head-and-shoulders” pattern is believed to be one of the most reliable trend-reversal patterns.  In other words, US stocks could plummet anytime… a lot.

The breakup of the euro… a US bond default and another US stock market crash. Three potential disasters waiting to break an already incredibly weak, global, financial system.   Any one of these problems could create huge global economic problems. Two at once a once… a centurion disaster.  All three at a time… cataclysmic.

Fortunately there are ways to protect against these potential crashes that we’ll address… what to do as investors, in business and in life at our upcoming International Business and Investing seminar, June 24 to 26, 2011 in West Jefferson, North Carolina.

This course has three areas of focus. The first being “How to Invest Better… globally”.

Diversification is once answer of currencies and equity markets. This is vital…right now.

The chart below from Bloomberg shows that there is no head and shoulders in global equity markets.

equity market charts

The Index above is the Morgan Stanley World Market Index with 22 component markets: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hongkong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, UK, and USA.

We will look at ways to invest in this index for diversification with as little as $5,000.

Next investors need to go for the growth.  This means we’ll see how to invest in emerging markets… the place most investors flee during troubled times.

equity market charts

The Bloomberg chart above shows the MSCI Emerging Market Index, again without a head and shoulders pattern.

Though investors think of them as risky, the reality is… Emerging markets have over performed major markets for more than a decade.

A recent 10 year comparison of major versus emerging markets show some of the reasons that emerging markets are one of the seven places I like to invest in now.

A comparison of the Morgan Stanley Capital index Emerging Market versus Morgan Stanley Capital Index Emerging Market Index.

Annual Return   Emerging Markets 19.81%    Major Markets  10%

Emerging Markets Longest Down period 6 months – Major Markets Longest Down 6 mos.

Emerging Markets biggest downward drop 55% – Major Markets biggest downward drop  53%.

Emerging Markets PE ratio 12.9   Major Markets  PE Ratio 15.2.

Major Markets yield    3.70%.
Emerging Markets yield  3.22%.

In other words in a decade… Emerging Markets have appreciated nearly twice as much as Major Markets.  There has been little difference in the lengths or size of drops and Emerging Markets offer much better PE ratios.  The only area where Major Markets have excelled is yield.

Emerging markets offer attractive returns and a search for value leads us to Brazil and eight other markets.

As of April 2011 the nine best value MSCI emerging markets were: Brazil,  the Czech Republic, Egypt, Hungary, Poland, Russia, Taiwan, Thailand, Turkey at equal weights.

One way to beat the upcoming crunch is to diversify into several of these best value markets and we’ll see how to do so with as little as a few thousand dollars.

Another way we’ll review on how to fight stagflation is with Brazilian bonds. The US dollar interest rate for ten year bonds is about 3%.  Brazilian real bonds pay up to 11%.

Plus there is currency appreciation. Since 2006 the Brazilian real has risen from 44 cents to 61 cents.

There is some extra risk.  Brazil is rated BBB, the USA, AAA but the rating agency Fitch raised Brazil to “BBB stable” so Brazil bonds are investment grade, two steps above speculative level.  There can be volatility. The real rose from 45 to 70 cents from 2006 to 2009.  Then it plunged to 40 cents before recovering back to 61 cents.

My own favorable experience has come from been holding three Brazilian bonds denominated in Brazilian real in my pension portfolio for some time.

Borrower                                         Coupon       Maturity
European Investment Bank     11.125%       14.02.2013
Brazil Republic of                         12.500%      05.01.2016
Brazil Republic of                          12.500%     05.01.2016

These bonds were purchased at excellent discounts back and have been dream investments, the type that causes one to wish he or she had put all their portfolio in.  Of course investing in just one thing is never a good idea because hindsight is so much clearer than foresight.

The bonds, during the worst recession in seventy years have created profit in three ways.

First, there is the yield... the quarterly payment that amounts to over 14% per annum on one of the bonds.   The coupon payment (11.25% and 12.50%) of each is really good in its own right.  Yet each bond was purchased at a discount so each is paying more than 12% per annum income.

Second, there is a capital appreciation. The 12.5 % Republic of Brazil bond due 05-01-2016 I purchased for $98 ($9,800 for a $10,000 bond was offered in May 2011 (when this report was released) for $117.75. This has dropped the yield to 7.84%.

This means that I could sell each $9,800 of bond I invested for $11,775, an extra $1,975 or  20.15% capital gain.

Third, there is a forex profit. Look at what happened to the Brazilian real versus the US dollar in this five year period of 2006 to 2011. These charts are from


The real rose from 45 to 70 cents from 2006 to 2009.  Then it plunged to 40 cents before recovering back to 61 cents.

In other words, during the time these bonds have been held, they gained an added 46% forex profit.

The rising Brazilian real is not just a short term trend either.  The 12 year chart below shows how it began its climb versus the greenback clear back in 2002.


Two global bond ETFs we’ll review with diversified portfolios including Brazilian bonds are:

Market Vectors Emerging Markets Local Currency Bond (EMLC), with about 10% of assets in Brazilian bonds.

iShares JPMorgan USD Emerging Market Bond Fund (EMB), has 8.87% of assets in Brazilian bonds.

Plus we’ll see the WisdomTree Dreyfus Brazilian Real Fund (BZF) ETF that invests in short-term, investment grade instruments and is up 35.14% since inception May 14, 2008. Wisdom Tree has also filed to create a Brazilian bond ETF.

Another way to beat the upcoming crunch is by avoiding correlation by trading currencies.

Now is the time to invest out of the dollar and the euro and pound.   But which currencies to choose?  At the June seminar Thomas Fischer who was a professional currency trader working for a large German bank for many years will review Jyske Global Asset Management’s Managed Foreign Exchange (FX) Portfolio, that only invest in currencies.

This combination reduces overall risk and enhances the chances of a good return.

Currency investments reduce overall risk by diversifying investments across different asset classes that do not react the same way to risks because they are not fully correlated. Traditionally stocks and bonds correlate inversely.  When stocks fall, bonds rise.

However, the crash in 2008 showed that at times all asset classes can collapse at the same time. In 2008, almost the entire financial market panicked due to fears of a systemic collapse. A fear still so profound it keeps investors overly nervous to the extent where an otherwise insignificant event can result in a massive market tremble.

Currency investments supplement traditional asset allocations of  stocks, bonds and commodities, because currencies do closely correlate with these traditional asset classes when the market panic.

Currency diversification should be an essential strategy for every investor.

You’ll see how to create a Managed Forex Portfolio using:

* Proven currency traders who avoid high volume trading and select investment opportunities with less volatility and fewer trades.

* Portfolios with positions in different currency pairs using stop losses to limit downside risk and using trailing stop losses to lock in profits.

*Regulated leverage depending on your risk factors.

You learn all this from Thomas Fischer and much more just in the global investing session of the seminar.

In the global micro business sessions we’ll see ideas on:

* How to create export businesses

* Self Publishing

* Internet Sales

* Ecuador Business Ideas

* Organic Business Ideas

* Health Business Ideas

* Ideas for Cuban Business

Plus the third session looks at ideas on how to live better…. using frequency modulation to be smarter… stronger…. more energetic… and healthier.

Most of us (my 87 year old mother is excepted) have seen such serious economic conditions as those that face us now.  A growing global population… depletion of natural resources and technology are bring social and financial shifts at a pace never seen before.

These shifts could rob many of their financial well being, but fortunately the same technology that is creating the change can also help you gain prosperity like you have never imagined.  We look forward to sharing these riches with you.


There is one week left to save $499 by enrolling in our June 24-26 International Business Seminar.

Each seminar updates how we doing business globally and how we are investing… and why… right now. Join Merri, me, Thomas Fischer from Jyske Global Asset Management, Bonnie Keough and our Canadian Cuban researcher.

June 24-25-26  West Jefferson, North Carolina

October 7-8-9  West Jefferson, North Carolina

Enroll here. International Investing Business and Quantum Wealth.  Enroll here. –  $749 Reserve- $999  for two.