Avoid Spurts With Peso Bonds

by | Mar 10, 2012 | Archives

See about Ecuador and US Inflation below… plus why the Mexican peso may be a good place to invest now.


There is not much tide on Ecuador’s Pacific but the tide is rising for Ecuador inflation.

There is a big inflation problem in the USA.  Statistics say prices are not rising but they are in two of the areas where people spend most… food and gas.

Plus investments in the bank return almost nothing and share prices are at scary highs.  What is one to do.  More on this in a moment.  First…

Ecuador Inflation

A March 6, 2012 Bloomberg article entitled Ecuador February Consumer Prices Rose Most Since September  by Nathan Gill said:

Consumer prices in Ecuador, which uses the U.S. dollar as its official currency, rose at their fastest pace in five months in February, led by increases in food and health costs, the statistics agency reported.

Prices climbed 0.78 percent last month and increased 5.53 percent from February 2011 (EDCPYOY), the National Statistics and Census Institute said today in a report on its website. Producer prices fell 0.57 percent in February and increased 1.94 percent from a year earlier, according to the report.

Food prices have risen this year as record rainfall in coastal areas damaged crops and disrupted supplies, according to today’s report and data from the country’s National Meteorology and Hydrology Institute. Bad weather, minimum wage increases and higher prices for imported commodities are pressuring costs, according to Deloitte & Touche LLP.

“Inflation this year is expected to rise,” the company’s Quito office said today in a report published before the data’s release. “It’s probable that there exists a scarcity of some products because of the effects of the winter, which could increase their costs.”  See a link to the entire article below.

Our messages at our two sites (the other site is www.ecuadorliving.com) are mostly about Ecuador, real estate and international investments and business.

Ecuador real estate has been one of our big recommendations… but now one has to be careful as prices in some parts of Ecuador have risen… a lot.

I hope our daily messages help you make and save money because money is energy and energy fills our needs but because the US stock market has recently experienced a boom when many indicators suggest great market risk and because Ecuador real estate has risen dramatically, I would like to share a reminder.

Investments are stored energy… like a battery that continues to fill our needs when we do not work.

The analogy however can be carried further.  Too much energy forced into a battery too quickly can cause it to explode and burn.

Let’s look at the importance of spurts in international investing and Ecuador real estate.

International investments… property in Ecuador… or other countries… multi currency stocks and bonds… all… can help fight inflation IF we do not get too caught up in  spurts.

All markets rise…  and fall… in spurts.  This fact kills the returns of most investors.

The odd fact is that upwards spurts can do more damage than the drops.

Be careful of spurts!

The key to all successful investing is the protection and increase of purchasing power.

International investments can help you achieve this, but attaining and keeping success can be trickier than it might seem.

Let’s hear (from the voice of experience) why the art of keeping wealth may be more elusive than just making a profit.

As mentioned all markets bubble up and bubble down in spurts.

The problem is that many, especially inexperienced (as in they have not yet been burned), investors who start investing when there is an upward spurt, take the instant profits they make seriously and spend them!

They forget… or do not realize that there are down cycles too.

This means they have not learned the most important part of how to survive cash spurts and sudden wealth.

I learned this lesson the hard way as a young executive, (just 25 years old). Back in the late 60s and early 70s.   I worked my heart out for four years, almost sacrificed my family and ended up divorced by trying to build a financial future.

I thought it was worth the stress. The stock market had been rising for decades. The bull market was all I knew, shares rising, IPOs were coming out every day-almost guaranteed success. The industry I worked in (overseas mutual funds) was in a hot sector and the company I worked went public.

My compensation was generous, a stock option for 50,000 shares at a dollar each. The shares were issued to the public at $20. At 25 I was already a millionaire and those were the days when you could buy more than a house for a million dollars! In fact a million then was worth about $12 to 15 million now.

I had not learned any lessons about locking in profit nor the downsides of markets.

I had never made more that $750 a month so this wealth was bewildering.

I bought everything I could, a new Mercedez 280 SL, a new house and I ran up some nice credit card bills.

But I bought all this on credit and kept my shares. Why would I sell?   They just kept rising! Right.

Then the stock market collapsed. The sudden drop caused a run on the shares of the company I worked for and it, with many similar firms, collapsed. The entire industry tanked and the company went broke. I ended up unemployed, with no money… zero income and in debt.

My stock options weren’t worth the paper they were printed on.

The moral…when you invest to make money be careful. You may make it! If you do not respond correctly, the sudden wealth can make life worse rather than better.

Most wealthy people receive their income in spurts. We saw this process regularly during the internet craze.

Merri and I have been lucky.  Our business has been solid and steady for 40 years. Yet when I look back… at least half of our assets and savings came from just a handful of deals… where we picked exactly the right thing… at just the right time and then cashed in on a spurt.

Fortunately I had also learned that you not only buy… but you also sell.  That Hong Kong experience and the observation of thousands of investors over 40 years suggests that sudden financial success creates disaster as often as not.

Investors all too often make one of three mistakes.

The first mistake is to believe that this is the only time there will be such an influx of cash. This tightens a person, so they can’t enjoy spending. They become afraid. Life becomes filled with paranoia. Unhappiness sets in. If money doesn’t make life better, what’s the use?

The second mistake is to think that these large chunks of cash will continue to come easily again and again without working. This thinking creates unrealistic lifestyles and work ethics that lead to disaster.

I first observed this ironic fact while living in England.  A happy, financially responsible middle class family won millions in the lottery. Just a few short years after reaping this spurt of cash through supposed good luck, the husband and wife were bankrupt, divorced and no longer speaking to their kids.

I have seen example after example, of people, who received a sudden chunk of income made very unhappy by this large inflow of wealth. This is why it is a risky time when investors make a big sudden profit. The proud owner of new found wealth, buys new cars, houses and becomes very spendy. They create overhead and debt. If there is a single reversal, they are wiped out.

The third mistake is to pyramid the success especially with debt. You can ask many US real estate investors about that as they continue to try and work their way out of negative equity housing.  This builds on a weak foundation and when the spurt turns creates a faster and often horrendous collapse.

Now the stock market has had a spurt and performed incredibly well over the past six months. We cannot depend on this trend to continue.  Look at the chart for the last year. Do not ignore the sharp drops!

dow chart

Dow Jones one year chart March 2012 from www.google.finance.com

How much is a big hit anyway? How much is enough to throw a person off track?

One measure is a ten times increase in wealth.

This normally is enough to make a significant difference in a person’s life. For someone with a thousand dollars in the bank, $10,000 seems like a lot. The extra money can make a difference. For someone who already has a million dollars, another million doesn’t make such a significant shift. Ten million does.

The reason spurts create problems is because they disrupt our discipline.

Money is discipline and our financial affairs have some form of economic routine, either self imposed or not.

We have a set of mental standards that makes us think, “I can afford this, but can’t have that”, etc. Spurts of wealth demolish these standards. Suddenly we can have many things we previously could not. We become, once again, kids in the proverbial candy shop.

Yet much of the Western world spends their lives trying to become and stay independently rich. If succeeding in this process can ruin happiness, what can we do?

First, realize that quantum wealth… which is independent, permanent never-ending, fearless wealth, is a process, (not a state) of a continual series of reasonable risks, mistakes, refinements, lessons and actions that culminate in getting it right. When success arrives, there is a huge income (or capital) spurt.

Understand that this is not just one time when you can make a huge wad of cash.

Impose discipline.

Here is a simple formula for dealing with spurts if you cannot create your own.

First immediately spending ten percent of the new money on your dreams.

Buy, the Porsche.

Take the world cruise.

Build the new eight bedroom house. Do whatever you want that does not cost more than ten percent.

Second, give ten percent to a worthy charity.

Take a little time, find a need in this world you feel really should be filled and truly give the ten percent away.

Third, invest the remaining eighty percent very conservatively. Use the PIEC system.  Hire a good, conservative investment manager such as Jyske Global Asset managers or Jyske Private Bank.

Finally be grateful every day, not for the lump of cash, but for all the important things in life.

Thomas Fischer and I have been especially concerned about spurts since the stock market has risen so handily at the end of 2011 into 2012.

When these types of results are obtained, inexperienced investors (and even many pros) begin to ignore the risks.

Having been involved with equity and currency investments for so many years, Thomas and I never forget the downside!

Dollar Dilemma

There are also several reasons to be especially concerned about the US dollar as well as Ecuador real estate and US shares.

There is every reason to believe that the US dollar will fall long term.   Despite all the problems in parts of Europe… the fundamentals for the euro as a whole still look much better than in the USA.

I certainly am shorting the greenback long term myself.

First, the world has become addicted to US spending. Americans consumers are spoiled. They continue to remain wealthy.  First there was the stock market bubble, followed by the US real estate bubble. These artificial wealth creators were spawned by a flood of liquidity that allowed people to borrow more and more.

When the correction came… the government bailed everyone out and create a monumental debt… an almost guaranteed reason for the buck to fall and that debt continues to grow.

Yet everyone wants the strong dollar to continue. The Asians want it to continue fueling their export sectors and to maintain the value of their investments in US dollar bonds.

Oil sellers want it to prop up their investments in the US . Europeans want a strong dollar to keep their exports competitive as well.

Next there are no strong alternative reserve currencies. Other western nations and Japan are riddled with debt as well.

Plus, and this is perhaps the most difficult factor to discern, other governments have created massive debt as well.  So the dollar is less likely to fall versus other currencies… but all currencies will suffer a loss of purchasing power.

There is one more problem about profits made by just holding non dollar assets.

Profits created by a falling US dollar will almost certainly be reduced by rising costs of living. A falling USA dollar almost certainly will increase inflation in the US . So your profits may look great but won’t buy anywhere as much as expected.

The best you may do is keep up, unless you invest and manage your spending well.

This brings us to the final dilemma, the Fed which aims to keep inflation down. They have reached that proverbial rock and the hard spot.  If there is inflation, they need to raise interest rates. This will push US real estate prices down further and perhaps stall the economy again.

Yet a run on the greenback may force rates up anyway.

So beware… of yourself and currencies.  The dollar is most likely to continue its decline. I am betting it will myself but I know it is likely to do so in spurts. How you handle these spurts can make the difference between wealth and poverty!

Diversify in Mexican Peso

Knowing where the US dollar will fall is one thing. Knowing which currencies to hold is another!  This is why I follow Jyske Global Asset Management’s Forex pooled account closely.

Thomas Fischer who heads the management of this account just wrote to me:

Gary, We have taken a new position in our managed FX portfolios. See below.

In order to fully utilize the difference in the interest rates you could also buy a Mexican Government Bond (Bonos) maturing in 2015 yielding approx 5.25%

Should our research partner BCA by right and we see new highs for the MXN against the USD you could pick up FX gains of 15-20% also.

Tuesday 6 March we opened a new position in our Managed FX portfolios.


The Mexican peso (MXN) is cheap by almost 13% against the US dollar (USD) based on key measures of relative prices according to our research partner Bank Credit Analyst (BCA). As the US economy is gaining momentum this will be supportive for the MXN as almost 80% of Mexico’s exports go to the US.

The interest rate differential between the US and Mexico will remain in favor of the MXN as the Federal Reserve Bank (Fed) is committed to keep its policy rate near zero through late 2014.

Position taken:
Short USD/MXN 12.8807
Size 20% of AUM
Stop Loss 13.5500 (-5.20%)
Target 10.9000 (+15.38%)

You can see our existing and closed positions in JGAM’s FX Positions 2012.

As outlined at our February 2012 International Investing & Business seminar we already hold a strong position in the 2015 peso bonds but I added more on this advice.

If you are interested in learning more about this investment Americans can contact Thomas Fischer Sr. VP at JGAM fischer@jgam.com

Other nationalities should contact René Mathys at mathys@jbpb.dk

Investing globally… living in low cost locations like Ecuador but investing outside the US dollar makes a lot of sense at this time.

Join us for our portfolio update at our June Quantum Thinking + International Investment & Business Seminar.

Until next message, may all your spurts be good!

Hear the entire February 2012 International Investing…. business and Quantum Thinking seminar on MP3.


Read Bloomberg article Ecuador February Consumer Prices Rose Most Since September