US Dollar Recap

by | Sep 29, 2013 | Archives

The US dollar recap below may be one of the most important I have shared.   As the sun filtered through golden forest, I padded to our forest room for my meditations and sun salute knowing that when the sun rises tomorrow… this Monday may see a global economy that we have never seen before.

gary scott autumn sunrise

Sunrise at our North Carolina farm.

There is a chance that this Tuesday the US government will begin to shut down.   If this risk has not been erased tomorrow, expect the US dollar to have a bad fall.

Yesterday’s New York Times article “House Republicans Propose Delay of Health Law as Condition to Avoid Government Shutdown” highlights the problem.  Here is an excerpt: With the federal government careening toward its first shutdown in 17 years, House Republicans chose a hard line Saturday in their attack on President Obama’s health care law, setting up a late vote to attach a one-year delay of the health care law to legislation that would keep the government operating past midnight Monday.

The House Republican package would also permanently repeal a tax on medical devices that helps pay for the Affordable Care Act.

The House will also vote on a separate bill to ensure military forces continue to be paid in the event of a government shutdown, an admission that the outcome of the fiscal showdown is all but sealed.

The decision to choose confrontation over compromise or surrender all but ensures that much of the government will close on Tuesday, barring a last-minute decision to pass a short-term spending bill while negotiations continue.

The risks of a US dollar collapse are so great that this last month our website has been devoted to sharing currency alternatives for diversification.  Here is a recap of the most recent alternatives we reviewed.

* August 27, 2013 ***  More Problems Emerge in Multi Currency Markets in Singapore.

There are negative elements for the Singapore dollar at this stage.  One is the overall emerging market downgrade.  Singapore can hardly be called an emerging market but its main business is in emerging markets.

The next negative is the strong US dollar.  Over the last year the greenback has risen versus the Singapore dollar.  

singapore dollar

US dollar rising against Singapore www.finance.yahoo.com chart

This to me creates extra value because the fundamentals for the Singapore dollar are strong and for the US dollar weak.

US GDP Growth last year 1.4%

Singapore GDP Growth last year 3.8%

US current account balance for last year  -$425 billion or -2.7% of GDP

Singapore current account balance for last year  +$49 billion or +19% of GDP

US Budget Balance as % of GDP for last year -4.5%

Singapore Budget Balance as % of GDP for last year +0.7%

US Unemployment  7.4%

Singapore Unemployment  2.1%

US$ Interest Rate 10 year bonds  2.71%

Singapore $ Interest Rate 10 year bonds 2.45%

This is a classic indicator that it is a good time to borrow US dollars and invest in Singapore dollars.

 

September 6, 2013   ***  To improve our lifestyle requires that we consider the US Dollar’s Default.

In 1913 the The Federal Reserve Act created the Federal Reserve Bank to protect the purchasing power of the US dollar… which has since lost about 94% of its purchasing power.  Here is its price compared with gold since 1900.

priced in gold

Dollar chart from pricedingold.com

Some good job.

Under the auspices of the Fed, the dollar lost most of its strength plus allowed interest rates to now fall to nearly zero so capital cannot be lent for enough to keep pace with the drop in purchasing.

However many readers may have forgotten about this risk because the greenback has been strong lately… as it was after the last great recession of the 1980s.

dollar-chart

Chart from Grandfather Economic Report.

Charles Vollum. our friend of many years, who publishes the pricedingold.com website agrees.  He wrote:   The dollar has been exceptionally strong the last year or two, but shows signs of returning to its downward trend. This makes NOW the perfect time to put those over-valued dollars to work in non-dollar investments like precious metals, real estate, foreign currencies, etc.

Readers who have been following this site for the past five years know that Merri and I have veered out of emerging bonds and strongly into US real estate as well as multi currency investments in Singapore dollars, Danish and Norwegian kroner, Mexican peso as well as Canadian and New Zealand dollars.

Another friend of decades… Eric Roseman agrees.  Eric runs ENR Asset Management, a good way for US investors  to diversify abroad and his August Economic Update says:

The ENR Global Currency Sandwich  is an equally-weighted anti-dollar portfolio including the Norwegian krone, Swedish krona, Singapore dollar, New Zealand dollar and gold bullion.

The update told how this portfolio gained 3.23% in July and 2% in August because of a weaker American dollar.

Eric wrote: Gold is the biggest percentage gainer over the past six weeks as it hit a two-month high and benefited from a surge in domestic Chinese gold consumption.

ENR’s Economic Update says:  ENR has added a sixth currency (they consider gold to be a currency), the Mexican Peso.

The Mexican peso ranks as one of the best performing currencies in the emerging markets in 2013 at a time when most emerging currencies are declining and in some cases crashing.

Until recently, the peso was up modestly versus the dollar this year but is now down 1.7%.

Mexico recently elected a young and energetic leader who is pro growth.

Markets welcome the change in economic policy and in August the country announced a bold experiment to grow its falling oil  production.

Mexico is inviting global oil majors, including drilling contractors, to explore for shale deposits and deep water oil.

Effective September 1st the ENR Global Currency Sandwich will hold six positions at an equally weighted 16.7%, down from 20% currently held.

enr asset portfolio

For more information on investing in the Swedish kroner via Jyske Bank US investors contact Thomas Fischer at Thomas@enrasset.com

Non US investors contact Henrik Boellingtoft Henrik.boellingtoft@jbpb.dk

 

* September 19, 2013 *** My first book “Passport to International Profit,” written in the 1970s, explained how to cash in on multi currency value… not as a speculator but through diversification into solid value using a multi currency sandwich in Mexico.

The premise of that book was “live in one country but bank in a second and hold assets in at least a third currency”.  This is not done through forex speculation or trading but is a long term strategy based on interest rates and fundamental currency values.

There are growing socio-economic problems in the USA.

Fortunately technology provides numerous ways to overcome the growing obstacles thrown at the Western lifestyle. One solution is to move abroad to better climes such as Ecuador.

Not everyone can move though and another way is to remain at home but earn in other countries or diversify savings and investments abroad… in places like Mexico…. Singapore and Japan.

The chart below shows the US dollar’s value versus the Mexican peso since 2004.   Let’s look at the problem and then see how multi currency diversification south can help us overcome problems north.

Mexican peso data

US dollar vs. peso multi currency chart. Click on image to enlarge or go to www.finance.yahoo.com

Why should we think the US should be immune to this?  This is why the theme of the  first book I ever wrote… “Passport to International Profit” was “live in one country but bank in a second and invest in a currency of at least a third country”.

Understanding multi currency investing is very timely and important.

There are three factors that suggest there will be another significant US dollar fall.   If the dollar weakens… everything Americans buy abroad… which is a lot… will cost more.  Interest rates may rise and business may suffer.

At the bottom of the 2000 recession when investors were flocking to the US dollar,  I invested in Mexican Fixed Rate  MXN 780.000 with an  8% coupon. They mature December 2015 and are still in my portfolio.

I purchased at a premium of 103 ($10,000 of these bonds cost $10,300) so my yield has been 7.30% per annum for the past four years… plus as you’ll see I have enjoyed a forex profit.

Mexican peso data

Dollar peso multi currency chart from www.finance.yahoo.com

Click on image to enlarge.

When I invested in these bonds, each dollar I invested purchased 13.6 pesos.  That means that each peso was worth 7.35 cents.

I would like to say I was a hot shot and made the investment in February 2009 when the peso had drop temporarily to 15.3 pesos per dollar.  I did not. I do not ever try to capture the absolute tops and bottoms…for a reason.

This is multi currency diversification, not multi currency speculation.

I invested in these bonds when the peso was a bit stronger… as mentioned 13.6 pesos per dollar.  I immediately made a nice forex profit as the dollar fell from 13.6 pesos per dollar to 11.3 pesos per dollar.  That was a 15.4% forex profit in nine months.  I did not take that profit though.

This is multi currency diversification, not multi currency trading.

I was not looking for a short term speculation but a long term profit.  The US dollar strengthened again.  Today each US dollar buys about 12.9 pesos. This means that each peso is worth 7.75 cents.  In other words every 10,000 peso bond I bought was worth $735 at purchase.   Today each 10,000 pesos is worth $775 and the dollar is trading down versus the peso.

I am still earning 7.50% per annum and in 2015, I’ll get my money back with either a forex profit or loss.  If the peso has a strong run up in the next year or so, I may lock in the forex profit with a forex contract.

Simply put, the purchasing power of those bonds has increased, plus every year I received 7.5% income.

Let’s look at what this means in terms of total return.

From 2009 till 2015, I get $750 for every $10,000 I invested.  In simple return I earn 45% and then I get my money back.

Compare that to having invested in a Dow Jones Industrial Index ETF.  Right now had I invested in October 2009 my return would be about 35%.  The Dow has to rise 10% more to match the peso bond return.  Of course if the peso rises the Dow would have to climb more to provide an equal return.

Why the peso still makes sense.

Here are three charts from the Economist magazine.

Mexican peso data

Mexican peso data

Click on the image to enlarge or go to the Economist Statistics by clicking here.

Compare the fundamentals of the US versus Mexico. The first important statistic is the interest rate, 7.75% for Mexico and  2.92% for the US.  Budget deficit for Mexico  is -1.8% of GDP.  The US deficit is -4%.  The US current account is -2.7% of GDP. Mexico’s is about half that at -1.4%.  These fundamentals suggest that the peso with strengthen  versus the US dollar.

This next chart shows that Mexico has strong foreign reserves.

Mexican peso data

Click on the chart to enlarge or go to the Economist chart by clicking here.

Finally this chart shows that the Mexican peso is the 8th most traded currency in the world so there is plenty of liquidity.

Mexican peso data

Click on image to enlarge or go to the Economist website here

Jyske Bank’s website says:  We recommend investors to BUY MBONO 9.5% 2014 as we find that the bond and the currency offer reasonable return potential. We estimate that there is basis for a strengthening of the currency. However, a number of factors may weaken the currency in the short term. Sustained moderate growth in Mexico and the US and the Fed’s initiated scaling down of its purchase programme involves a risk of affecting the currency adversely.

It is important to keep an eye on particularly two issues with respect to our expectations of a strengthening of MXN over the next 12 months. Firstly, that energy and fiscal policy reforms will be implemented and, secondly, that growth will improve in H2. We expect that both of these factors will materialise. There is still potential of a number of upgrades of Mexico’s credit rating, and Mexico’s proximity to the US will be beneficial.

This bond yields about 3.5% per annum at this time.

How to Leverage

There is one more step that investors with a more speculative nature can take.  Borrow US dollars in the 3% range  and invest in pesos in the 6% range.  The idea behind this Borrow Low – Deposit High Strategy is to take advantage of the interest differential called the “positive carry”.  This creates additional income and potential for increased forex profit at the cost of risk from forex loss.

The bond that matures in 2104 does not pay high enough interest now, but longer term bonds do such as the 8% Mexican Bonos maturing 07-12-2023  is rated Baa1 A- and selling at 114.34 yields 6.11%. You borrow for 3% and invest for 6.11%.

EZ Peso

An easy way to invest in the peso is with the ETF iShares MSCI Mexico Index Fund (EWW) launched in 1996 on the New York Stock Exchange. This is an easy way to invest via the Mexican Stock Market into pesos, but of course has the normal market risks.

The iShares MSCI Mexico Index Fund seeks to provide investment results generally equivalent to publicly traded securities in the Mexican market, as measured by the MSCI Mexico Index.

You can learn more about investing in a diversified portfolio of ETF from Morgan Hatfield at mhatfield@ruggiewealth.com .

 

* September 23, 2013 *** Serene Currency in New Zealand.

It is hard to remain calm when one’s currency is losing its purchasing power by the day and the dollar fell last week to its lowest level since February.  (Markets were surprised by the Federal Reserve’s decision to continue communications on keeping monthly bond purchases unabated depending on the strength of the economy.)

The U.S. currency fell against most of the 16 highest traded currencies.  This was the third straight week of dollar weakening.  Now it must withstand a test of confidence as Congress battles over the debt ceiling and budget.

One way to regain calm is to hold a basket of fundamentally stronger currencies that pay higher interest.

Recent posts have looked at the ENR Global Currency Sandwich  as an equally-weighted anti-dollar portfolio including the Norwegian krone, Swedish krona, Singapore dollar, New Zealand dollar and gold bullion.

Here we review the New Zealand dollar

finance.yahoo.com NZ dollar Chart

NZ – US dollar Chart from www.finance.yahoo.com

The New Zealand dollar has risen 23% versus the US dollar since 2009. Click on chart to enlarge.

The chart above and this one below show that the Kiwi has risen steadily after the 2009 fear based dollar boost and it is in a much longer term trend as well.

finance.yahoo.com NZ dollar Chart

The New Zealand dollar is a good place to diversify some of your investment and savings for the next year or so when the US dollar is at risk of a large downwards slide.

Compare the fundamentals of the US versus New Zealand. The first important statistic is the interest rate, 2.62% for New Zealand and  0.25% for the US.  Budget deficit for New Zealand  is -2.1% of GDP.  The US deficit is -4%.  These fundamentals suggest that the Kiwi will maintain strength versus the US dollar and pay a higher return.

Two AAA rated short term New Zealand bonds:

EUROPEAN INVT BK   6.500  maturing 10-09-2014  AAA  selling at 103  yields appx. 3.27% per annum.

KFW   6.375  maturing 17-02-2015  rated AAA  selling at 104 yields appx. 3.25% per annum

 

* September 24, 2013 ***  The Power of Social Currencies in Sweden.

This message looks at ways to earn and invest globally because Congress and the President are now one week from pulling a trigger that could cause the US dollar to fall. This creates a great opportunity.

Sweden

See below how to gain safety and opportunity here in a very social country and a 59% gain in perhaps the world safest currency. Photo from carefreetraveller.com

The US dollar has been falling for the past 40 years and then became irrationally strong during the 2007 recession.  The debt ceiling battle could cause an equally irrational collapse of the greenback.  If the dollar over corrects, those who earn and invest globally will have a great advantage.

More Dollar Danger Signs

The US dollar is Ecuador’s currency. If the dollar falls… all imported goods will cost more in Ecuador and we can see the future of the greenback in the here and now.  There are many danger signs.. weak fundamentals, low interest rates, rising US deficits and debt, plus a risk of the first default ever.

Stronger Dollar Danger Sign

Future currency positions are a leading indicator of  a currency’s future strength.

The Friday Sept. 20, 2013 Reuter’s article “Net US dollar longs fall to lowest level in 7 months – CFTC,” says:  Currency speculators cut by more than half their bullish bets on the U.S. dollar to the lowest level in seven months, according to data from the Commodity Futures Trading Commission released on Friday.

This is one more signal that the greenback is at great risk of tumbling now.

One way to protect against the dollar’s weakening is to invest in a basket of fundamentally stronger currencies that pay higher interest.

swedih korner cahrt www.finance.yahoo

US dollar dropping over 40% versus the Swedish kroner Chart from www.finance.yahoo.com

Click on chart to enlarge and see how the US dollar has dropped over 40% versus the Swedish kroner in the past ten years.

The chart shows how the kroner has risen steadily after the 2009 fear based dollar boost and it is in a much longer term upwards trend as well.

Sweden has been the safe haven since the 2007 recession.  The AAA-rated Swedish bonds are the default safest in the world for the foreseeable future.

The Swedish government bond market is the world’s safest when looking at sovereign credit risk factors such as solvency risk, external dependency and governance.

Sweden’s debt-to-GDP ratio stands below 40%.   This is one of the lowest in the world.  Sweden is a high-income country that has government surpluses.

Sweden’s current account surpluses are also very strong at over 7% of total GDP.

Sweden is in the EC but has its own currency so is not pulled down by Greece, Portugal, Spain and Italy.

The Swedish kroner is a good place to diversify some of your investment and savings for the next year or so when the US dollar is at risk of a large downwards slide.

Compare the fundamentals of the US versus Swedish kroner. The dollar is slightly stronger in one important fundamental, the interest rate, 2.92% for 10 year bonds versus 2.74% for Sweden.  Budget deficit however for Sweden is -1.4% of GDP.  The US deficit is -4%.  The current account for Sweden is +7.1% of the GDP compared t -2.7% for the US. These fundamentals suggest that the Swedish kroner will maintain strength versus the US dollar.

One ETF that invests only in the Swedish kroner is the iShares MSCI Sweden Index ETF (symbol EWD).

finance.yahoo swedish etf chart

This chart from www.finance.yahoo.com shows that the iShares MSCI Sweden Index ETF has risen 59% in the past two years compared to 43% for the Dow Jones Industrial Index and 42% for the Morgan Stanley MSCI World Index.

For more information on investing in the Swedish kroner via Jyske Bank US investors contact Thomas Fischer at Thomas@enrasset.com

Non US investors contact Henrik Boellingtoft Henrik.boellingtoft@jbpb.dk

 

* September 27, 2013 *** Adventures in Currency in Norway.

We can apply this adventure philosophy to currencies also.

We can see that the US dollar (as we have predicted in recent weeks) is falling.  The greenback has been fundamentally weak.  Dollar strength over the past five years has come from fear based emotion. Investors feared other currencies.  Now the debt ceiling argument in Washington, DC is counteracting that emotion with fear of the dollar which allows the fundamentals to take hold.

Yesterday’s Reuters article “Dollar weakens as U.S. budget woes weigh” by Gertrude Chavez-Dreyfuss conforms the warnings we have been sending in these posts. Here is an excerpt (bolds are mine):

The dollar fell on Wednesday after four sessions of gains, weighed down by worries about gridlock in Washington on the U.S. budget that could lead to a government shutdown next week.  U.S. congressional officials must reach a budget deal by Monday that would allow the government to keep running, but negotiations have been contentious so far.

“The risk of a government shutdown next week is certainly being felt by the market. We are in the initial stages and right now, the dollar is getting hit,” said Greg Moore, currency strategist at TD Securities in Toronto.

Recent posts have looked at the ENR Global Currency Sandwich  as an equally-weighted anti-dollar portfolio including the Norwegian krone, Swedish krona, Singapore dollar, New Zealand dollar and gold bullion.

The currency we review here is the Norwegian krone.

NOK chart

Click on image to enlarge or click here  www.finance.yahoo.com to see how the Norwegian krone has risen over 55% versus the US dollar in the past ten years.

The chart also shows how the kroner has weakened recently as the Norwegian government has tried to lower the NOK.

Compare the fundamentals of the US versus Norwegian krone. The dollar interest rate is slightly lower  2.92% for 10 year bonds versus 3.27% for Norway Sweden.  Budget deficit for Norway does not exist.  The Norwegian government has a budget surplus of 13% of GDP.  The US deficit is -4%.  The current account for Sweden is a whopping +13.2% of the GDP compared to -2.7% for the US. These fundamentals suggest that the Norwegian krone will maintain strength versus the US dollar.

There is a positive kicker for the krone.

The Norwegian krone has become a safe-haven currency during Europe’s debt crisis.  The budget surplus of  this triple-A-rated country attracts investors seeking refuge from the U.S. debt crises.  This has hurt Norwegian businesses and the Norwegian government has been taking steps to weaken the krone.

Any time a government tries to fight currency fundamentals… an artificial buildup is like to create a blockage  that creates profit opportunity when it corrects.  In this case the krone may weaken versus the dollar short term which gives dollar investors more time to accumulate krone.

One ETF that invests only in the Norwegian kroner is the The Global X FTSE Norway 30 ETF (symbol NORW. This ETF is traded on on the New York Stock Exchange and tracks an index of Norwegian stocks.

This chart from www.finance.yahoo.com shows that the Global X FTSE Norway 30 ETF has risen over 10% in the past two years compared to 43% for the Dow Jones Industrial Index and 42% for the Morgan Stanley MSCI World Index.

For more information on investing in the Swedish kroner via Jyske Bank US investors contact Thomas Fischer at Thomas@enrasset.com

Non US investors contact Henrik Boellingtoft Henrik.boellingtoft@jbpb.dk

 

* July 1, 2012 *** Beyond Diversification  in Japan – See how readers gained over 40% in just six months by borrowing Japanese yen to invest in the Dow.

 

There are two ways we can help you spot currency breakouts.

#1: We review currencies at our International Investment & Business Seminars. See details of the October 4-5-6 and February 14-15-16 seminars here.

#2: Learn about how to diversify and leverage multi currency investments in our report “Borrow ow Deposit High”. Details are below.

Gary

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New York Times Friday Sept. 27  House G.O.P. Raises Stakes in Debt-Ceiling Fight by Jonathan Weisman

New York Times Sat Sept. 28  House G.O.P. to Plan Next Step as Budget Clock Runs Down