World Reports July-August 2000


* A TRUE STORY THAT CAN MAKE YOU RICH: Learn three negative economic forces that are building now. See how to cash in when the downturn comes.

* NEXT U.S. FINANCIAL SCANDAL: Don't let a rising U.S. economic problem take you (and your wealth) by surprise. Check this out on page 3.

* JOIN ME IN ZURICH SEPT. 27. GAIN 11 VITAL FINANCIAL CONTACTS. (Page 7.)

Colonial breakfast in the tropics, dining outdoors under ancient ceiling fans that turn in lazy arcs coaxing gentle breezes. Shafts of morning sun warm crisp, white linen while traveller palms sway in soft harmony with grackles, katydids and gentle clinks of silver.

This true story (and warning) begins in Singapore at the Raffles Hotel in an open air restaurant, near the Long Bar. A 25 year old, young and earnest executive is having breakfast there. He has worked his heart out over four years, almost sacrificed his family (ended up divorced) to build a financial future. He thought it worth the stress. The stock market had been rising for decades. Bull oriented investments were all he knew, with shares rising, IPOs coming out every day-almost guaranteeing success. His company, near the top of the hottest industry, had gone public. His stock options, 50,000 shares at a dollar each, were trading for $20. At 25 he was a millionaire!

Yet he was troubled. Business was good and competition was fierce. Employees were jumping job to job, grabbing larger salaries and bigger options as they moved. His hapless company (and competitors) were spending so much on staff and wild advertising they could not profit. "Don't worry. This is a new era," everyone said. "Profits don't matter, just build market share."

So the young man remained loyal and worked hard despite his fears. He pushed down common sense and relied on what everyone said. Then the market collapsed causing a run on his company and the entire industry. His firm was soon starved for operating cash and collapsed. He ended up unemployed with no money and in debt. His stock options were worthless.

Which dot.com did this guy work for you ask? Or was it a software firm? This has to be high tech. Right? Wrong! The hottest industry in 1968 was the overseas mutual fund business led by three huge concerns (IOS, Gramco and USIS). I was that young man starting at age 21 with USIS when they had eight employees. Within four years they had over 2000 staff and at age 25 my stock options were worth one million dollars (a lot of money then). But by 1972 the U.S. stock market (after nearly 20 bull years) had collapsed along with the U.S. dollar and I lost everything. I am sending you this true story and 11 vital financial contacts at my expense, with no obligation because I lost my first fortune, but learned a lesson I want to share. This information can turn today's potential problems into cash.

The economic crash in the early 70s is similar to many of today's financial events. Many factors in dot.com and high tech industries are the same as in mutual funds then. Spotting these similarities can help us see future problems and how to increase profits. I explain next page.

Investors hate to walk away from markets that have not topped. But because we can't tell exactly when major shifts will come, we are at risk. Human nature being what it is, we often refuse to accept a long term drop when it starts. We think, "Let's wait and see if prices will come back". Then it's too late! Overnight 40% – 50% – 60% can be lost, even everything.

I learned this the hard way when I was in Singapore and the U.S. share crash helped cause the dollar to fall. I was trapped with only greenbacks in my pocket (credit cards were not commonly used then). Money exchangers would not even take dollars! I had no way to buy anything or even to pay my hotel bill. I was stranded thousands of miles from home. Yet that painful lesson was a good one because I have never trusted any one share or any one currency since. I have especially watched currency movements. This has paid off. My best profits (along with many of the readers I have served for three decades-this newsletter will reach over 44,000 readers in 82 countries) have come from currency shifts.

Now the U.S. dollar is set to fall again and Wall Street is likely to fall further as well, even though there may be some temporary spurts up. I believe strongly in these facts because economic events I see now also took place 30 years ago. This means we can predict (to a degree) what is ahead. We can see a crash coming. This gives us time to prepare so upcoming economic events will make us richer instead of robbing us.

Rising Danger

I invite you to learn more about gloabl investing because there are three negative economic forces building now. One, is a downturn in the U.S. economic cycle. Second, is the falling stock prices which erode the U.S. dollar and third is rising U.S. bank risks worsened by a weak federally backed-home loan system.

These risks should not be ignored. Recently two of the world's top investors (Warren Buffet and George Soros) began to withdraw from equity markets. They know the same thing I learned thirty years ago, that markets are dramatically affected by cycles. The chart next page, highlights this vital fact and shows the Dow Jones Index and how it has moved in very similar ways prior to, during and after the three major times of social conflict we call WWI, WWII and the time I call WWIII.

When was WWIII? This was the era beginning in 1980 when President Ronald Reagan and Prime Minister Margaret Thatcher fought the "Evil Empire". Though no shooting took place, all the economic aspects of a military buildup (huge defense spending-research into new sciences, etc.) were similar to any other major war.

Since then we have basked in the warmth of a post war boom, just as our parents did after WWII and our grandparents after WWI. This chart shows that we should not be surprised by the current market turmoil and suggests that this turmoil may last ten, fifteen or even more years. We can expect U.S. interest rates to rise, U.S. shares to yield less. It should not be unexpected for money in the bank to earn more than shares.

Yet the downturn in the U.S. economic cycle and falling stock markets are where our problems just begin. Economic history does repeat. The last era of stock market doldrums in the 70s and 80s was accompanied by inflation, high interest rates and a falling U.S. dollar. This cyclical pattern is reinforced now by the comparatively high U.S. interest rate.

There have also been huge, growing, record-breaking U.S. trade deficits over the last several years. This gigantic financial outflow has been offset for years by foreign investments rushing into the hot U.S. stock market. But the current bear on Wall Street is slowing this overseas inflow and will push the greenback down.

Plus U.S. bank risk has grown because of the recent economic boom. When times are good, banks get loose. This looseness has grown so much that the Federal Reserve Bank openly admitted the problem in the May 2000 issue of "Monetary Trends". An article entitled "Are Banks Making Riskier Loans?" points out that bank supervisors have been expressing concern about the risk assumed by U.S banks, especially the large banks with assets over $10 billion. The article concludes by saying, "The increases in problem loan rates at large banks during recent years of rapid economic growth provide emperical support for the concerns expressed by supervisors." The article included two charts, one on the rise of non performing loans, the other on the percentage of loans being charged off as losses. I have reproduced these Federal Reserve charts so can see the problem for yourself.

Bigger Banking Risk

The problem runs deeper than just banks as well. There is a huge distortion that could create a scandal worse than the U.S. Savings and Loan disaster of the early 90s. America's booming housing market has swayed the government backed home loan agencies Fannie Mae and Freddie Mac to take greater and greater risks. U.S. house pricing is notoriously cyclical. The drop in Wall Street can push housing prices down. A recent article in The Economist magazine (April 15-page 79) tells how the agencies have increased lending at a 20% per annum rate. They have 1.4 trillion of debt and at current expansion will bear risk on more than half of U.S. residences within three years. These agencies are listed on Wall Street and should be private companies. Yet they gain benefits from their quasi official state and have $32.00 of debt for only one dollar of capital whereas large banks have $11.50 of debt per dollar of capital. Their implicit government guarantee allows them to borrow cheaply, yet they are making the same mistakes savings and loans made in the 80s. They pay officials and staff way above public and most private sector rates. Even worse they are moving into "sub-prime" lending.

Bigger Risk

Now here is the crunch. A dangerous house of cards has been built because these agencies are exempt from rules which limit banks from holding too much exposure in any one company. Banks can hold all they want of this stuff. Today, one third of total bank capital in the U.S. is this federal agency debt and equity, a highly concentrated risk!

During the 80s housing bust, Fannie Mae became technically insolvent, though regulators allowed it to keep operating. Now the risk of a future default has grown and this risk filters through the entire U.S. financial and banking system and is still growing. The U.S. Treasury expects these agencies to soon issue more debt than the U.S. government. A crash of the agencies can affect the U.S. dollar, U.S. debt, U.S. budget, taxation, U.S. banks and Wall Street in a very negative way.

There is one more concern. The politicians already know this risk. Recently Congressman Richard Baker argued that this debacle may cost the U.S. taxpayer an amount that dwarfs the savings and loan cleanup. This is an election year in which a new President will be in his first term. New Presidents always let the public feel the pain in the first two years of a term hoping that memories will fade by the next election! If a crisis must unfold, the next administration may encourage it to happen in 2001.

The Good News

This seemingly bad news will be good for those who are ready because there really are no good and bad markets. There are only investors who are ready for events up or down and those who are not.

Fortunately we have time to react. We do not have to rush away from U.S. risk, though we should begin to prepare. Hence the importance of learning how to diversify globally.

What to Do?

To get ready move into safer investment positions. Start shifting out of U.S. dollars and the U.S. banking system. Reduce equities and long bonds. Increase holdings in short term (up to three years) bonds and cash. Upgrade the quality of your investments. Use banks in more than one country.

Be smart about the higher risk investments you make. Aim for safety and take only smart risks. Look for high-potential deals that are at low ebbs. Then wait for them to rise. Avoid hot deals that have peaked and are likely to fall.

More Profit Potential

One great way to diversify is through a Multicurrency Sandwich (borrow low-deposit high tactic). This is a perfect time for such investments because they diversify currencies. There are also two added currency distortions now which enhance your chances to profit with low interest loans. The Japanese yen has risen too high and the euro has fallen too low. This creates instability which offers ideal conditions for a multicurrency sandwich in which you borrow the overly strong yen (which has a low interest rate) and redeposit the loan in the overly weak euro (or associated currencies) which has a higher interest rate.

Here is how such a Borrow Low investment can add 46.76% per annum to your earnings. This example shows how to use an existing asset (with 6% yield) worth US$100,000 to borrow US$400,000 of Japanese yen at 1.5% for investment in European and other currency CDs and bonds.

Currency                    Investment                    Return     Yield
US$100K Original Asset earning 6% in AAA investment 6.00% US$6,000
US$ 50K General Electric Polish Zloty Bond AAA 11-2-02 17.06% US$8,530
US$ 50K Hungary Government Florin Bond A1/A 12-1-01 10.30% US$5,150
US$ 50K IFC Slovakian Kroner Bond AAA 10-8-01 8.72% US$4,360
US$ 50K Argentina Gvt Euro Bond B1/B+ 6-02-03 8.28% US$4,140
US$ 50K Brazil Government US$ Bond B1/B 5-11-01 8.39% US$4,195
US$ 50K Mexican Gvt 3 Month Peso Cetes Bond Baa3/BB+ 14.00% US$7,000
US$ 50K Norwegian Gvt NOK Kroner Bond AAA 31-05-01 6.77% US$3,385
US$ 50K Turkish Gvt Lira 3 Month Bond B1/B 32.00% US$16,000
US$400,000 Japanese yen loan interest 1.500% US$-6,000
Total return on initial $100,000 at risk 52.76% US$52,760

This multicurrency portfolio is based on current bonds and interest rates available at the time of this writing and takes advantage of several principles. First, is leverage. 46.76% of the profit earned is pure, extra profit above the 6% that the original asset earns. This works because existing assets are used as collateral. No additional cash or investment is required.

Second, the principle of positive carry means when you borrow money at 1.5% and earn an average return of 13.05% (the average return of the investments before leverage) you have an 11.55% margin of error (the difference between the 13.05% and 1.5%). You have this much protection from fees, defaults and forex losses.

The next advantage is diversification into nine currencies, nine different investments of which more than half have strong A to AAA ratings. This reduces forex and default risk, but because five of the currencies are related to the euro, chances for forex profits are enhanced. The euro has fallen by 22% (as I write this report) since its launch in January 1999. Yet the entire euro economic area was growing at a robust rate of almost 4% in the second half of 1999. Because Europe is running behind the U.S. in the economic cycle, just as the U.S. dollar's fall is overdue, so too is the euro's rise. Plus the dollar's strength has been boosted by a hot U.S. stock market and a much higher interest rate than the euro.

None of this guarantees the euro will rise but these forces increase the likelihood it will. Plus because the loan is in an overvalued yen and Japan still has many economic challenges, there is an added chance the yen will fall versus the U.S. dollar as the dollar falls versus the euro, which means this portfolio has double, forex profit potential which can add profits above and the beyond the 52.76% shown above.

This tactic has worked for me (and my readers have reported great success as well) again and again. For example when I recommended taking yen loans to invest in U.S. dollar and Mexican peso CDs and bonds in the early 90s, profits exceeded 108%. Later when I recommended yen loans at 1.75% invested in Korean won AAA rated bonds paying 15%, the won immediately revalued and made 43% profit in two months (plus 53% on interest differentials or 96% in the year).

In 1998 one of my recommendations was to borrow Japanese yen and invest in Japanese stocks. This idea made triple sense…first, giving global diversification and second entering Japanese markets at decade low prices. (Japan was in its tenth year of recession.) Getting in at this bottom made more sense than staying in super inflated .coms, high tech and U.S. shares that had peaked in Wall Street's highest and longest bubble yet. Third, the risk was reduced because the investment was in yen, the currency borrowed. This tactic quadrupled profits and turned an astounding 1,315.5% gain in 1999 when invested in the Warburg Pincus Japan Small Company Fund (which rose 329.7%).

I lack space to explain the Borrow Low – Deposit High and other diversification tactics here, but feel these issues are so vital at this time I have listed some of my best contacts-banks, financial experts, publications, courses and seminars that can help you increase your knowledge now. In addition I have posted a free report available at my website www.garyascott.com by just going to the site.

Contacts

These contacts and sources of information below can help you diversify globally and organize strategies to profit during the U.S. economic downturn.

Jyske Bank, Private Banking, Teddy Christiansen, Vesterbrogade 9, DK-1780 Copenhagen V, Denmark. Telephone: 45-33-78-00. Fax: 45-33-78-76-33. email: Teddy@jyskebank.dk Jyskebank is Denmark's fourth largest bank and has one of the most advanced Borrow Low – Deposit High programs I have ever seen called Invest Loan. I have used their system for more than a decade because they make the strategy so easy to use. Jyske also offers a complete range of private banking services including multicurrency demand deposits, CDs, bonds, stocks and a full range of mutual funds. There are no taxes charged in Denmark on interest and profits for non Danish accounts.

Jyske Bank Schweiz, Wasserwerkstrasse 12, Postfach CH-8035 Zurich, Switzerland. Tel: 41-1-368-7373. Fax: 41-1-368-7379. email: Jyskebank@jyskebank.ch Jyske offers all its services through this Swiss branch for investors who wish to bank in Switzerland.

ANZ Bank Singapore, Mr. Kevin Ho, 10 Collyer Quay, #17 – 01 Ocean Building, Singapore 049315. Tel: 65-539-6018. emaiil: kho@anz.com I have used ANZ often in Sydney and Guernsey, but include the Singapore branch here to help you increase your Asian exposure. This branch also offers 15 to 1 leverage for the very few who may from time to time want to take short term currency and interest rate speculations. Remember do not leverage more than you can afford to lose! ANZ is one of the largest banks in the world and I have found their services to be excellent.

Monetary Trends, Federal Reserve Bank of St. Louis, PO Box 442, St. Louis, Mo 63166. Tel: 314-444-8808. Web address: www.stls.frb.org The front page article of this periodical, published by the Federal Reserve, provides deep insights into the U.S. banking industry. Its May 2000 article "Are Banks Making Riskier Loans?" offers a warning call.

Ian Dalrymple, Nigel Stephens Counsel Inc., 1200 Sheppard Ave. East, Toronto Ontario, M2K 25S. Telephone: 416-502-9393. Fax: 416-502-9394. email: scottb@nigel.com Nigel Stephens, the only manager I allow to manage a portfolio on a discretionary basis for me, is the largest private portfolio manager in Canada and offers conservative global portfolios kept at one of the world's largest banks in Jersey, Channel Islands.

Larry Grossman, 2706 Alt 19, Suite 114, Palm Harbor, Florida 34683. Telephone: 727-784-4841. Fax: 727-784-6181. email:siamsite@gte.net website: www.siamsite@gte.net Larry is one of the few U.S. investment advisors that can help manage a conservative portfolio with funds held in London, Copenhagen or the Caymans. He also specializes in investing pensions and IRAs abroad.

Steve Rosberg, 1507 NW 82 Avenue Miami, Florida 33126, USA. Tel: 5411-4538 0770 (Argentina). Fax: 520 447 2325 (USA). Email: steve@steverosberg.com website: www.steverosberg.com Steve has been a friend and banker of mine for years and now lives in Buenos Aires where he can provide diversification such as an American Liquidity Fund that is the successor to a Coutts's fund which showed the volatility of a time deposit, even when markets were tanking and people fleeing. This fund yields 8% to 11% and is a cash substitute for a portion of portfolios. Also he offers an Argentina Fixed Income Fund run by TPCG Capital, of Buenos Aires which invests predominantly in Republic and Provincial debt. This offers monthly liquidity, an expected yield of 10% to 16% and low volatility.

Richard MacAulay-Mannyng, 4750 North Central Avenue, #3-J Phoenix, Arizona 85012-1725. Tel: 602-264-3470 email: mannyng@uswest.net Richard, a member of an ancient noble family, has been a friend for decades. He was twenty-two years in the Diplomatic service, having served as a high ranking officer – starting in Iran in the late 70's then to various points in Africa up until his retirement. Now living between the U.S. and Ecuador, he can consult on economic issues and questions about Africa and Ecuador.

The Economist, PO Box 58510, Boulder, Co 80323-8510. Tel: 1-800-338-0631. website: www.economist.com My favorite news magazine offers a far more global perspective than its U.S. counterparts. Though conservative to excess (as I am) the editors and writers offer a deep perspective on global economic issues and the last three pages of each issue are full of useful economic indicators. The April 15, 2000 issue contains an article entitled "Homesick Blues" (page 79) that outlines the U.S. home loan risks. The April 29, 2000 issue contains an article "The Euro's Agony, Europe's Opportunity" (page 45) that will help investors interested in investing in euros.

Borrow Low-Deposit High, International Service Center, Inc., PO Box 157, Lansing N.C. 28643. Fax: 336-384-1577. email: gary@garyascott.com website: www.garyascott.com This 14 lesson correspondence course, which I wrote, is published in London and delivered by publisher Medina Ltd. We have set up a service center here at our farm in North Carolina to expedite shipment of the course from London to anywhere in the world.

This $199 course teaches how to bank in 15 countries including Canada, Austria, Belgium, Bermuda, Cayman Islands, Channel Islands, Denmark, Gibraltar, Hong Kong, Isle of Man, Luxembourg, Monaco, Singapore, Switzerland, England and even the little known banking center of Uruguay.

Written in simple terms, anyone can go about the complex task of setting up his own family's overseas banking structure. It lists hundreds of banks, fees they charge, services they offer, their safety, provides numbers and addresses and gives simple step-by-step procedures on what can and what should not be done with overseas accounts.

The course teaches all the important facts you'll need to know including the laws that relate to banking abroad, the differences between the banking centers, the way to correctly open accounts and how to bank so you can keep your account regardless of what laws in the future say. There are many chapters on how to use the Borrow Low – Deposit High tactic.

This course is so vital I encourage anyone considering an overseas bank account to take it. A valuable taped (2 cassettes) workshop on How to Cash in With Borrow Low – Deposit High is included. I believe so strongly in this course I make the following personal guarantee. Try the course. If it's not everything you need, return it in good condition and I'll send a full refund. Keep the taped workshop for your trouble. Send US$199 or any major credit card to the fax or address above or at our secure web site.

Gary Scott's Special Report. I post regular reports on how to make, keep and enjoy wealth at my website. They are free, just click on. There is also a special update on the Borrow Low-Deposit High tactic which you can get FREE by clicking on the site www.garyascott.com

Until next issue, good investing!

Gary Scott

Gary Scott enjoys a global reputation and began writing and speaking about international investing in 1968 when he moved from the U.S. to Hong Kong. Then he moved to London and began publishing two monthly newsletters on international investing and numerous investment reports. Today his readers exceed 44,000 in 82 countries. He has written and self published 36 books, reports and courses on international investing and business. Thousands have attended his International Investment & Business Courses which he has conducted around the globe.

Enrollment Form

 ____Gary, send your 14 lesson correspondence course Borrow Low - Deposit 
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Until then, good investing,

Gary A. Scott

Gary Scott


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