International Investments in Dollars with Czech Loans


International investments, even in US dollars, can be a sensible way to combat inflation and protect purchasing power. International investments can be leveraged with loans with low interest rates. US dollars offer higher interest rates that may drop.  This could create a short term double international investment opportunity.

This message is part of an international investments series that looks at how the Czech koruna has all the elements of a good currency to borrow to invest in international investments at this time. It has risen to a very high level versus the euro which is the benchmark currency of that region.  The interest rate of the koruna is low and there are many economic fundamentals in the Czech Republic that suggest that it will fall versus the euro.

Others messages in this international investment series have looked at multi-currency portfolios based on a Czech koruna loan invested into a basket of European currencies. 

Another approach is to borrow Czech koruna and invest in US dollar bonds.

Let me begin this by saying that in the long term, I believe the US dollar will fall versus European currencies.  I have almost half my portfolio in US real estate and the other half is totally outside the US dollar.  However I am happy to wait a year or more for the greenback to drop more.  Others may wish to catch a short term dollar rise as many good sources feel the dollar could be strong in 2007.

However there are many analysts who feel the dollar has some strength ahead. For example one of Citibank’s analysts just wrote:

“Conventional wisdom holds that the Dollar may weaken as our major trading partners raise rates making fixed income returns more attractive.  Today, the U.K. surprised the market by raising short-term rates by 25 basis points bringing commentary that money will move away from the U.S. currency toward where rates are moving up.  It is important to remember that the Trade Weighted U.S. Dollar moves with the REAL short-term interest rates relative to our trading partners.  FTN's Chief Economists points out the real rates in the U.S. are higher than our trading partners (including Europe) because inflation is trending higher overseas and lower here.” 

Today's Czech financed multi-currency portfolio assumes that we invest $100,000, borrow $400,000 in Czech koruna and invest $100,000 in each of the bonds below.  Some of these bonds have higher risk borrowers but are considered safe because they are for such a short term.

Currency Bond Yield
USD 12/01/2009 FORD MOTOR CRED 6.62%
USD 22/07/2008 DEUTSCHE TEL FIN 5.10%
USD 15/08/2009 CAPITOL RECORDS 5.68%
USD 11/02/2008 SIEMENS CAP CORP 5.17%
USD 15/09/2011 GMAC 6.37%

This portfolio has an average return of 5.78% less the 3.875 loan cost.  In short this portfolio earns $28,940 a year in interest. The loan cost is $15,500.  The income left is $13,440 or 13.44% return on the original return.

This is midway between the potential return compared in the first portfolio we reviewed on Wednesday and the euro portfolio looked at yesterday.  This is a very high return for short bonds denominated dollars.

This is a well diversified portfolio with some chance of a forex gain as well.  Future messages will look at other types of koruna loan based multi-currency portfolios.  There are of course risks even in this quite safe portfolio.

Jyske Bank’s Lone Olsen recently wrote about some of this risk. She wrote:

“The financial markets set out in 2007 where they left off in 2006. Especially investment in high-interest currencies and funding in low-interest currencies – mainly CHF and JPY – have increased to such an extent that it should give rise to reflection. This development clearly reflects the low risk aversion among the financial market players and so do the historically low volatilities on both foreign exchange rates and not least equities. The disinclination over the past six months to hedge against unexpected events in the financial markets is thus still at play. A possible strengthening of CHF and JPY will not only come as an unpleasant surprise to many players in the financial market, it will also mean a revival of the apparently erstwhile risk aversion. If risk aversion is rekindled again, it will make waves in all markets, including the equity market which perhaps – perhaps not – is waiting for a much-needed correction. Without predicting a final low for either CHF or JPY – or for that matter a top in the equity market – we nevertheless believe that it is time to take appropriate action in the event that risk aversion is rekindled.

“Nothing lasts forever, especially not trends which are uncritically projected into the future. Though it would make life easier if that were so. With the current risk scenario in mind, it is important to remember the wise words of the American economist, Hyman Minsky: ‘The longer the period of stability, the higher the potential risk for even greater instability, when market participants must change their behavior.’”

This could be good news for the koruna multi-currency portfolio if the yen and Swiss franc rise and the koruna does not. Yet the koruna could appreciate even against the US dollar no matter what we think will happen. This would create a capital loss.  Bond values could also fall or lenders could default so never leverage more than you can afford to lose.

You can gain more details from Thomas Fischer at fischer@JBPB.com

Our Borrow Low-Deposit High Multi-Currency Sandwich Educational Service tracks five multi-currency portfolios so we can learn from their rises and falls. The emerging markets portfolio we track is leveraged in Czech koruna. You get a free 16 page report on economic conditions for 2007 when you enroll in our Borrow Low-Deposit High Multi-Currency Sandwich Educational Service. Subscription is $149 for a year. Details are at http://www.garyascott.com/catalog/bldh

You can continue this message and learn more protein Quinoa ideas at garyascott.com/international_investments/165.html

Until next message, good global investing business and fun to you!

Gary

P.S. Join us in the Ecuador sun this winter. Here is a schedule of the courses Merri and I will sponsor and or conduct.

Jan. 22 – 26, Mon.- Fri. Self-Fulfilled: How to Be a Writer & Publisher.

Feb. 20 – 25, Tues.-Sun. Import-Export Course.

Mar. 9 – 15, Fri.-Thurs. Expanded Super Thinking + Spanish.

Mar. 16 -18, Fri.-Sun. International Business and Investing Made EZ.

Mar. 19 – 21, Mon.-Wed. Andes Extension & Real Estate Tour.


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