Multi Currency Portfolio Update 2008 Lessons


Multi Currency Portfolio Update 2008 immediately reminds of three great lessons in today’s review of real global markets as they unfold.

First let’s look one more time at the last review of our 2007 portfolios (sent to you November 1) before we look at the first review of the 2008 portfolios.

Here is the one year performance of the five portfolios that Jyske Bank created with our direction and that we have tracked for educational purposes though 2007 beginning November 1, 2006.

Portfolios 2007 July 20 Aug 31 Sept 9 Sept 28 Oct 5 Oct 31
Swiss Samba 15.19% 26.42% 30.86% 44.40% 47.94% 53.32%
Emerging Market 30.50% 58.18% 67.95% 103.22% 105.22% 122.62%
Dollar Short 9.14% 20.29% 23.16% 42.71% 42.06% 48.19%
Dollar Neutral 13.56% 22.33% 24.22% 34.74% 37.19% 38.67%
Green 110.93% 155.84% 170.22% 220.22% 236.47% 266.30%

We looked at this one more time because the 2008 portfolios are reacting almost exactly opposite of 2007.

In 2007 all five portfolios shot straight up from the gate. The performance in just the first two months would have been respectable for an entire year!

As you will see below this year all the portfolios fell out of the gate.  Some have dropped like a stone!

Thomas Fischer wrote:

Hi Gary , Attached is the first 2008 up-date.  All our portfolios are suffering the “sub-prime blues” as markets world-wide are plummeting. The loss has been further increased by the risk-aversion and thus liquidation of the carry trade which has led to an increase in the funding currencies the Japanese yen and the Swiss franc. It is still early days and hopefully the markets will stabilize when (hopefully) the bad loans have been flushed out and declared. We might have to wait for the full year results of the banks before we see the full, true picture but I guess now is the time to remember Warren Buffets words ” be afraid when the market is greedy and greedy when the market is afraid”

Thomas

Here is the first two weeks performance of the 2008 portfolios.

Portfolios 2008                     Nov 16

Infrastructure                      -16.46%

Emerging Market                 -13.33%

Danish Health                      -13.32%

Green                                   -10.86%

$ Short Non Leveraged       –   5.26%

Blue Chip                            –   2.78%

Here is the first lesson we gain by noting what Thomas wrote above about borrowed currencies rising during times of risk aversion.

Lesson #1: When you are leveraged with popular, low cost currencies, the leverage hurts worse in times of panic because lots of borrowers bail out at once.

The second lesson comes from a question that a Multi Currency Subscriber just asked. This subscriber wrote:

“Dear Gary, We are subscribers to your portfolio educational services & attendees to your Ecuador business made easy event in 2005. I was looking over your new portfolios for 2008. I was surprised that they did not contain a bond portfolio, as in years past. Why quit on bonds now and go with only equities? Stock markets around the world are coming off all time highs? Best Regards,”

My reply reflects an important lesson we have learned over the past two years of our study in the real markets.

Here is what I replied:

“This is good question about bonds.  In my Nov. 12 message I wrote about two of the six portfolios we are tracking:

“Blue Chip Portfolio. One prominent feature we saw in the portfolios we tracked these last two years has been the panics. The world is not convinced yet that emerging markets are the places to go. Plus emerging markets are highly leveraged, especially with Japanese yen loans. One lesson we learned from the panics of the last two years is that equities recovered the best after each panic.  There are many scenarios we can imagine that will cause a 2008 panic including further fallout from the sub prime loan disaster, a slowing US economy and over $100 a barrel oil.  Last go round investors fled to US dollar bonds. As noted above the flow to US dollars last July could have been the last time in our lives, that we will see a rush for safety into the US dollar. If there is a 2008 panic we are thinking that investors will flee into Blue Chip, mainly non US dollar, equities…and this portfolio will do well.”

“What we have seen in the last two years is that equities recovered much faster than bonds after the panics. From this fact and the realization that bond returns may not be sufficient to make up for a falling US dollar, we selected this portfolio rather than one in bonds.”

Here is a review of asset class performance  over 95 years.  The assets compared are Equities, Housing, Bonds, T- Bills and Silver. Over the entire 95 years the returns on these asset classes was:

Equities: 11.9% per annum
Housing:   6.7% per annum
Bonds:      4.8% per annum
T-Bills:      4.6% per annum
Silver:       4.2% per annum

So long term equities were the best investment to hold. Hard assets the worst.

However the results were very different when the economy was split and viewed in four different conditions, Stable. Moderate Inflation, Rapid Inflation and Deflation.

During “Stable Times” the returns of the asset classes were:

Equities:      14.0%
Housing:        5.9%
Bonds:           5.3%
T-Bills:           3.1%
Silver:            0.7%

In “Moderate Inflation” this barely changed to:

Equities:     14.0%
Housing:       5.9%
Bonds:          5.0%
T-Bills:         4.6%
Silver:           0.7%

“Rapid Inflation” brought huge changes:

Equities:         9.6%
Housing:         7.0%
Bonds:            3.6%
T-Bills:            5.0%
Silver:           17.9%

“Deflation” brought even greater change:

Equities:          -6.2%
Housing:          -0.5%
Bonds:              4.8%
T-Bills:              4.6%
Silver:            -15.3%

Our view in constructing these portfolios for the year ahead are that we are more likely to see rapid inflation rather than deflation.  This means that bonds are the worst possible investment to hold.

I also wrote to the “why not bonds” subscriber:

We also view the chances of a falling US dollar when we constructed the dollar short portfolio.

“Dollar Short Portfolio.  Since I have closed all my loans personally, Jyske accepted my suggestion to try one portfolio without leverage.  This is the one we chose. We reduced leverage but dropped bonds and invested in a spread of global equities instead.  This is not really a dollar short portfolio…rather a portfolio of non US dollar equities that gives a broad distribution around the world that should do well if the greenback weakens more.”

“I am a bond person like you as you can see by looking at my portfolio which I have reviewed twice in the last couple of weeks.

“Please see http://www.garyascott.com/2007/11/18/1879.html

and http://www.garyascott.com/2007/10/26/1852.html

“I am very aware that bonds may now be the worst place to be…now…especially dollar bonds.  The rush to bonds may push down yields exactly as US dollar related currency units lose purchasing power. This means I’ll be using down turns that merge with my bond maturities in the market to reduce bonds and increase equities.”

So lesson two is that times of turmoil are good times to buy equities.

Finally we see lesson three by observing that the Blue Chip and Dollar Short Portfolios performed the best in this first short performance period.  Lesson three is be careful of leverage and the US dollar.

Until next message, good global investing!

Gary

See attached file.

Join us for our next International Investing Course. Our course fee is rising for our 2008 courses. Since we have had only one price increase in over 20 years we are forced to make a substantial increase now.

We are accepting early enrollments for our 2008 courses at the 2007 price for about two more weeks so if you sign up now, you’ll save.

Mar 7-9 International Investing and Business Made EZ Ecuador.

The current fee of $549 will rise to $799 and for two from $749 up to $999.

IBEZ plus the Mar 10 -11 Imbabura Real Estate Tour.

The current fee of $899 will rise to $ 1,199 and for two from $1,199 up to $1,599.

IBEZ plus the March 10 -11 Imbabura and March 12 -14 Coastal Real Estate Tours .

The current fee $1,199 will rise to $1,499 and for two from $1,599 up to $1,999.

The current prices will last only for early enrollment in November. Enroll and save at

http://www.garyascott.com/catalog/international-business-made-ez-ecuador


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