Multi Currency Warning


The rising US dollar and Japanese yen remind me of a 1970s multi currency warning.

Last Friday, the New York Times said: “Fear that the financial crisis is infecting once-healthy economies created another white-knuckle day for investors Friday, causing stocks to tumble from Tokyo to New York.

Uncertainty also roiled currency markets as investors continued to turn to the security of the United States dollar and the Japanese yen and drove down currencies of developing countries like Brazil, Ukraine and South Korea and even of developed countries like Britain.”

This article misses an important point. The dollar and yen are not rising just because they are viewed as secure currencies. They are not in my opinion secure multi currency investments now. Japan and the US are two of the largest debtors in the world. Their currencies must be suspect.

Over the past twenty years, more and more investors have been borrowing low and depositing high. I wrote one of the early books about this multi currency investing tactic in the 1980s. Subscribers to my multi currency course still study an updated version of this text.

Investors and institutions everywhere borrowed the US dollar, Japanese yen and Swiss francs…billions in loans at low interest rates. They then converted the loans and invested into currencies with high yields like the Brazilian real, Ukraine hryvnia, South Korea won and even the British pound.

Now as the high yield investments are tumbling, due to global economic panic, these investors have to sell their investments and convert the Brazilian real, Ukraine hryvnia, South Korea won, British pound and other currencies to buy dollars, yen and Swiss francs so they can pay off their loans.

A clue that reinforces this thought is seen in this chart from finance.yahoo. See how the pound has fallen verses Swiss franc.

Pound Chf chart

In theory the the Swiss franc should be linked to the euro and the euro to the pound.

Yet a year ago a Swiss franc bought 42 British pence. Now it buys 53 pence.

Even more telling is how the Swiss franc has risen sharply versus the euro itself. The strong Swiss franc puts Swiss industry at a distinct disadvantage at exactly the wrong time. The Swiss will not like this strong franc but I suspect they cannot stop it because the franc purchases are being made to pay off swiss franc loans…not to deposit in francs.

euro SFR chart

This buying of the dollar yen and franc is a forced and panicked move that may be like a crowded, dark theater. Someone yells, “FIRE.” Everyone stampedes for the door. The crowd gets there all at the same time and realizes they have run to the wrong door!

A reverse rush could create a chaos you should avoid….so be careful if you choose to bet on the greenback, yen or franc.

Rethink selling if you are holding emerging currencies without loans or have loans but do not have to pay them off.

An economic downside correction is unfolding yes. The end of the world…no. The end of commerce as we know it…no. The end of fundamentals as we know them…no.

Here are seven fundamentals that our multi currency studies over the past years have found are worth investing in again and again. I doubt that they have flown the coop.

Economic fundamental #1: Globalization is good for everyone and is here to stay. Bet against any globalization block. Bet for globalization.

Economic fundamental #2: Government involvement in global economics and business may dampen the sharper acceleration of the natural financial rhythm but eventually makes the corrections worse.

Economic fundamental #3: Mature economies cannot grow much faster than 3% per annum.

Economic fundamental #4: Emerging economies grow much faster than 3% per annum.

Economic fundamental #5: Emerging stock markets fall faster and further than major markets during times of panic.

Economic fundamental #6: Emerging stock markets rise sooner, faster and further than major markets after times of panic.

Economic Fundamental #7: The most guaranteed way to lose purchasing power in the long term is hold long term, low yielding…supposedly safe… government bonds.

If these fundamentals are still correct, than the current rush to the dollar and yen create a monumental opportunity! There will be a time to invest in the very currencies that are tumbling now. One way to do this will be in emerging bonds. This site recently examined some ideas about multi currency seasoned bonds.

Emerging equities also will make sense as will emerging currency certificates of deposit, major market equities and some discounted major market bonds.

Now, however, is probably not the time to act…yet.

I have been looking at seasoned bonds with my investment advisor at Jyske Global Asset Management.

He wrote: “Dear Gary, I recommend that we hold back before investing anything. The market spreads are simply too high right now. If we buy bonds today you will be down 10-20% when the trade is settled, as the bid-offer spread currently are at 10-15 points on bonds trading in the 40-50 area. So hold back until we see where this ends. I hope that you agree!!!!!!! Kind regards”

I did agree and had come to the same conclusion to hold off buying for now. I remember in the 1970s, when gold was selling at $860 an ounce and silver $48 an ounce. The spread on silver was $10 an ounce! You could buy for $48 but only sell for $38.

High spreads like this mean that even the pros are totally uncertain. My account exec is right. The cost of buying is way too high. If the traders are this uncertain, then I have no business trying to outsmart such chaos.

However the worse this confusion is now…the better it will be shortly. Be ready to see some real multi currency bargains.

You can get information about multi currency accounts from Jyske Bank and

Jyske Global Asset managers

US investors contact Thomas Fischer at fischer@jgam.com

Non US investors contact Rene Mathys at mathys@jbpb.dk

Until next message good global investing!

Gar

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