Three Multi Currency Solutions


Three multi currency solutions to inflation are below.

Inflation will certainly come from the current global economic bailout.

Every multi currency investor needs to mold a personal multi currency solution to meet their specific needs. Whatever individual tactic is used, it will normally work better if it includes multi currency diversification based on a search for multi currency value.

Yesterday’s message Multi Currency Warning looked at seven economic fundamentals that we can relay on during this downwards correction and stated:

The current rush to the US dollar and yen create a monumental opportunity! There will be a time to invest in the very currencies that are tumbling now.

Why am I sure of inflation?

One of the seven multi currency fundamentals (#2) is that: Government involvement in global economics and business may dampen the sharper acceleration of the natural financial rhythm but eventually makes the corrections worse.

A recent article in USA Today covering Alan Greenspan’s testimony to the US Congress said: that the “Former Federal Reserve chairman Alan Greenspan told angry lawmakers” about his shock.

I wonder? We these angry OR frightened lawmakers? I suspect that a few weeks from election day the better word would have been SCARED.

Fear destroys reason if one is not trained to deal with it. Most of Western society is not trained to deal with fear. William James aptly put it this way.

“In civilized life it has at last become possible for large numbers of people to pass from the cradle to the grave without ever having had a pang of genuine fear. Many of us need an attack of mental disease to teach us the meaning of the word.”

Since politicians are also human beings they too lose reason when they give way to fear. They seem to definitely get a mental disease!

For example what is the cause of today’s economic crisis? Too much debt.

Yet yesterday’s BBC article entitled “Brown defending higher borrowing” says:

“Gordon Brown is defending his plans to increase government borrowing in order to tackle the economic downturn in a speech in London.

The prime minister is telling business leaders it is the right time to boost demand with government spending.

Opposition parties have attacked the current levels of debt, saying Britain is inadequately prepared for recession.

Leading economists have also criticised the government over its spending plans and called for tax cuts instead.

In a letter to a Sunday newspaper, a number of economists warned against an expansion of government spending as a way of stimulating the economy.

They described a focus on public works projects and higher spending as “misguided and discredited”.

The latest quarterly public debt figures hit a record £37.6 billion – higher than the whole of the previous year. Yet Brown said: The responsible course is to borrow now to maintain growth and output.”

I have little doubt that England’s debt will grow…as will America’s, and Europe’s and Japan’s because of…fear.

The borrowed money will be spent by government’s to, as Brown says, “kick start the economy”. The economy will recover but if the fundamental about government inefficiency remans true, it will not recover as it could and should.

The price of this borrowing will be inflation…the loss of purchasing power.

Now here is where frightened politics and politicians get involved.

The same BBC article also said:

“Over the weekend, Mr Brown paid a brief visit to Glenrothes in Scotland as part of a by-election campaign and made predictions food and fuel bills would begin to come down next year.

He also hinted falling oil prices could lead to further co-ordinated interest rate cuts.

“Now inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the Bank of England, round the world to make a decision about interest rates,” he told the BBC.”

Brown is probably wrong. Inflation will not come down…which is okay for those who know what to do.

Do not be misled. Chances are that Western governments will borrow more than they should. Inflation will follow.

If this belief is correct then the best investments will be shares, commodities and real estate in a diversified basket of strong currencies.

What will make a currency strong?

Fundamentals of currency value (purchasing power potential) include:

A: Interest rate.
B: Inflation rate a three levels – labor – wholesale and consumer prices.
C: Trade balance.
D: Current account.
E: Debt as % of GDP.
F: Debt as % of government income and spending.
G: Amount and velocity of direction in government deficit.

Ideally we want to invest in currencies of countries that offer an interest rate above the local inflation rate, that have a positive trade balance, current account, falling government debt and deficit versus government income.

This combination of qualities in a currency are as rare as hen’s teeth and will become even harder to find during and after this downturn.

As the Western economies stall, their imports will slow. This will slow growth in emerging economies. Governments everywhere will be pressed. Fear will grow. Reason will diminish and government borrowing will increase everywhere.

Inflation will grow. Multi currency investing will become increasingly a relative process….looking for the currencies that are least bad.

Here are the three multi currency solutions to inflation.

#1: Measure all currencies relative to one another using the seven value fundamentals above.

Short term considerations should weight the fundamentals in the order that they are listed above. Interest rate increases will have the quickest affect…then interest ate above inflation…then trade balance etc.

#2: Expect inflation in all the currencies. This suggests that investors increase the weight towards the best inflation fighting investments in the currencies chosen, stocks, commodities and real estate.

The alternative, if you are a stock investor, is to use your value system and just make the currency of the share one of the values you look for.

For example when I consider investing in a share, its currency of denomination is only one of a number of answers I seek. I ask:

1: Are the shares traded in a good value market?
#2: Does the share trade at fair Price to Earnings and Price to Cash Flow ratios?
#3: Does the share pay a good value dividend?
#4: Do the share have a good value relative to their previous price?
#5: Does the company have rising earnings?
#6: Has the share price been rising?
#7: Is the company’s management good and is their product or service line in a wave of the future?

#8: Is the share denominated in a strong currency?

I am searching for good value shares first and currency value is just one portion of the formula.

#3: Keep you diversification related to your liquidity…especially if you borrow.

About 15 years ago I began borrowing yen when they were 111 yen per dollar. Over the next few years the yen rose to 79 yen per dollar. My forex losses were huge…on paper.

Fortunately paper losses and profits do not count.

I believed in the fundamentals that suggested the yen was overvalued. I held on and finally cleared my loan position when the yen plunged nearly 100% to 146 yen per dollar. I lucked out and exited right at the low. Honestly when I sold, I had no clue…just gut instinct that comes from experience and a belief that the yen was undervalued.

The yen returned to the 110 range. This process took years. During that entire time I had yen loans at 3% and below…always earning higher. The reason I was able to enjoy this and hold on fr so on was that I had not over leveraged.

I never borrowed so much that the paper losses made me lose my nerve or tripped my bankers collateral requirements. I never had to close my position until I desired.

Much of the world, I believe, is in a state of fear. Frightened politicians are making bad fiscal errors. Frightened investors are making unreasonable investments that are creating enormous opportunity and value.

Hold on. Stay reasonable. Great profits will come.

You can get more 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

Gary

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