Inflation or Deflation


Recent messages have looked at the struggle between inflation and deflation because few economic fundamentals will have as much impact on how you should diversify your multi currency portfolio.

The key to understanding these economics is a clear view of how much the global economy shrinks (deflation) versus how much governments borrow to stop that shrinkage (inflationary).

In the US for example it is looking like a dead heat if the US economy shrinks 15%.  15% of the 14 trillion is a 2.1 trillion drawback.

If the US government borrows and spends 2 trillion (it does not have) there is a balance…about too trillion each for inflation and deflation.

A December 2008 New York Times article entitled “As Outlook Dims, Obama Expands Recovery Plans by  Jackie Calmes says: Faced with worsening forecasts for the economy, President-elect Barack Obama is expanding his economic recovery plan and will seek to create or save 3 million jobs in the next two years, up from a goal of 2.5 million jobs set just last month, several advisers to Mr. Obama said Saturday.

Even Mr. Obama’s more ambitious goal would not fully offset as many as 4 million jobs that some economists are projecting might be lost in the coming year, according to the information he received from advisers in the past week. That job loss would be double the total this year and could push the nation’s unemployment rate past 9 percent if nothing is done.

Mr. Obama’s advisers have projected that the multifaceted economic plan would cost $675 billion to $775 billion. It would be the largest stimulus package in memory and would most likely grow as it made its way through Congress, although Mr. Obama has secured Democratic leaders’ agreement to ban spending on pork-barrel projects.

Watch for the figures…global government debt and global economic growth or contraction.

Historically during inflation the best investments are commodities, equities and real estate.  During deflation, the best are bonds, cash (T-Bills) and real estate.

During inflation leverage works best.   During deflation it is nice to sit in a no debt situation.

Review each possible scenario with your financial adviser.  If they assure you that they know…beware.  NO one knows for sure…so adjust your portfolo to your personal circumstances and the scenario that you and your adviser agree is most likely to unfold.

Remember… statistics  are sometimes obscured for political reasons at best.   Even when they are transparant… they are often incorrect.

The best we can do is make a reasonable guess,  keep watch  and be willing to adapt.

Always look for value in distortions and trends.

There is a huge distortion growing in the trend of the US government  borrowing to fix everyone’s woes.   If  this borrowing offsets deflation but does not create runaway inflation, the dollar is likely to drop versus currencies with higher interest rates or where the government is not so deeply in debt.

This borrowing and the US economic slow down have created the perfect storm for a currency distortion…an over strong currency…that is likely to fall….and can be borrowed at a very low interest rate

There are many similarities between the US economy and the US government’s response to the downturn with Japan’s slowdown in the early 1990s and the Japanese  government’s response then.   Readers made fortunes borrowing yen as they may make fortunes borrowing dollars now.

Watch especially now for ways to borrow dollars at low rates for investing in high yield, short term dollar bonds like:

Currency                      Bond                             Yield

USD    9.125   19/05/2009    SOUTH AFRICA     6.04%

USD    10.25   17/06/2013     BRAZIL REP OF     6.24%

USD     8.25     31/03/2010     RUSSIA                 5.93%

This type of bond has no currency risk if leveraged in US dollars.  Your only major risk is default.

Bonds denominated in euro are even more to my liking because they pay higher interest and have a potential forex gain if the dollar drops again verus the euro.

Yet this type of leveraged investment also has a chance of loss if the dollar rises verus the euro. Do not borrow more than you can afford to lose!

There is even more yield potential in bonds denominated in euro.

EUR      5.75   02/07/2010     ROMANIA             10.81%

EUR    8.5     24/09/2012     BRAZIL REP OF      7.49%

EUR    5.25     16/05/2013     SOUTH AFRICA     8.61%

These three bonds yield an average 8.97%. They represent a diversification into Europe, Latin America and Africa.   If you invest $100,000 and also invest another borrowed $100,000 at 4%, your total annual return is 13.94%  before  any forex gains or loss.

Until next message may all your scenarios be clear.

Gary

The bonds mentioned above are from Jyske Bank’s bond list. These are indicative rates not recommendations.

To learn more about bonds like those above diversification  and to check on current Jyske risk profiles, US investors should contact JGAM Thomas Fischer at fischer@jgam.com

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

Until next message good global investing.

Gary

Join Merri, me and Peter Laub of Jyske Global Asset Management at OUR INTERNATIONAL INVESTING & BUSINESS COURSE IN ECUADOR. We review economic conditions, Ecuador real estate, my entire portfolio plus investing and business ideas for the months ahead.

Feb. 9-11 Beyond Logic.

Feb. 13-15 International Business & Investing Made EZ
Feb. 16-17 Imbabura Real Estate Tour

Better still join us all year in Ecuador! See our entire schedule of 27 courses, tours, mingos and expeditions we’ll conduct in 2009 and learn how to attend them FREE.


Related Artices

If you enjoyed this article "Inflation or Deflation" you may find these related articles of interest too:

    None Found