Greek Tragedy


Risk grow in multi currency portfolios due to rising government expenditure.

Jyske Global Asset Manager’s latest Market Update show how fast the world’s love affair for a currency (the euro) can end when it wrote:
The tragedy of the Greek budget deficit has now entered the 3rd act. What began as one nations budget deficit and its negative impact on the European Monetary Union (EMU), has now evolved into a multistate problem dragging the economies of the Iberian peninsula, Portugal and Spain, onto the stage. Market participants speculate that these 3 economies together will tone down the euro-zone’s overall growth in 2010 and thereby extending the current record low interest rate, making the US dollar more attractive – albeit the mighty dollar also has credibility problems.

The euro has, this far in 2010, lost 4.5% versus the US dollar, a scenery that very well could continue unless investors are convinced that these 3 troubled countries again can live up to the euro convergence criteria; demanding the euro-member nation’s “ratio of annual deficit to Gross Domestic Product (GDP)” not to exceed 3%. Greece currently has a budget deficit ratio of 12.7% to GDP, and a public debt expected to increase to 135% of GDP in 2011. A brutal consolidation plan has been approved by the European Commission, an ambitious plan to cut the Greek government spending and raise taxes in order to reduce the deficit ratio to below 3% of GDP by 2013.

Greece’s biggest labor union yesterday announced a 2nd mass strike this month, protesting against this major budget reduction, adding public pressure on the Greek Prime Minister George Papandreou to soften the necessary adjustments.

The European Central Bank (ECB) yesterday left its benchmark rate unchanged at 1%, later signaling that the bank is in no rush to hike rates. The ECB president Jean-Claude Trichet later tried to restore credibility to the euro, by comparing the overall situation in the euro area to a number of industrialized countries. However, he failed to persuade the market to look at the euro-zone as a whole, rather than focusing on the individual problems in Greece, Spain and Portugal. The market is now suggesting that Greece invite the International Monetary Fund (IMF) to help them getting back to fiscal responsibility, steering clear of any potential default scenery, and thereby calming the market nerves.

As it often goes in Greek tragedies, the story ends with a divine intervention, the “deus ex machina” in this case is manifested by the deep pockets of the IMF.

Recent Multi Currency Updates, pointed out how I am totally divested in US dollars but have also have also dramatically reduced my euro holdings as well.

This has a negative effect on my portfolio which had a US dollar loan protected by 5% a stop loss.

Yesterday my portfolio manager at JGAM wrote:  Dear Gary   I hereby confirm that the stop loss on your USD loan has been hit. Your USD loan is now converted into Euro, at 137,78 (spot 137,99).

Monday, I’ll  look at changing that loan from euro to Swiss francs based on the thoughts of one of my advisers who wrote:  Perhaps it is better to borrow CHF instead of EURO if we are listening to the experts. They believe that the franc is overvalued.

You can see this potential of a Swiss franc drop versus the euro in the five year euro Swiss franc chart (euro/chf) at yahoo.finance.com.

Two years ago a euro bought about 1.68 Swiss francs.  Last year it bought about 1.55 Swiss francs. Last week a euro bought only 1.46 Swiss francs.

multi-currency-chart
The stronger Swiss franc makes it hard for Swiss businesses to sell their products in Europe… their major trading partner.   The Swiss National Bank has repeatedly threatened to intervene to push the franc down.

A falling franc trend, versus the euro may already be afoot as the Euro rose strongly against the Swiss Franc in the last trading session.   Rumors of intervention from the Swiss National Bank added some fear in the market which is concerned that  the aggressive EURUSD and EURJPY selling would drag EURCHF below the 1.46 level for the first time in almost a year.

The Swiss National Bank has regularly warned for the past year that it will intervene against EURCHF if it became too strong.

The 1.50 Swiss franc per euro level was thought to be a threshold and 1.46 a resistance level that worries traders.

However the Swiss National Bank may be more interested in the rate of the Franc’s appreciation and not so much any certain level. If so then the franc may be allowed to continue to rose… just more slowly.

I had a dollar loan equal to about 5% of my portfolio.  The stronger dollar meant that as the dollar appreciated… it costs me more to repay the loan.  So I took my loss.

Now I have a loan in euro.  If  I switch to Swiss franc and the franc weakens in terms of the euro, I’ll gain… because it will be less expensive for me to buy Swiss francs to repay my loan.

The impact of this problem may reach deeper than just Forex markets as explained in a New York Times news alert yesterday that said:
Sovereign Debt and Job Worries Push Stocks Down Sharply; Dow Industrials Fall 2.6%

Two of Wall Street’s biggest fears — a deteriorating employment picture and the debt woes facing foreign governments — re-emerged on Thursday, pushing stocks sharply lower. The Dow Jones industrial average fell 2.6% and briefly

dipped below 10,000 before closing at 10,002.18 in preliminary figures; broader indexes slid nearly 3 percent.

Thursday’s trading brought hefty declines across the board, with a possible crisis in the European financial system overshadowing news of robust earnings for technology companies.

Read More:  http://www.nytimes.com?emc=na

Here is why this is happening.  Since 2008, wise investors have been investing in fairly risky investments expecting the world to recover from the 2007-2008 recession. These investments though have been tentative because of fear that the basic global economic structure is taxed.
This chart from a recent article in the Economist entitled “Leviathan stirs again” shows why.
Though we know that US debt is huge… this chart helps us see that government spending as a per cent of GDP is higher in Canada,  France Britain and Germany.
Here are excerpts from this article:  The return of big government means that policymakers must grapple again with some basic questions. They are now even harder to answer

FIFTEEN years ago it seemed that the great debate about the proper size and role of the state had been resolved. In Britain and America alike, Tony Blair and Bill Clinton pronounced the last rites of “the era of big government”. Privatising state-run companies was all the rage. The Washington consensus reigned supreme: persuade governments to put on “the golden straitjacket”, in Tom Friedman’s phrase, and prosperity would follow.

Today big government is back with a vengeance: not just as a brute fact, but as a vigorous ideology. Britain’s public spending is set to exceed 50% of GDP. (See chart above).

America’s financial capital has shifted from New York to Washington, DC, and the government has been trying to extend its control over the health-care industry. Huge state-run companies such as Gazprom and PetroChina are on the march.

Many European countries have devoted a high proportion of their GDP to public spending for years. And many governments cannot wait to get out of their new-found business of running banks and car companies. But the past decade has clearly produced changes which, taken cumulatively, have put the question of the state back at the centre of political debate.

The obvious reason for the change is the financial crisis. As global markets collapsed, governments intervened on an unprecedented scale, injecting liquidity into their economies and taking over, or otherwise rescuing, banks and other companies that were judged “too big to fail”. A few months after Lehman Brothers had collapsed, the American government was in charge of General Motors and Chrysler, the British government was running high street banks and, across the OECD, governments had pledged an amount equivalent to 2.5% of GDP.

Yet even before Lehman Brothers collapsed the state was on the march—even in Britain and America, which had supposedly done most to end the era of big government. Gordon Brown, Britain’s chancellor and later its prime minister, began his ministerial career as “Mr Prudent”. During Labour’s first three years in office public spending fell from 40.6% of GDP to 36.6%. But then he embarked on an Old Labour spending binge. He increased spending on the National Health Service by 6% a year in real terms and boosted spending on education.

In America, George Bush did not even go through a prudent phase. He ran for office believing that “when somebody hurts, government has got to move”. And he responded to the terrorist attacks of September 11th 2001 with a broad-ranging “war on terror”. The result of his guns-and-butter strategy was the biggest expansion in the American state since Lyndon Johnson’s in the mid-1960s. He added a huge new drug entitlement to Medicare. He created the biggest new bureaucracy since the second world war, the Department of Homeland Security. He expanded the federal government’s control over education and over the states. The gap between American public spending and Canada’s has tumbled from 15 percentage points in 1992 to just two percentage points today.

Another chart in that article shows how the American budget no longer makes sense.

The level of public spending is only one indication of the problem.

Looking at where the spending goes is another. In the case of America’s proposed 3.6 Trillion 2011 budget, defense and Social Security get an increased lion’s share of the money. Education… infrastructure and important activities get tiny amounts and less than before.

This suggests that despite the dollar’s current strength… long term we should be investing out of the dollar and not too much in the euro.

I have covered my dollar loan and in the process reduced my position in euro…. so my portfolio still has no dollars. It is just no longer short the greenback and has 5% (of the total portfolio) less euro.

Most portfolios should hold currencies around the world.

Sadly… US banks have little experience in helping multi currency investors.

This is why Jyske Banks upcoming Forex seminar in California may be helpful to you.

Pressures to reduce tax evasion and terrorism have stopped many overseas banks from serving US investors exactly when Americans need multi currency help them the most.

Fortunately for me and readers,  Jyske Bank in April 2008 set up Jyske Global Asset management as an Asset Management Company servicing US clients called JGAM. During the first 9 months JGAM  had to help their US clients cope with the worst financial crisis since the thirties.

They changed the investment strategy accordingly and over weighted their clinets portfolios in defensive investments.  During 2009 they became cautious optimists and began increasing the exposure towards equities and corporate bonds.

All investment decisions in JGAM are carried out by an Investment Committee who meet at least once a month.  Every member in the committee has responsibility for an asset class.

JGAM offers a number of portfolio’s depending on the size ranging from low risk to high risk… with or without leverage.

Since May of 2009 JGAM  also offers managed IRA accounts.

JGAM’s portfolios have performed very well in 2009  and the performance opf their client’s portfolios range from 10-33% depending on size and risk profile.

The IRA portfolios which were established in May 2009 has returned between 12% – 18%.

JGAM offers two types of multi currency service for US investors.

US investors can have a fully managed portfolio or have an advisory account where they make their own decisions.  For clients living in the US the advisory accounts come with many investment restrictions.

Managed portfolios are best for most US resident Americans.

Americans living outside the US can have advisory accounts without limitations regarding the investments.

Jyske Bank Copenhagen is the custodian for all JGAM accounts and for larger clients Jyske offers a VISA debit card associated with the account.

The VISA card comes with restrictions. It is a debit not credit card and normally requires a minimum balance of two times the spending limit PLUS  a minimum  investment account with JGAM of $50,000.

JGAM maintains a close relationship with its clients, makes regular visit to the US and provides a direct phone line for each client to an investment adviser.  JGAM also visits its clients in Ecuador as they participate in seminars that I and International Living conduct in Ecuador.

Beginning in 2009 JGAM also started conducting  their own seminars.

Last years seminar was in Naples Florida.

In April 2010 JGAM will conduct a Foreign Exchange seminar in Laguna Beach California.   In August JGAM will venture with Jyske Bank to conduct a seminar in Copenhagen.

JGAM is a fee based only company. Their only objective is to make money for their clients.   All JGAM employees, as with Jyske Bank,  are on a fixed salary WITHOUT BONUSES.

2009 was an extraordinary year and JGAM does not expect a repeat in 2010 as they expect central banks to begin withdrawing liquidity from the market.

JGAM does expect some interesting theme based investments in 2010. Clean energy will probably play an important role as governments across the globe focuses on the climate.  JGAM believes that the “climate aspect” has to be integrated into future investments, and that such a strategy can offer good returns.

They have already invested in iShares S&P Global Clean Energy Index.

This Exchange Traded Funds (ETF) aims to track the S&P Global Clean Energy Index and offers exposure to 30 of the largest publicly listed companies around the world that are involved in clean energy related businesses.

JGAM expects many country’s to tighten monetary policy (Australia and Norway have already started) which will create tension and volatility in the currency market.

JGAM plans to take advantage of these investment possibilities also in 2010.

Merri and I will join JGAM  at their Laguna Beach seminar where you can be introduced to foreign exchange trading and investing in general. I will speak at the seminar and review my portfolio… why… what and what if.

The Laguna Beach forex seminar will be conducted 30 April  to 2 May 2010.

You will have the opportunity to:

• find out about JGAM’s BRAND NEW upcoming Managed FX Portfolio

• find out how JGAM  use’s currencies in our portfolios

• find out how you can take advantage of the profit
opportunities available with foreign exchange trading

• learn about and ask any FX questions that you didn’t dare to ask

• discuss key foreign exchange topics in greater depth than normal

• network with currency experts and JGAM’s experts.

For more details about the seminar contact Thomas Fischer at fischer@jgam.com

Gary

Read the entire article Leviathan stirs again


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