* WHAT TO DO NOW: Be a Multicurrency Investor. In this course you learn first why all of us must be multicurrency investors now. See below.
* EZ CURRENCY SAFETY: Learn who can really protect your wealth. Page two explains an important lesson about politics and currencies.
* EZ PROFIT: Increase Earnings Six Times. Invest in the right currencies for safety. When you do, your money at times can grow enormously. See Case Study One on page ten. It shows how a 1983 portfolio designed for safety increased earnings from 5.05% to 33.4%!
Imagine the room-walnut paneled with carpeting that is deep blue, rich and plush. The table of polished oak is heavy and important, as are the men that sit around it. Tension hangs, thick. A soft hum, steady and calm, perhaps from a heating fan, goes unnoticed in the deathly silence. These men are powerful, but now they are afraid. The fear shows. They fidget, squirm, their faces tight with the tension. Many of them go pale when the man at the head of the table finally speaks. "Gentlemen, the nation is closer to a monetary collapse than we would like to believe."
This scene sounds like one we would see in a tense melodrama at the movies. Even worse we could imagine that this was real. It was like this in Mexico just before the last devaluation of the Mexican peso.
It is unfortunate but we must think again. Because this scene is not based on fiction. The events above are all too real. More unfortunately the statement was not made in a third world nation.
The event upon which this scene is based actually took place in the United States of America at the headquarters of one of the most powerful financial institutions in the world, The Federal Reserve Bank. The man speaking was the chairman of the Federal Reserve, Alan Greenspan. The statement that the United States is closer to a monetary collapse than we would like to believe, is his and regretfully is very, very real.
To make matters most unfortunate, this meeting did not just happen. The statement was made by Mr. Greenspan just after Black Friday, October 1987 when the U.S. stock market crashed.
At that time, Federal Reserve policy makers met and grimly speculated that a run on the dollar might trigger renewed chaos or that consumer confidence might cause a recession. Despite their reassuring public pronouncements, they confessed privately to an inability to foresee the economy's future with any certainty. Greenspan underscored the seriousness of the situation saying at one point, "The nation is closer to a monetary collapse than we would like to believe." So great was his concern the meeting was kept secret, and this information has only recently been revealed. Mr. Greenspan's quote comes from a newspaper article published by the Miami Herald that exposed the secret meeting. This secret meeting can be good news for you! I explain next page.
The secret meeting held at the Federal Reserve in 1987 can be good news for you if it proves to you that a new economic era has arrived. That meeting which was so carefully muffled will have accomplished something if it can be a focus that helps all investors see that now is the time to take independent action to protect their wealth! Even a benefit can be gained from the secrecy, if investors learn that this secrecy means the dollar problem is so bad that world economic danger is imminent and extreme!
If you use this meeting as a warning about the enormous currency dangers that exist right now, then that meeting will be of great benefit to you. That warning and the lessons in this course can bring you increased safety and immense rewards.
If you let that meeting serve as the warning, this course can help you learn many reasons why currency disaster is here and what we as individual investors can do to protect and profit ourselves now.
An important point to remember. The first lesson we can learn about currencies is how government officials treat investors. Why did we, as investors, not know of the Fed meeting in 1987? We did not know because government officials almost always deny that a currency is about to be devalued just before it is!
This first lesson caused this course to be created. My name is Gary Scott. I am a writer and publisher of information about international investing and have been for over 20 years, but I was shocked that I had not heard about this meeting. I wanted to know why none of us knew?
We did not know about the currency risk we faced because a meeting of our public servants was kept a secret. As so often happens, the public was intentionally misled and kept in the dark for fear that truth would create panic. Only months ago were secret tapes of this meeting revealed and exposed in various newspapers including the Pulitzer Prize winning, Miami Herald. This is where I learned of the meeting.
Reading about this secret meeting had a profound impact on me. We, as investors all over the world, were misled about dangers that could dramatically affect our wealth! This made me realize two important and urgent facts of investing.
The first fact is that the U.S. dollar and U.S. monetary system is at extreme risk and has been for nearly a decade. The system is now held together with little more than chewing gum, wax and bailing wire. Chances are this system will eventually fail.
The second fact I learned was that we, as investors, will not be forewarned unless we look beyond what our political and major financial institutions tell us. The political system, big banks and brokers have too much at stake. They all fear that the truth about the world's currency system will create a self-prophesy of doom.
The currency problem is global. The dollar, though under incredible pressure, remains the reserve currency of the world. What will happen when the dollar collapses? What will happen to other currencies when the reserves (in dollars) of thousands of non U.S. governments/banks collapse?
This led me to see the urgent importance that exists for global currency diversification. Here's the easiest way to diversify now.
This course will give you an indepth understanding of currencies, but also will give you many contacts that can further your knowledge. Contacts that you can easily use!
The course format gives information to you in four different ways, #1: Educational Text, #2: Case Studies, #3: Glossaries and #4: Contacts. The Contact Section gives you a way to expand the knowledge you gain from the course and allows you to customize what you learn to meet your own particular needs.
In the Contact Section we show you easy ways to actually invest in overseas currencies. Then we give you names and addresses of businesses that deal in the activities covered throughout the course. The investments and names provided in the contacts sections are not recommendations. They are firms that have generally been chosen because they are among the largest and most experienced firms in their fields. Our goal in including them is to give you a variety of contacts so you can continue learning directly from firms where you can actually put your knowledge to use.
If you ever plan to do business with any of these contacts you should exercise normal care and caution and take the same precautions you would before choosing to do business with any firm. Check and make sure that any firm you do business with is reliable and can provide the services you need with fees that you find acceptable.
In this first contacts section, we look at overseas Money Market Funds, one of the easiest ways to diversify in currencies abroad.
Money Market Funds offer an alternative to saving accounts and certificates of deposit. The funds invest in top quality short term interest bearing instruments at wholesale rates in one currency. The rates of return in money market funds are not guaranteed and will fall during times of falling interest rates and rise during times of rising interest rates (of the currency in which the fund invests). These funds are best held when one expects interest rates in a particular currency to rise, which you will learn later in this course.
Money market funds are also available to many investors when CDS are not, because many such funds allow small investments. Most certificates of deposit start with $10,000 to $50,000 minimums.
Also money market funds let the investor choose which currency to hold. They allow complete flexibility as to when to get in and out. These funds can also offer a high degree of safety because they typically spread their deposits between many institutions.
Listed below are managers of many large well established firms that manage Money Market Funds in many different currencies.
Capital House, IGF Funds, PO Box 348, St. Helier, Jersey, JE4 8UH, Channel Islands. Tel: 011-44-534-285-707. Fax: 011-44-534-285-751. This is an example of a manager that has many money market funds including funds in Australian and Canadian dollars, ECUs (European Economic Units), German marks and Japanese yen.
SVB Money Market Funds, Postfach 631, 8021 Zurich, Switzerland. Tel: 011-41-1-228-1111. Fax: 011-41-1-808-3801. This manager is the subsidiary of the large SwissVolks Bank.
DIT Lux DM Garantie, Dresdnerbank Asset Management, 13 rue Beaumont, L-1219 Luxembourg. Tel: 011-352-463-4631. DIT is a subsidiary of one of Germany's largest banks. It is not surprising that this manager offers a German mark Money Market Fund.
Gartmore Fund Managers, PO Box 278, 45 La Motte Street, St. Helier, Jersey JE4 8TF, Channel Islands. Tel: 011-44-534-27301. Fax: 011-44-534-886689. A well established British firm owned by one of France's largest banks (Banque Indosuez) with seven money market funds including Swiss and French francs.
Hambros Emma Continental Europe Money Fund, PO Box 225, Barfield House, St. Julians Ave., St. Peter Port, Guernsey, Channel Island, Britain. Tel: 011-44-481-715454. Fax: 011-44-481-727139. Another large British based firm, this manager has money market funds in US dollars and British pounds.
Rothschild Five Arrows Reserve Fund, PO Box 242, St. Peter Port, Guernsey, Channel Islands GY1 3PH. Tel: 011-44-481-713713. Fax: 011-44-481-723965. This manager is part of the well known Rothschild organization and has perhaps the largest number of money market funds available anywhere. It offers money market funds in nearly 20 currencies.
CS Money Funds, Credit Suisse Money Managers, Grand Rue, L-1660, Luxembourg. Tel: 011-352-460-0111. Fax: 011-352-475541. This manager is a subsidiary of one of Switzerland's largest banks.
Each lesson of this course will also leave you with more action to take to increase your knowledge of currencies. In this case, write to the fund managers above. Find out which currencies in which they offer money market funds. Look at the types of returns these funds have offered. Look at the safety factors provided by the managers. Compare the fees that each fund manager charges and look to see what minimum the managers will accept. Look at the history of each manager and see which appears to be most sound financially.
We, as investors all over the world, now have to understand currencies, why they move and what makes them weak or strong. We have to know which currencies we should hold and how to hold them. It is imperative to our financial well being that we see the big global currency picture!
This is why we created this course, Currencies Made EZ, and commissioned author, Jeff Moses, to research and write it with me. I chose Jeff because of a book he previously wrote, the best selling book on great religious principles, Oneness.
Jeff's excellent book, Oneness, is a book about the most important laws of nature and how they are reflected in all the major religions. My decision to choose Jeff to research and write the bulk of this course on currencies may at first seem odd. You might ask why choose an author of a book on universal laws to research and write a course on economics?
You will learn in this course that this choice was very logical because the laws of currency go far beyond mathematics and accounting. You will learn money is much more then credit, plastic, gold or paper.
You will learn that we think of money as a physical object but at its roots, money is nothing more than discipline. Money is a discipline created by applying accounting to fundamental natural laws. Money is more like a religion than anything else. The reality behind money is a social contract that simply applies mathematics to morality.
There are many problem with our monetary system. One is a lack of fiscal discipline that exists in almost every government. But another is that we have lived so long in a world that has distorted its money via political interference that I wanted this course to reach beyond the numbers and touch the very essence of money. I wanted it to help us see and understand the big picture, so that we make intelligent decisions about which currencies we should hold to protect our future.
My plan in creating this course was to let Jeff explain the big picture in the academic portion of this course so I could blend that view with details I have learned through my 20 plus years of international business, investment and money management.
The introduction of this course could not have been at a better time. Just months ago, the Mexican peso was dramatically devalued only three days after the President of Mexico assured investors that the peso would remain pegged to the U.S. dollar. At the time of release that devaluation hangs heavy in economic markets, and the final results are still unknown. This devaluation could even be the spark that ignites a global currency crisis that will rob millions of their wealth.
The peso's fall certainly was an important factor in one of the most dramatic short term falls of the U.S. dollar ever. Now at the release of this course, the dollar is at an all time low versus the Japanese yen, German mark and Swiss franc. The peso devaluation is a stark reminder that we cannot trust what any government leader tells us about currencies. The fall of the dollar warns us yet again that no currency can be trusted.
Less than a quarter of a century ago, the United States dollar was worth over 4.25 Swiss francs. If you had taken a fabulous skiing trip to the Swiss Alps at that time, $5,000 U.S. dollars could have been converted into 21,250 francs. As this report was written, the dollar was worth 1.28 Swiss francs. This means that the same $5,000 could be exchanged for only 6,400 Swiss francs. Now as the course is printed, the dollar is worth only 1.13 francs. Just in the few weeks it took to print this course the $5,000 lost another SFR750 and will buy now only 5,650 Swiss francs!
In less than 25 years, the dollar has fallen so much in value that it is now worth only one-quarter of its original exchange price.
Less than a quarter century ago, the dollar was worth 4.00 German marks. Now the dollar is worth less than 1.5 German marks (1.43 to be accurate). That means that a BMW that cost $20,000 now costs over $53,000 (all else being equal).
The dollar was worth nearly 400 Japanese yen twenty-five years ago. Now it's worth about 90 yen. The dollar is now worth less than one- quarter of what it was once in terms of the yen.
It's much the same with many other hard currencies, also. The value of the dollar has fallen continually, and as a result, at every stage of the fall foreign goods have cost more for U.S. citizens.
Take, for example, the cost of French wine. In 1971 a bottle of fine French wine might have sold in the U.S. for $20. In France the same bottle of wine sold for 400 French francs. The foreign exchange ratio in that day was, approximately, US$1.00 to 20 FrF. But today the exchange ratio is approximately US$1.00 to 5.3 FrF. That means the same wine, bottled by the same winery, now costs about $75 in the United States.
1971 1994 U.S. dollar French franc U.S. dollar French franc $ 1.00 20 francs $ 1.00 5.26 francs Price in U.S. Price in France Price in U.S. Price in France $25.00 400 francs $75.00 400 francs
As the value of the dollar falls in relationship to any other country's currency, goods from that country become proportionately more expensive when purchased in dollars. This is true for wine, bread, cheese, cars, TVs, CD players, clothing, furniture, etc.
You may say, if you live outside the United States or if you live in the U.S., but buy American, "This doesn't affect me. I don't buy foreign products. I buy American when I can and pay for everything in U.S. dollars." You may think that you only spend U.S. dollars.
But the complexity of international trade and economics today makes it impossible for you to not be affected dramatically by fluctuations in the value of the dollar compared with other currencies. In addition, all you will learn in this course about what happens to currencies applies to your currency as well as the U.S. dollar. The fate of the dollar as the reserve currency is linked to the fate of all currencies.
Take, for example, a U.S. resident who purchases a General Motors car, paying U.S. dollars. Nothing could be more American than a Buick or an Oldsmobile, right? But parts of every car today are produced in numerous countries. Every dollar you pay for the car is divided into segments and changed into many different foreign currencies -- not by you, of course, but by someone.
You might pay $25,000 to the dealership for an American car, but several thousand of the dollars are converted to Japanese yen to pay for parts that come from Japan. A thousand or two dollars are turned to Korean won for labor and additional parts. Several thousand are converted to German marks for engineering work done in Germany. Additional thousands for design work might go to Italian lira, British pounds and Irish punts. Additional payments for engineering or labor might be sent to Canada, Hong Kong, South Korea, France, etc. And, if we go even deeper into the actual metallic, plastic and rubber components of the car, separate payments also might be sent to South Africa, Mexico, Saudi Arabia, Russia, Malaysia, Brazil, and so on.
In the end, less than one-half of the dollars you spend on this most American of products stay in America. Someone, acting on your behalf, converts those dollars into foreign currencies.
A person may say that he or she doesn't buy many products manufactured overseas, so why worry about currencies? The above example shows why every American is continually at the mercy of foreign exchange rates. It also shows why investors have to now understand both their own currency and the U.S. dollar.
The dollar has been falling in value for nearly two decades with the result that prices of products bought by Americans in dollars are rising steadily. This has continually eroded the purchasing power of the dollar and has made many products more expensive for every American.
Automobiles are only one example of this interconnected global maze. The gasoline you use for your car or to heat your home, the clothes you wear, the food you eat, the paper you use to write on, etc., all have components produced or purchased abroad, and have increasing prices reflecting the falling value of the dollar and other currencies.
However, other currencies have fallen versus the U.S. dollar, making goods and services from these countries less expensive to U.S. spenders. Yet this can be a problem too! Right now Mexico is a perfect example. With the collapse of the peso, credit card interest rates have soared to over 100%. Millions of middle class investors cannot make their debt payments. They have been losing their homes, their cars, their jobs and many have been protesting, even rioting in the streets. The short term future of Mexico looks grim. This is likely to increase the flood of illegal immigrants into the U.S. and add to security and social costs here. These added costs are likely to add to the U.S. debt which is one of the main reasons for the weak U.S. dollar.
Mexican bank bad debt ratios have risen to 9% (in the U.S. the rate is 1%) and it is reckoned that it could rise to 16%, causing Mexican banks to fail which in turn could cause another international monetary crisis. U.S. exporters of goods to Mexico have watched their sales almost dry up as Mexicans can no longer afford U.S. goods which have suddenly doubled in price. This means the U.S. global trade deficit will grow and could further weaken the dollar.
At the same time, many U.S. and Canadian industries are being ruined by cheap Mexican prices caused by the peso's fall. Take the Florida tomato growers. They are currently trying to sue Mexican tomato shippers to stop the flow of the cheap Mexican tomatoes that are flooding into Florida at prices below the Florida growing costs.
Only the most short term thinkers will see the fall of the peso as a boon to the U.S. or other nation that can now buy Mexican goods for less. Any clear thinker will see that economies around the world are now so related that bad news caused by a currency crash is bad news everywhere.
Currency fluctuations affect you and your family daily, and they affect you more profoundly every year. As we'll examine in this report, the dollar is falling in value and by all rights will continue to fall. This will tend to keep prices inflating. Purchases you make for your business and for your family's livelihood will continually be affected by the international forces of foreign exchange.
Most lessons in this course will include a glossary of words to make the lesson easier to understand. Listed next page is the Glossary of words that relate to this chapter.
Key or Reserve Currency. The central currency of the world, which is used as reserves by many countries and in which many international commodities (such as oil, gold, steel, etc.) are bought and sold. Before WWII, the British Pound was the world's key currency. Since the war, the U.S. dollar has been the key currency. But with the severe loss of value the dollar has been experiencing, many economic experts say that the world is actually in search of a new key currency.
United States Federal Reserve. "The Fed," as it is often called, is a privately-owned organization chartered by the U.S. government. It creates and maintains the U.S. monetary supply by buying Treasury Certificates, loaning money to banks and designating interest rates. On a daily basis, the Fed decides if it wishes to add to the U.S. money supply. If it does, it buys U.S. Treasury securities directly from the government or from major banks and brokerage companies. To pay for these securities, the Fed writes a check on its own account -- but in reality it has no assets in its account, other than the assurance of the U.S. government that it will pay the bearer of the securities in full. In effect, the Fed has created money with the stroke of a pen (or a computer stroke, to be more accurate). The Fed also makes direct loans to U.S. banks, charging them a specific interest rate (discount rate) that determines the rate banks charge for loans. When making such loans, the Fed, again, simply writes a check, creating money with the stroke of a pen.
Gross Domestic Product. (GDP) The sum of private consumption, investment, government expenditure, net stockbuilding and the surplus of national exports over imports.
Gross National Product. (GNP) GDP plus any excess of investment income from abroad less investment income owed to foreign governments or individuals. The GNP represents the production growth of a country and is usually expressed as a yearly percentage. Thus, a GNP growth of 3% for a particular year means that a country's total economic productivity for the year increased 3% over the previous year.
ECU. ECU is short for Economic Currency Unit. It is a currency represented by a basket of European currencies -- German mark, French franc, Dutch guilder, Italian lira, Belgian-Luxembourg franc, British pound, Spanish peseta, Danish kroner, Portuguese escudo and Greek drachma.
Here we look at how you can spot whether a currency will be strong or not by looking at how a nation invests in itself.
The strength of a nation's currency is a reflection mainly of the real wealth of a nation. Let's look at the richest countries of the world today and compare them with the richest countries of the world one hundred years ago.
The Richest Countries Per Capita 100 YEARS AGO TODAY 1. Australia 1. Switzerland 2. UK 2. Iceland 3. Belgium 3. Japan 4. Switzerland 4. Norway 5. Netherlands 5. Finland 6. United States 6. Sweden 7. New Zealand 7. Denmark 8. Denmark 8. United States 9. Canada 9. West Germany 10. France 10. Canada 11. Argentina 11. Luxembourg 12. Austria 12. France 13. Italy 13. Austria 14. Germany 14. United Arab Emirates 15. Spain 15. Netherlands 16. Norway 16. Belgium 17. Ireland 17. UK 18. Portugal 18. Italy 19. Sweden 19. Australia 20. Chile 20. New Zealand
To have their wealth, all the richest countries today have dedicated tremendous internal resources to maintain growth over a long period of time. Each has put together an average 3% or thereabouts annual GNP (Gross National Product) growth rate over the last one hundred years. This is a rare feat among nations. This dedication has also caused the currencies of these nations to be strong.
To continue such growth, to maintain a place on the wealthiest nations list and to maintain a strong currency, each country will have to dedicate steady internal investment to its own future. In U.S. dollar terms, the figures are staggering. To get each American now being born to a level of productivity that will enable U.S. global economic competitiveness in the next century, the following approximate per capita dollar totals must be spent over the next 20 years or so:
1. Housing -- $20,000 2. Food -- $20,000 3. Education -- $100,000 (private and public expenditure) 4. Work Productivity -- $80,000 in plant and equipment expense 5. Public Infrastructure -- $20,000
This means that an average of $240,000 is needed to be invested in individuals before they are capable of becoming a self-sufficient, average citizen/worker/consumer. If the United States were to continue its average 4% population growth rate, more than 40% of the entire GNP each year would have to be devoted to provide this funding. Clearly, with public and private debt level in the U.S. today, this will not be possible in the coming decades unless drastic changes are undertaken in the national consciousness.
Over the last 100 years, the U.S. GNP has grown an average of 3.3% per year, with population growth 1.5% per year. (Much of this population growth came from immigration, not from internal growth.) As a result, the U.S. per capita income grew on the average of 1.8% per year. Similar figures can be shown for many of the world's leading industrial countries that are on the list of wealthiest countries: Japan, Germany, etc.
A country must discipline itself to maintain such growth. Real growth cannot be maintained by any other means than by increasing the actual total production of the country. Government borrowing to pay for growth is a temporary measure. Eventually the debt must be paid back...at the cost of future generations.
If a country does not discipline itself to have this real growth, in today's political atmosphere (where politicians almost always promise a better life without cost to the voter) you can almost be assured that the country's currency will weaken, both in parity versus other countries and versus internal purchasing power.
To maintain real, substantial economic growth, a country must be disciplined enough to place a substantial amount of its own GNP back into the development of its own citizens and internal infrastructure. Japan and Germany have continued to do this during the last decade; the United States has not, as we will see in this report. The government of Japan funnels much of its GNP back into business productivity and infrastructure development (roads, sewers, airports, etc.). The government of Germany is currently funneling much of its GNP into the unification of its country, a strategy that is producing an enormous industrial machine.
In contrast, the United States funnels much of its GNP into welfare and other entitlements. And increasingly the U.S. is spending its GNP on maintenance of its debt. (Note "maintenance of the debt," not actual paying off of the debt.) Estimates show in less than 20 years that at current debt rates (if major changes are not made), the U.S. will pay more in interest alone per year than it will be able to take in from taxes.
Because of debt, the United States faces losing its economic position. Per capita income will fall, and the U.S. standard of living will fall with it. The U.S. has already lost economic dominance. Unless government discipline is tightened, future generations of Americans will find their role much different in the world.
We have seen that the strength or weakness of a country's currency is a direct indication of the underlying, fundamental factors affecting the country's economic growth. A country's economic philosophy is related to its economic strength and how its economic strength directly affects the value of its currency both in terms of local purchasing power and in terms of other currencies. How a country thinks about itself, its public debt, its spending and saving habits, its overall economic discipline, its education and dedication to infrastructure development -- all these work together to determine a country's future economic strength or weakness. This strength or weakness, in turn, is directly mirrored in the perceived value of a country's currency.
In the short term, many factors affect the price of a country's currency, and we'll discuss all of these factors too. We'll learn to see when and how currencies move. In the long term, extending over years and decades, only a country's level of productivity and self-discipline affect fundamental economic strength and the resulting currency price. An Important Point to Remember: Economic and investment discipline in a country are the foundations for its strong currency.
By Gary Scott
In this case study, we learn how spotting economic discipline can help make currency decisions.
As I was researching the relationship of government debt of major countries in relationship to the country's Gross Domestic Product. The information I learned is next page.
CURRENCY RESERVES (November 1993) COUNTRY GOLD TONNES GOLD $ TOTAL RESERVES GOLD % NATIONAL IN US DOLLARS RESERVES DEBT AS % OF GDP USA 8,146 86,434 147,559 58.6% 63.0% Canada 318 3,369 13,175 25.6% 82.3% Japan 754 7,996 79,439 10.1% 64.9% Australia 247 2,617 13,609 19.2% 29.7% * Germany 2,980 31,409 116,965 26.9% 44.0% Switzerland 2,590 27,482 56,984 48.2% 30.0% * France 2,546 27,011 54,252 49.8% 50.1% Italy 2,074 22,001 47,974 45.9% 108.4% Netherlands 1,357 14,395 34,567 41.6% 78.3% Belgium 779 8,263 19,545 42.3% 134.4% Austria 616 6,537 18,621 35.1% 52.1% UK 581 6,161 43,838 14.1% 41.9% Spain 486 5,155 47,723 10.8% 48.4% Greece 107 1,132 4,811 23.5% 84.3% Sweden 189 2,003 21,409 9.4% 54.4% Finland 62 660 7,650 8.6% 29.0% * Denmark 52 548 9,242 5.9% 62.2% Norway 37 389 16,694 2.3% 43.9% Ireland 11 119 3,522 3.4% 98.1%
This data among other facts showed me that Finland, Australia and Switzerland had the lowest debt as a percentage of their Gross Domestic Product. Though I was surprised about Finland (a very socialistic country) and Australia (also socialistic), I decided to invest a core portion in these two currencies. In simple terms, I decided to invest in the currencies of the two countries that had shown the most discipline in keeping their debt in hand.
At that time the interest rates for the Swiss franc were 4.62%, the Finmark 6.25% and 4.88%. This compared to a 3.37% interest rate for the U.S. dollar. The currency parities were as shown below.
Currency Rate Per U.S. Dollar Swiss Franc 1.42 Finmark 5.83 Australian dollar 1.54
Holding those currencies over the past 18 months has paid me a much better return than if I had held U.S. dollars. However, it gave two other benefits. First, it added safety to my portfolio through diversification. Second, it brought me some foreign exchange profits.
As this report is going to press, the Swiss franc and the Finmark are the first and second strongest currencies in the world! The Australian dollar has also appreciated versus the U.S. dollar. Here are the current parities.
Swiss franc 1.15 Finmark 4.34 Australian dollar 1.36
Look at the difference in return for a $10,000 investment in these three currencies (assuming that interest rate differentials remained the same) made over 18 months versus a deposit in just the U.S. dollar. In September 1993, $10,000 bought 14,200 Swiss francs, 58,300 finmarks and 15,400 Australian dollars.
Amount Invested Interest Rate Actual Return US$10,000 3.37% per annum for 18 mos. $ 505 SFR14,200 4.62% per annum for 18 mos. SFR 984 FIM58,300 6.25% per annum for 18 mos. FIM 5,462 A$15,400 4.88% per annum for 18 mos. A$ 1,127
At the time this course was published, the U.S. dollar deposit, with accumulated interest, in the example above was worth $10,505. Look at how much the deposits in each of the other currencies with interest are now worth if converted back to U.S. dollars.
Currency Deposit Interest Total Parity US$ Value SFR 14,200 984 15,184 1.15 $13,203 FIM 58,300 5,462 63,762 4.34 $14,691 A$ 15,400 1,127 16,527 1.36 $12,152
A U.S. dollar deposit earned 5.05% over 18 months, but an investment in Australian dollars was up 21.52%, Swiss francs was up 32.03% and Finmarks up a whopping 46.91%! Anyone who invested in a basket of the three currencies averaged a 33.4% increase over the past 18 months. here $10,000 grew to be worth $13,340.
The lesson we can learn from this case study above is that it is possible to make dramatic differences in your portfolio returns by simply choosing currencies in countries with strong fundamentals.
However, there is much more we can learn as well. For example in our case study, we assumed interest rates remained the same over 18 months. They in reality did not. Today the interest rates are much different. The rate for Swiss francs has dropped to 3.75%, the Finmark stayed about the same. The Australian dollar rate has risen to 8.00%.
There are many questions that the case study creates.
Question: Does the same tactic that did so well 18 months ago make sense now? The answer is probably not. The U.S. dollar is at all time lows already and the chance of a rebound much greater now. We will look at currency rebounds in the next lesson.
A lesson we can learn from answering this question is that the currency allocation in our portfolio must be continually reexamined.
Question: What kind of investments should we have made in each currency? I made the decision to invest in Australian dollars and Finmarks and bought Finmark equities (via a Finnish mutual fund called Evli-Select) and Australian bonds. We will examine the conditions that dictate when to choose equities, bonds or CDS in later lessons.
The lesson we can learn from answering this question is that once we have chosen a currency, we must then determine whether to invest in CDS, bonds or shares or just speculate on the currency through derivatives.