Lesson Three Free Course
on Currency Investing
By
Gary Scott
Most investors are always alert for ideas on how to gain
profit. Yet few know much about currency investing basics.
The first rule of currency investing basics is to look
at risk as well as potential profit. Only when you face potential
rewards and risks, can you make a truly sound currency investing
basics investment decisions. This special report begins by
looking at ways to view currency investing basics risk. Then
future lesson look at what I have written about the Multicurrency
Sandwich over the past ten years.
This third lesson is updated from data I sent my readers
about currency investing basics in 1993.
Currency Investing Basics Risk Assessment
I recommended in December 1993 that my readers consider
borrowing Japanese yen to invest the loan in Mexican Pesos!
Here is what I wrote about currency investing basics at that
time (1993):
1993 Currency Investing Basics Recommendation:
"You
may think I am wild and crazy suggesting you invest in
Mexican pesos, with borrowed yen which has been
the world's strongest currency.
"The
key currency investing basics that lead to success in the
Multicurrency Sandwich
is to borrow a currency when it is strongest and invest it
in a currency that has been weak but is about to become strong.
"The
yen has been very strong, but let's look at why I think
it will become weak in U.S and Mexican peso terms
and why currency investing basics supports this position.
"Japan
has its troubles. Japan's success over the past 20 years
has brought many of the same ills we in North
America and Europe suffer. High labor costs are forcing Japan
to export many of its factories and profits. These currency
investing basics could push the yen down.
"One
way Japan is solving high labor costs is by exporting its
business knowledge. It is moving its manufacturing facilities
out of Japan. I believe Japan was waiting in the wings just
hoping that NAFTA would fail. Failure would have opened a
ripe opportunity for Japan to make Mexico a more major trading
partner. Japan would have profited enormously in later years
when the U.S. was forced to open up to free trade with Mexico
. With all its faults, NAFTA at least moved the U.S. in the
right direction and stopped the Japanese from getting even
more foothold in Mexico.
"This
short term loss to Japan is just one of many current setbacks
to the yen currency investing basics. Yen
problems are both fundamental and cyclical. Since 1975, the
yen has suffered three periods of abnormal strength. The
first was in 1976 to 1978 when it advanced 37% versus the
U.S. dollar. The second was 1985 to 1988 when it rose 51%
versus the dollar. The third, which we have just seen started
in 1990. The first two periods of strength averaged 42 months
in length. This third period of yen strength reached its
42nd month in October 1993. In this third period, the yen
advanced 32% versus the dollar and 50% against European currencies.
We need to keep such currency investing basics in mind.
"After
previous periods of strength, the yen sustained a period
of weakness. After the last bout of appreciation
in 1988 the yen dropped 25% versus the U.S. dollar.
"There
are other reasons why the yen may well drop now.
"Currency
Investing Basics Factor #1: Japan 's Recession.
The strong yen is creating high costs for Japanese products
in the U.S. and other countries right at a time when the
Japanese economy is in the doldrums. A review of the Global
Economic Cycle shows that Japan is in recession and has not
yet reached the bottom of the economic cycle yet. This recession
means there are fewer buyers of goods in Japan . This puts
pressure on Japan 's businesses to sell as much abroad as
it can. A strong yen makes this much more difficult.
"Currency
Investing Basics Factor #2: Lower yen interest
rates. The recession in Japan will tend to push yen interest
rates down. Lower yen interest rates will reduce demand for
the yen (and cause its strength versus the U.S. dollar to
weaken). The yen interest rate last month fell for the first
time in years below the U.S. dollar rate. This also reduces
yen demand.
"Currency
Investing Basics Factor #3: Important structural
changes. Japan has really been canny over the past two decades.
While saturating almost every market in the world with its
products, they have managed to keep up barriers which keep
the inflow of foreign goods sold in Japan at an absolute
minimum. This has created huge trade imbalances all over
the world. In the long run this really cannot continue.
"Now
here is the interesting part! You can borrow yen at an
even lower interest rate than the U.S. dollar.
Right now for example, Jyske Bank in Denmark offers U.S.
dollar loans at 4.875%. They offer yen loans at 3.875%! The
one percent drop in the loan cost adds 4% per annum more
to the potential profit. In other words if you borrow yen
to invest in pesos rather than borrow U.S. dollars you increase
your return on money invested from 40% to 44%.
"This
is only the beginning. It is possible that this investment
can bring you a return of nearly 97% in 1994 (96.72%
to be more exact).
"Here
are the projections for how this profit can be earned.
PERFORMANCE PROJECTIONS OF YEN-PESO LOAN MODEL DEC. 1993
"Convert
$25,000 to Mexican pesos and buy Cetes 3 month T Bills
Use the T Bills To borrow U.S. $100,000 of
yen at 3.875%. Invest the loan in Mexican peso T-Bills as
well.
$100k Mexican Peso Yield 12.00% less 3.87% 8.13% $8,130
Extra Earned From Loan $8,130
$25k Mexican Peso Yield 12.00% $3,000
TOTAL PROJECTED RETURN ON $25,000 INVESTED IS 44.52% OR
$11,130
"This
is just the beginning of the profit potential in this portfolio.
We expect the yen to fall in value versus
the peso. The yen's fall can add an extra 52.10% of profit
to the portfolio!
Jyske Bank
Currency Investing Basics Calculations
"At
this time the yen is trading at 108 yen per dollar. Let's
look at what a fall of the yen from the 108 level of
5%, 10% and 15% would affect our model portfolio.
"We
borrowed US$100,000 worth of yen at 108, that is 10,800,000
yen.
"A
fall of 5% would be 5.4 yen which would put the yen dollar
parity at 113.4. Thus to buy back 10,800,000 yen
would cost only US$95,238. You add an extra $4,762 (or an
extra 19% profit) if the yen falls 5%.
"In
total if the yen falls 5% and if you have invested US$125,000
worth of pesos of which US$100,000 has come from
a yen loan, you make $15,892 return or 63.56%. You make 44.52%
($11,520) from the loan spread and $4,762 or 19.04% in foreign
exchange profit.
"If
the yen fell 10%, the yen dollar parity would be 118.8.
It would cost only $90,909 to buy the $100,000
worth of yen to pay off your loan. You would make $9,091
or 36.36% of forex profit.
"In
total if the yen falls 10% versus the U.S. dollar, you
gain US$20,221 on each $25,000 invested or 80.88% total.
You make 44.52% ($11,520) from the loan difference and $9,091
in foreign exchange profit.
"Now
let's look at a 15% yen drop which would bring it to 124.2
yen per dollar. It would cost you only $86,950
to pay off the Yen 10,800,000 loan. You make $13,050 or 52.1%
in foreign exchange profit.
"In
total if the yen falls 15% versus the U.S. dollar you gain
$24,180 on each $25,000 invested or 96.72%. You
make 44.52% ($11,500) from the loan difference and $13,050
from foreign exchange.
"The
big question is can the yen fall 15%? After the last wave
of yen strength (it rose 51%), it fell back almost
half the amount it rose. It fell 25% in two years. If the
yen fell half as much as it has risen in this third wave
(it rose 32%), it would fall 16%!
We now know that the yen fell even more than 15% as it
dropped from 108 yen per dollar to 146 yen per dollar over
the next ten years. Investors made a fortune (though they
may not have remained invested in pesos).
Next lesson looks why we assessed the risk of that yen-peso
multicurrency sandwich back in 1994.
Gary Scott
Join Gary Scott
and Jyske bank at an International Investing and Business
Course. Details are at GaryScott.com
To learn more about Gary
Scott go to GaryScott.com
To understand currencies you need to understand countries.
Learn more about Japan and
the Japanese yen
Jyske Bank specializes in
currency investing basics. Attend Jyske
investing seminars in Copenhagen. Details available from
Thomas Fischer
at FISCHER@jyskebank.dk |
