By
Gary Scott

For more than two decades I have written about the Borrow Low- Deposit High investing strategy. Most readers who have followed this idea and have used the tactic have profited mightily.

Once in awhile we have even hit real home runs. For example Here the 14 week performance of the five portfolios we outlined and began tracking last October 21, 2005 have been outstanding.

The Asian portfolio is up +68% or has risen at a 252% per annum rate. The Emerging market portfolio is up +47% or at a 174% per annum rate. The US dollar Long portfolio is up +10% (37% annual rate). The US dollar Hedge portfolio is up +8% (29% annual rate). The US dollar short portfolio is up +7% (26% annual rate).

I have been warning readers not to expect this type of performance to continue. In fact such astounding rises are often followed by bubbles that burst.

This is why our service follows five different philosophies, one for investing in Asian, another for emerging markets and then three tactics based around the movement of the US dollar. The key is to have properly constructed portfolios that are leveraged and diversified. Such portfolios can be safe and profitable regardless of short term moves if the underlying idea and fundamentals are correct.

Thus I am not surprised to read a recent article in London’s Telegraph newspaper that warns that the Borrow Low system of enhancing profits through leverage may end.

The article begins:

"The cash machine that sustained a world boom is about to close, and it's going to get ugly", says Ambrose Evans-Pritchard.

"One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.

“The 'carry trade' - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.

"It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet," he said.

Another reader sent me an article about this from another newspaper that predicted a huge crash something like the Asian and Wall Street stock market crash of 1987.

This is interesting and brings several thoughts to mind. Let me add right here that I have some conflict of interest. I publish an ezine service that promotes the Borrow Low-Deposit High concept. I have Swiss franc loans (at 2.62%) invested in Euro and other related European currencies (earning 4%-5% and more) myself.

So the first human knee jerk reaction is to defend the tactic and position and write "poppycock".

This, however, would be wrong.  My loyalty is to my portfolio and my readers not to a concept. There is always opportunity somewhere. If the Borrow Low-Deposit High is truly about to end then I should be the first to say so and get on with looking for “What’s Next?” 

I have not been successfully publishing data about global investing for 38 years by limiting my horizons.

So if the newspapers are correct, we'll examine what opportunity this shift will create.

However, let’s first think what is happening through as I doubt that Borrow Low Deposit High is at an end. In fact it may get better.

Remember newspapers almost always get it wrong and they sell panic, drama and fear.  They know that it is panic that gets reader attention. They love headlines that scream PANIC MARKET CRASH.  For reasons disclosed below, I’ll take the news article with a grain of salt for now.  BUT…a warning.

First, if enough newspapers warn investors of impending doom, there may be some immediate volatility. This means investors using borrow low tactics (especially if they have a nervous disposition) should reduce their leverage now.  Or they should make sure they have adequate cash on hand to fund any margin calls.

Second, investors who use the borrow low-deposit high tactic should remember that they should “never leverage more than they can afford to lose”.

Third, all of us should look at special opportunities that any panic may create.

Lets look at some fundamentals why Borrow Low opportunity may "loom and boom".

My attention was caught by the article that suggested recent jumps in currency and interest rates surprised everyone and was akin to the great Asian and wall Street stock market crash of 1987…but not because of panic or fear.  This smells of huge profits!

Read about the 1987 Asian crash under the title “GREATEST MARKET CRASHES”

Investopedia explains how this crash nearly wiped out Wall Street and I recall the panic in the market at that time (even though I had earlier warned readers to evacuate the market).

Now think about the profits that have been made by those who got in the markets (especially Asia)….right after that crash of 1987!

They have enjoyed really good returns. Since I am doing this in a hurry I have not been able to locate all the numbers I want, but we can get a clue looking at numbers provided for the Templeton Asia (ex Japan) equity fund which was formed in 1991.  DETAILS of all the numbers.

I’ll just summarize here. The Moran Stanley Capital All Asia ex Japan Index is up since 1991 + 201.4%. This is after a huge 40% drop in 1997 when there was a second panic.  The index has grown 7.9% per annum since 1991.

The point here is…despite a huge panic sell in 1987 and 1997, Asian shares have performed extremely well over the past 20 years.

What is more... investors who bought after the 1997 Asia panic have really cleaned up earning over 15% per annum.

The stock markets in Asia would look even better if Japan had not been in a 20 year funk. The Japanese economy has stagnated, and its stock market disintegrated. The Nikkei 225, Japan's benchmark index, dropped 30,000 points, or 78%, from its 1989 peak. Stocks did not merely crash— they kept crashing.

The "Tigers" — smaller Asian countries that turned aggressively to capitalism 20 years ago had a different story.  They generated vast enthusiasm among investors in the mid-90s but went bust in 1997, practically destroying the currencies of South Korea, Thailand, Malaysia, and Indonesia.

China, the big driver, suffered due to minimal legal protections, poor financial reporting, and little transparency.

Yet despite all this, Asia has had really impressive performance.

Why? Due to fundamentals.

3.5 billion people live there — three times as many as in North America and Europe combined. Asia is the fastest-growing part of the world and already accounts for over a quarter of all global economic output.

So what does Asia have to do with Borrow Low - Deposit High? Each tells a story of boom and bust. There was panic and euphoria…in the short term. There were big profits for those who ignored the day to day press and looked at fundamentals. 

Investors who ignored the static in the press and steadily invested in fundamentals did well. Those who took advantage of the scaremongering news did even better!

This is how I suspect it will be with the Borrow Low-Deposit High tactic.  Here is why….currency fundamentals have not changed.

Most currencies are fundamentally controlled by national productivity, government debt, trade and current account balances and interest rates. Governments have limited short term control over these first three fundamentals so interest rates take up the slack and are controlled by the multi billion dollar a day market place.

Countries with high debt and a bad productivity and deficits in their current account and trade balance tend to have high interest rates and vice versa.      

However the market place is more powerful than any government’s intent so usually some of these fundamentals are out of whack. This creates opportunity for Borrow Low - Deposit High.

Nothing I see in the panic articles I have read to date changes these fundamentals. I will continue to dig, watch the interest rates and currency parities and let you know. Stay tuned.  But do not panci. I suspect there will be some huge opportunities on the horizon. The more panic, the better and it is fun finding the crisis created investment jewels.

Until next message, good global investing!

Gary

P.S. Double your profit potential with the MultiCurrency Sandwich. If my assessment is correct the volatility in currency markets right now could lead to extra profits. DETAILS on my Borrow Low - Deposit High service

Join Merri, Thomas Fischer of Jyske Bank and me at our next International Business and Investing Made EZ course in North Carolina.  Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead.

Join Merri and me and our Ecuador on our Import-Export Expedition.  We'll look at many items to export including carved wood doors like the ones at our hotel. Here is a picture of the doors below.

Welcome to Meson de las Flores!