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In recent editions of the DailyKos Investment Club, we've learned The Basics, evaluated risk at Disneyland, learned about Index Funds, and nepolon discussed Investment Strategies.  This Investment Club entry is very cynical, really: it is about profiting from the fiscal and economic mismanagement of the Republican Party...

In the last four years, we went from budget surpluses, strong employment, and rising wages to staggering deficits, a struggling job market, and real wages which are declining relative to inflation.  As jobs have fled the country, the technologies of the future are being developed elsewhere.  The economic growth we do have is driven by unsustainably increasing debt.  The stock market has stagnated, we've destroyed hundreds of billions in American wealth (not to mention countless lives) in unnecessary war, and we're driving a full-size SUV into a future with limited oil supplies.  In spite of our best efforts, George W. Bush and the Republican Party have four more years to steal from our children, sell out the middle class, and drive America into a ditch.

It sounds pretty grim, for America and for investors.  However, cynical as it may be, we weren't able to stop George W. Bush, but at least we can try to profit from his foolishness.  We aren't dogmatically bound to the fictions of "deficits don't matter" or the idea that the economy is driven by the wealthy.  So what do we do if we have little faith in the stock market and find few bargains there, but we want returns on investment better than current interest rates offer?  One strategy, which may or may not work, is to sell the American dollar short.

What do I mean by selling the dollar short?  Normally, when you invest, you buy something, wait for it to increase in value, then sell it.  When you sell something short, you sell it, wait for it to drop in value, then buy it back at the cheaper price.  Dollars are something we already have in our bank and investment accounts, and we can sell them for other currencies.  If the value of the dollar drops relative to the currency we bought, we can use our foreign currency to buy back more dollars than we sold.  If the value of the dollar rises, however, we lose money.  To start with, let's look at how the euro and the yen have performed against the dollar over the last five years: (from MSN Money Central)

The Yen has been flat for a lot of reasons, including chronic economic malaise in Japan and its government's desire to keep its currency low to promote exports.  Notice that the Euro now buys almost 50% more dollars than it did in January 2002.  Anyone who bought Euros three years ago got a huge return on their investment.  The big question is, will this trend continue, will the Yen follow the Euro's rise, or will the dollar increase in value instead?  The valuation of currencies against each other is complex, but it pretty much boils down to supply and demand.  Here are some of the big factors involved:

  • Economy: a strong U.S. economy encourages foreigners to invest in our economy and buy dollars in the process
  • Interest rates: if interest rates are high here compared to other countries, foreigners are encouraged to buy interest earning U.S. investments
  • Trade: a high or increasing trade deficit means there is a lot of supply of dollars overseas, which lowers their relative value
  • Budget: the same effect as trade: a budget deficit means we are demanding other currencies to buy our bonds, thus raising other currencies relative to ours
  • Inflation: if a currency is experiencing inflation, the value of that currency drops.

What makes things especially complicated is that these factors can work contrary to each other: a strong economy tends to bring a higher trade deficit.  Inflation risk causes the Fed to raise interest rates.  Higher interest rates will slow the economy.  Still, there may be an investment opportunity for those willing to take a little additional risk.  What currency would provide a good investment?  Some speculate on the Yen, particularly since its value would rise if China raises the value of its currency, but investing in Yen really puts your investment at the mercy of the governments of Japan and China.  The Euro has its own problems - Europe's economy is also weak right now, with Italy and Germany on the edge of recession, and if France fails to ratify the European constitution, it will harm the Euro.  Europe doesn't want the Euro to increase in value, and currency experts say it is probably the most overvalued of the major currencies.

So what am I doing?  I am partially invested in Euros.  In spite of everything going against the Euro, the dollar's value relative to it is largely a function of the U.S. economy.  Basically, it all boils down to whether you see the glass as half full or half empty:  if you are an optimist about the U.S. economy, keep your money here.  If the U.S. economy weakens, the dollar is really screwed regardless of what is happening in Europe and Japan.  I'm a pessimist right now (like Jerome a Paris), since I see a lot of potential downsides to the U.S. economy, but far less upward potential relative to where we are right now.  Since I am a fan of Vanguard and index funds, I've invested in a European Stock Market index fund (VEURX).  I figure I get the investment in Euros that way, plus any benefit from growth as the European economy wakes up.  Others may suggest a bank account in Euros - I'm not very familiar with how that's done, but advocates of that approach can leave details in the comments. UPDATE:: Commenter Impasto says you can get bank accounts in other currencies at Everbank.

DISCLAIMER: This is risky, with greater potential upside and downside than more conventional investments.  Believe me at your own risk!  Nobody (not even Vanguard) is paying me anything to mention their products, but I own VEURX.

Everyone is encourage to submit their own Investment Club entries, or this series will soon die out!  I don't know that much on my own!

Originally posted to CA Pol Junkie on Wed May 18, 2005 at 02:59 PM PDT.

Poll

What to you think about the U.S. economy over the next four years

3%1 votes
15%5 votes
18%6 votes
21%7 votes
42%14 votes

| 33 votes | Vote | Results

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Comment Preferences

  •  Totally Agree (none)
    I've recently raised the non-dollar share of my portfolio from 15% to 35%.  I'm generally not a believer in trying to time the market, but there's little chance you're going to go horribly wrong betting against the dollar between now and 2008. Even if Dems do well in the 2006 elections, it's highly unlikely that anything will be done about the budget deficit (meaning raising taxes on the wealthy) until at least 2009.
    •  Welcome, fellow bear! (none)
      I'm probably running around 40-45% European stock, 30-35% U.S. stock, 15% cash, and 10% U.S. bonds right now.  I'll reevaluate my position before the 2006 elections, but I agree that U.S. policy isn't likely to change before 2009 (shudder).
  •  How does one invest in Euros? (none)
    How can the average person invest in Euros? What mechanism/investment vehicle does one use?

    (Forgive me for being mostly clueless financially.)

    •  stock or cash (none)
      The way I'm doing it is by buying a European Stock index fund (from Vanguard, VEURX), which you can do from an investment account.  I've seen Kossites post about how they basically opened a bank account in Euros, but I forget how it worked.
    •  Er, maybe I should clarify my question. (none)
      Is investing in European stocks (or bonds) through mutual funds equivalent to investing in something denominated in Euros?  Is that true even if the mutual fund is denominated in dollars?
      •  Yes* (none)
        I'm pretty sure it is.  The prospectus for my fund says it is subject to currency fluctuations, and I notice it on days when the dollar goes up or down relative to the Euro.  As I understand it, you buy your mutual fund in dollars, but the mutual fund buys and sells its stocks on the European markets, using the native currency.  Some of what I get with my mutual fund is British pounds, which I figure is likely to be a little better than Euros thanks to relative strength of the British economy under Labour rule.
  •  I think the dollar's reasonably strong against EUR (none)
    The Euro is showing some significant signs of weakness, and I don't think it's going to pull out of it in the immediate future.  Interest rates are very low, discouraging buyers of the currency, and are unlikely to be raised in the near future because Germany's economy is not doing well—indeed, they've been lobbying to lower interest rates from their current ~2% level, which would further increase the interest-rate premium on USD.  European governments also have a stated interest in devaluing the Euro at least slightly, because its strength is hurting their export market.

    I'd probably bet on things keeping in the same general range, though of course all predictions are to be taken with a large grain of salt.  I don't think a level like the highs we've seen in the mid-$1.30s is sustainable, but I don't think it's going to dip back to $1.10s either, unless something major happens.  Basically, the downward pressures on the dollar (trade deficit, budget deficit, etc.) are roughly balanced by the downward pressures on the Euro (pitiful interest rates, slow economic growth, government support of export markets).

    "See a world of tanks, ruled by a world of banks." —Sol Invictus

    by Delirium on Wed May 18, 2005 at 03:28:09 PM PDT

    •  I somewhat agree (none)
      The analyses I've read say the Euro is a little overvalued and Europe wants to fix that, but that ultimately the exchange rate boils down to the performance of the U.S. economy.  If the U.S. economy continues its present course, investing in Euros is not going to be a winner.  I tend to think the present debt-financed U.S. economy is unsustainable and the chickens are bound to come home to roost.  The big question in my mind is when that will happen.

      Your analysis covers the most likely scenarios.  I just see a really bad scenario as more likely than a really good scenario.

      •  quite possible (none)
        I'm not sure I'd put my eggs in the Euro basket though, even if I were betting against the U.S. economy.  The eurozone economy has a lot of potential catastrophic downsides too, from a likely French rejection of the constitution to a seemingly inevitable abandonment of the 3% deficit limit under French and German pressure, to chronically slow growth and widely divergent national interests between the various countries in the common currency.  I don't think a Europe-wide crash on par with Japan's is impossible.

        If I really wanted to bet against the U.S. without betting on the Europeans, I'd probably put my money in some diversified basket of currencies, with some Euros, Pounds, Pesos, Yen, Canadian dollars, and Australian dollars...

        "See a world of tanks, ruled by a world of banks." —Sol Invictus

        by Delirium on Wed May 18, 2005 at 04:11:09 PM PDT

        [ Parent ]

  •  Tepid Growth, jobs up but wages down (none)
    The economy grows but not as fast as population.  Jobs are up but wages down.  Personal spending will favor services driving up the ratio of low wage jobs to higher wage jobs.

    I don't know how an individual can safely "short" the USD but I've done it on behalf of large corporations.  I wouldn't do it myself due to the possibility of a margin call and because my aversion to risk would probably prompt me to make moves out of a position at the wrong time.

    Instead of being short USD I would be long one of the other currencies, probably Euro or yen. This would accomplish the same thing as a short.

    I favor the Euro over the yen or remembi because economic and political risk is spread over many more countries.

    Take a look at Everbank for non-USD deposits.

    They can be found at:

    http://www.everbank.com/

    they were covered in Forbes here:

    http://www.forbes.com/bow/b2c/review.jhtml?id=1600

    I'm not using them yet but as I re-balance my portfolio I'm going to seriously consider non-USD deposits with them.

    Great idea for an investment club.  I'm looking for ways to get a good return and at the same time invest in (support) non-exploitive companies.

    By the way, my wife had a charge card with MBNA through the Sierra Club which we recently replaced with a card more in line with our progressive leanings.  We need to get more people to flex their progressive economic muscle to punish the bad guys and support the good guys.  But that's another subject.

  •  a good forex forum here (none)
    http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=forum&f=16&submit=Go

    OANDA allows you to trade EURUSD and other currency pairs.  This is mostly margin trading (although it doesn't have to be) so I'd recommend using a demo before committing your cash to this, it is very dangerous.

    There's also a bunch of political flamewars on this board, which can get entertaining.  The wingnuts tend to be bearish on EURUSD.

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