Holding some foreign currencies?

[hogtied]

I'm thinking of taking a portion of my cash holdings (perhaps 3-5%) and converting them to a few foreign currency CD's with EverBank.  Mostly because I believe the dollar will continue to tank.  The CD pays 1.2% for six months and hopefully will gain on the exchange rates down the line.  What say ye?  Thanks.

[melveyr]

Why do you think the dollar is going to tank?

[hogtied]

Just my prediction but:  The nations spending habit is not sustainable.  Our politicians did not indicate today, by passing legislation on the debt ceiling and spending cuts, that they are about to or will ever do anything to get this nation back on a sound financial course.  The US bond rating will be lowered.  Interest rates will need to increase to bring in buyers, which will further add to increase spending.  Their proposed 1-2.5 trillion dollar spending cuts over 10 years won't cut it.  We needed 10-12 trillion in cuts over the next 4 years to get on track.
What a mess!

[moda0306]

hogtied,

I'd look into Modern Monetary Theory or even Modern Keynesianism before you decide whether we're truly in the fiscal mess you think we're in.

Some of us have drastically changed our opinions on sovereign fiat currency behavior relating to deficits.

A lot of this stuff has been discussed already on this board.

[MediumTex]

And make sure to take a look at the Japanese bond market.

It looks like the Japanese 30 year bond is going to slip under 2%.

That's not what decades of insane levels of deficit spending is supposed to lead to, or so the TV tells me.

[moda0306]

To add to MT's post, Japan has a currency very much like ours... their debt/gdp ratio is 200%.  Ours is about half that.  Their rates are about half of what ours are for similar terms.

It would seem that a sovereign fiat currency operates by a different set of rules than pegged currencies... it seems, at least so far, that the default/rate-spike spiral may never really take hold under such a currency... possibly.

Many disagree here... but it's at least worth getting your feet wet into currency types and how they might affect how a countries interest rates might end up.

[Gumby]

Just my prediction but:  The nations spending habit is not sustainable.  Our politicians did not indicate today, by passing legislation on the debt ceiling and spending cuts, that they are about to or will ever do anything to get this nation back on a sound financial course.  The US bond rating will be lowered.  Interest rates will need to increase to bring in buyers, which will further add to increase spending.  Their proposed 1-2.5 trillion dollar spending cuts over 10 years won't cut it.  We needed 10-12 trillion in cuts over the next 4 years to get on track.
What a mess!

But, that doesn't mean that the dollar will definitely tank. For all we know, the dollar could get stronger if we slip into a full-scale deflation.

One of the most reliable ways to lose money is to follow the opinions and forecasts that confirm your own beliefs. If you carefully weigh, and factor in, opposing and contrarian opinions into your investment decisions, you'll be far more prepared for other outcomes — like the possibility of a strong dollar.

Everything you've said makes a lot of sense on the surface — unfortunately the obvious outcomes almost never happen.

Perhaps one of the greatest qualities of the pure 4x25 PP is that an investor isn't married to any one outcome — which can make it easier to envision almost any outcome.

[TBV]

Hogtied:

There are many here who see little downside to runaway debt of the sort that concerns you.  Perhaps it's not so bad, and we probably won't ever actually pay it back (at least not with real money that holds value), so why worry?  Of course, if rates do go up, we might see catastrophic contraction of domestic spending, as we struggle to meet the payments on our crushing debt load.  But by then we'll have all forgotten about the Tea Party terrorists who argued against all this.  Instead, we'll have convinced ourselves that it was some selfish foreign devils who lured us into debt.  For a preview, read up on the current Irish, Greek and Icelandic rhetoric on that subject.  You may need it some day.  Cheers.

In the meantime, no matter what happens, stick with the HBx4 PP.  That's one thing we all agree on.

[Gumby]

There are many here who see little downside to runaway debt of the sort that concerns you.

TBV, I don't believe anyone here thinks that "runaway debt" has little downside. Exploring contrarian viewpoints means going outside your comfort zone to explore the possibility of other outcomes.

[stone]

hogtied, if you are worried about depreciation of the USD, then the gold part of the PP is there to cope with exactly that. I don't think that it is impossible that a shock response to USD depreciation could occur at some point in the future with the Fed hiking interest rates up as was done in 1981. If that happens, then USD cash is what will save your PP. The exchange rate would swing sharply in favor of the USD and against foreign currencies. Gold, stocks and LTT and foreign currency holdings would all suffer badly.
My guess is that the same "increasing government debt gives lower treasury yields" force could apply to the USA and UK as to Japan. BUT Japan has a trade surplus and that prevents Yen depreciation. The trade deficit and decreasing reliance on the USD as a reserve currency is what drives USD depreciation. Everything rests on whether the Fed chooses to let that USD depreciation run rather than hiking rates to reverse it. By reducing your USD cash allocation, you would be betting on the Fed never stepping in as they did in 1981.

[TBV]

Gumby:

Pardon me for suggesting that doubling our debt every 10 years or so (even with historically low interest rates) is deeply troubling.  If those who denounced all this in 2006 can embrace the dark side now, who am I to object?

[moda0306]

TBV,

Your post was sarcastic and condescending... a bit insulting to the intelligence of the people here that argue that maybe (not definitely, but simply MAYBE) cutting spending right now is not going to solve any problems... and use Japan as an example, with double our national debt and half our interest rates.

Most MMT followers were probably deficit hawks at one time... as most financially-minded people tend to view debt as a bad thing.

Someone considering the PP would do well to at least consider observations of non-deficit hawks before they make their conclusion.  That was my only goal.  I'm not trying to rally an Army of MMT echo-chamber groupthinkers to my cause.

[MediumTex]

Gents:

Courtesy please.

Thanks.

[TBV]

Academic speculation is harmless enough.  Exploring alternatives is also usually a good thing.  Accepting greater levels of risk with one's own money is perhaps unwise, but ultimately a concern only for oneself.  That is what this forum is about, or should be.

However, as recent events have shown, a tone of advocacy has crept into the discussions.  A flaming adjective here, an unkind characterization there. And the issues at hand are not rooted in personal finance, but matters affecting everyone in ways both big and small.  That changes things, and invites rebuttal.

The essence of the PP is that one should not bet on any given theory (especially ones that may be satisfying politically.)  Instead, HB sought an approach that offered benefits no matter which scenario prevailed.  We should try to do the same.

[moda0306]

To add to MT's post, Japan has a currency very much like ours... their debt/gdp ratio is 200%.  Ours is about half that.  Their rates are about half of what ours are for similar terms.

It would seem that a sovereign fiat currency operates by a different set of rules than pegged currencies... it seems, at least so far, that the default/rate-spike spiral may never really take hold under such a currency... possibly.

Many disagree here... but it's at least worth getting your feet wet into currency types and how they might affect how a countries interest rates might end up.

I seemed to offer plenty of room to breath outside my own opinion here, TBV.  Some of our discussions have had unkind characterizations and maybe flaming adjectives, but this one hadn't come close to that point. It seemed to me your post did a lot more to insult those that think like Gumby and I than to spark intellectual curiosity within someone who seems to have certain predispositions about our global financial system.  Further, we were hardly advocating a change in the PP... on the contrary, we were warning against it and just providing some fresh perspectives to someone that seemed like he may not have been exposed to them.

I'll take your post as an extension of some of my more vehiment posts in other threads and call it a day... I know I can be one of the more sarcastic and some times low-brow ones here. I just thought it was a little bit unnecessary and sarcastic to expose a new member to... that's all.

[MediumTex]

And make sure to take a look at the Japanese bond market.

It looks like the Japanese 30 year bond is going to slip under 2%.

That's not what decades of insane levels of deficit spending is supposed to lead to, or so the TV tells me.

Japanese 30 year bond is at 1.98%.

That's really something.

[moda0306]

Also, US 30 year is most likely sub-4.0% today.

My tax-adjusted mortgage rate is 3.9%... temptation is nigh.

[MediumTex]

Also, US 30 year is most likely sub-4.0% today.

3.94% on the 30 year right now.

[moda0306]

Where do you see this spot-on MT?

[MediumTex]

Where do you see this spot-on MT?

Bloomberg--Markets--Rates & Bonds

[Pkg Man]

I say do it with money you can afford to lose -- so take money from the VP, if you have one, to invest in FX.  I would not take it from the PP.

[hogtied]

I live on the Canadian border.  I know I can legally take $10,000 across.  Perhaps I'll just take some of my emergency money and deposit it in a Canadian bank.

[Reub]

Has anyone seriously looked at using Everbank to diversify into a certificate of deposit from another country? I see that the CD's offered there are FDIC insured. I noticed that a 3 month Brazilian Real CD is currently offering 4.75% and that a 12 month Australian CD is at 3.63%. What do people think of investing a small portion of the cash portfolio in something like this? I fully understand that currency depreciation is a risk here.

[Storm]

I live on the Canadian border.  I know I can legally take $10,000 across.  Perhaps I'll just take some of my emergency money and deposit it in a Canadian bank.

Hogtied, be careful.  Foreign banks are required by law to report all income and accounts back to the IRS.  Just by opening a foreign account, you will probably put yourself on a very short list of "people who we want to look very closely at their taxes."

I would just caution you that the risk may not be worth the reward.

If you do want to invest in a foreign currency that has some upside potential - Bank of China has a New York branch in Chinatown.  You can open an account denominated in RMB.  Most people believe that eventually China will have to relax their RMB peg to the dollar.  They have already started to, to some small extent.  When they do eventually relax their peg, your RMB will grow in value relative to the dollar and you'll come out ahead.  This is, of course, more of a Variable Portfolio Forex play and probably not something you want to do with your 25% cash portion.  As always, good luck, and YMMV (your mileage may vary).

[Storm]

Has anyone seriously looked at using Everbank to diversify into a certificate of deposit from another country? I see that the CD's offered there are FDIC insured. I noticed that a 3 month Brazilian Real CD is currently offering 4.75% and that a 12 month Australian CD is at 3.63%. What do people think of investing a small portion of the cash portfolio in something like this? I fully understand that currency depreciation is a risk here.

Reub, before you go investing in Brazilian CDs, you might want to look at their rate of inflation.  I think their inflation was something like 12% in the last year...    Yikes!