How to build a currency basket? II

In the first article, we predefined a fix number of currencies (AUD, CAD, CHF, USD, and GBP), and we calculated a reasonable portfolio to hedge against EUR. In this second article we want to determine why these currencies and why we started using 20% of each one when some of them behave approximately the same. For instance, AUD and CAD have a high correlation and if we use them separately we are overweighting their importance in our basket.


How to build a currency basket? I

Imagine our main currency is euros. We are paid in euros and we live in a euro country. But we don´t trust our currency that much, or we are not sure where we will live in a few years, or simply to diversify our portfolio, we want to create a currency basket. Problem: which currencies and in which percentage?

First of all, we don´t want to talk about the different tools to invest in a specific currency (funds, Forex account, foreign stocks...). Here we will only show an algorithm to build a reasonable currency exposure.


Euro/USD forecast…

The EURUSD closed on 2021.11.19 at 1.1285.

On the charts, an old support becomes a new resistance. The key level is marked by the red pen. It has bounced there, and the new way is down. Also the movement up is NOT supported by any momentum indicator.

If we had to bet, we would see the EURUSD lower than 1.1 and eventually crossing the parity. What we don’t consider is any big strengthening in the euro for many years.


Turkish lira, out of control

10 years ago, we just needed 2 liras to buy 1 euro, now we need 11. What is going on with Turkey?

The old Ottoman empire is gone, and we need to accept it. It has happened to others in the past. Just remember the Spanish empire covering America, Europe and Philippines…, and see Spain now. Or the British empire, still influential but losing pace every year.

Turkey has a powerful military and has been trying to be a key piece in the Middle Eastern political turmoil, supporting one or another. Perhaps it is time to focus on itself and start sending a modern, positive message of a business oriented country with a wonderful young generation.

The currency in most cases reflects the country´s situation, but to change the macro variables and the perception abroad takes time, and meanwhile, instead of lowering interest rates that only decreases the faith in the lira, a possible solution could be the creation of a currency board. It will protect the currency but it will limit the Government mobility.

With a currency board, the exchange rate and money supply is managed by an independent money authority, which more often than not, backs the domestic currency with a basket of different foreign currencies (ideally in a proportion similar to its trading).

It has been done more or less successfully in Bulgaria in 1997 (link).


Bank for International Settlements

The BIS is “the Central Bank of the Central Banks”. It is based in Basel with offices in Hong Kong and Mexico. Its goal is to create monetary and financial stability. Of course, they set up the rules for the comercial bank’s leverage.

But the purpose of this post is to draw your attention to the very interesting papers you can find in its web. You will have to separate the wheat from the chaff, but, in a sense, it will help you to better understand what is happening globally.

For instance, here you can find the Global Liquidity Indicators, or you can read the interesting Annual Report, or the Research Papers.


To test your kids…, and yourself!

It can be nice to remember the borders and capitals of all of these countries: Kazakhstan, Uzbekistan, Tajikistan, Kyrgyzstan, Turkmenistan… 

Also how the geography affects the economics of the countries. For instance, the Turkmenistan to India gas pipe (link), also known as TAPI.


The importance of owning some gold

PDM, Stichting Pensioenfonds DSM Nederland (DSM Nederland Pension Fund), manages the pensions of all companies affiliated to DSM Nederland B.V.

Recently, they have decided to open their array of investments and start reducing public bonds to buy property even gold. Very interesting link here.

As we have been saying for long time, gold doesn’t behave like the rest of investments and can hedge the risk and volatility of the stock market. You can check our PORTFOLIO on the right and you will see that is what we try to accomplish.

Owning some gold is like buying insurance for the rest of the portfolio.


Offices, office REITs?

In general, we love REITs. It is a very convenient way of owning real estate without the hassle of dealing with tenants. However, not all of them are the same. Here you have an old list of high dividend REITs.

With the rise of on-line shopping, we tried to avoid mall REITs. We felt many malls were built and only a few became successful. Besides malls, the Covid era has accentuated another global trend: working from home. This new reality we feel is likely to linger on.

When the pandemic wanes, do you think employees are going to return to the office?

Some financial firms are requesting their workers to return to the office as soon as possible. However, others such as Twitter, Spotity, Square... are going to let telework forever. We still don’t have enough data to value the effectiveness of the employees doing their job from home. We don’t even know if the intermediate managers are well prepared to assign specific tasks with adequate duration estimates. Probably, all of us have an opinion on the matter based on our own experiences.

That been said, the most probable outcome is going to be a hybrid model. Many big corporations (Microsoft, Maersk, etc...) have publicly announced they are willing to let employees combine work at home and at the office. There are even some office models with distributed workstations all over the cities. 

In any case, office space is going to suffer the consequences of more people zooming. There are REITs that only invest in offices. We never liked them. However most of the big REITs invest a big part of their capital in offices. It is up to you to decide if it is worth it.

Remember: before buying a REIT check the portfolio they own to have a clear idea of what you are buying.


Ripple, BTC and regulation

In the best moments for bitcoin, we see a big drop in another promising cryptocurrency, Ripple (link). Why is that? The American authorities are investigating if Ripple can be considered a security instead of a commodity like bitcoin. If that happens, it will be kicked out of the crypto exchanges and will lose its liquidity. Its value could be much lower in a few months, despite the initial potential. We wish them the best.

This has been a “notice to airman” to sell other alt currencies and focus on bitcoin (now its volume is about 70% of the market), but it should also be a warning to see the power the legislators have over cryptos. Some people think it could be a good time to sell half of the BTC position with nice gains...


I don’t really know

Paul Krugman recently wrote an article in The New York Times basically advocating for high levels of National debt: Learn to Stop Worrying and Love Debt. Besides the political bias, his point was governments have managed adequately high levels of debt and “nothing” bad has happened.

The Covid crisis is going to be solved creating money and giving it away. Honestly, we are just a humble group of thinkers and don’t have all the answers. However, when we are in doubt we choose two approaches:

1. Follow the big movements. For instance, in investments, before choosing a company, we choose the sector and the country. At the end, even without considering all factors, if the sector has a solid future, geographically the area is doing better than the rest and the price you pay is decent, the investment tends to be successful.

2. Follow common earthy laws. When we see that I receive money for asking a loan, or that I have to pay interest for giving a loan, we feel something is crooked and will not end happily.

When governments can create as much money as they need with no limitation and inflation is under control, and people still trust the currency, we feel we are buying time, but something is wrong.

It is true that the time we buy can be enough. First, the worst currencies won’t be able to survive and suffer tremendously. We are seeing it today, for instance with the Turkish lira or the South African rand. But eventually the good ones will start feeling the pain as well. It is funny that the moment in history in which “size matters”, some countries are trying to go in the other direction (Brexit, independence movements in Spain...).

Highlanders moment?


Delaying gratification

After meeting many people who have successfully retired before 50, I found one thing in common. It's not they were amazing investors, or very lucky. Their shared characteristic was they all were able to delay enjoyment.

Some people might think this is not a virtue, and they could be right. However, to become a young retiree you have to have it. One of them said that when he was a kid, instead of going to the playground or talking between classes, he prefered to advance his homework.

Delaying enjoyment is something that can be learnt by children. It will give them more freedom because those individuals who find it difficult to delay gratification will often find it intolerable to have to put off their enjoyment.

Deferred gratification is also related to impulse control. In fact, there is a link between addictive personality and the inability to delay gratification.

Besides, it can be used to increase motivation. For instance, people on a diet can have a day off to eat junk food if they have been compromised the days before.

Last, psychologists say it's better to seize the day, which probably is right, but, again, to retire young you have to have the capacity of "seizing the day" by thinking of the future. That is a double twist!


Presión fiscal vs. esfuerzo fiscal

En España, debido al Covid, se ha procedido a repartir dinero desde las instituciones públicas a los individuos y empresas de una forma u otra. Como el dinero no se genera SOLAMENTE con el deseo de generarlo y como las ayudas europeas son limitadas, es de esperar una fuerte subida de impuestos. Pero, ¿es esto razonable? ¿No está España al borde del colapso para seguir exprimiendo la teta de la vaca?

Se comenta que la presión fiscal en España todavía permite subir los impuestos en comparación con otros países como Noruega. Se define presión fiscal como la RECAUDACIÓN FISCAL (incluyendo IVAs, Seguridad Social, etc...) dividido por el PIB. En 2018 España tenía una PF de 35.2% y Noruega un 40.2%.

Sin embargo, algunos pensamos que estas medidas macro se alejan mucho de la realidad del individuo. Nos explicamos. El PIB per cápita en España es de 26500 EUR al año y en Noruega de 69300 EUR (también datos del 2018). No es lo mismo que yo pague impuestos del 35% cuando apenas me llega para comer que del 35% cuando estoy pensando en cambiar mi barco porque no me gusta el color. Por eso se definió otro índice, mucho más entendible para el ciudadano, que es el esfuerzo fiscal. Este no es más que dividir la presión fiscal por el PIB per cápita. Si lo hacemos en este caso tenemos que el EF en España es de 35.2/26500=0.13% y en Noruega 0.06%, esto es, menos de la mitad.

Los sueldos en España son muy bajos y apretar más al ciudadano lo llevaría al colapso. Es más fácil pagar UN POQUITO MÁS de impuestos cuando los sueldos son casi el triple que los españoles.

Formen su propia opinión. No se dejen llevar por los medios ni por nosotros. Piensen por sí mismos.


Reminder: where and how to buy gold?

You feel gold is soaring..., at historical maxima in most currencies. For years, we have been advising that it would happen and some of you think that you missed it. Not so sure. The long-term perspective is brilliant, like gold itself. But in case you want to join the race, how do you buy it?

Very easy. We would give you some ideas here:

1. Go to your broker and buy an ETF of gold backed by physical gold. Many good ones. Just google it.
2. You can buy gold on/in the ground. How? You can buy gold mines. They are going to work as a mix between gold and the stock market. You can buy an ETF with several big ones, GDX, or small ones, GDXJ.
3. There is a beautiful and reliable program in Australia, called Perth Mint (link here). Check the list of distributors in your country.
4. Why not having bullions or non-numismatic coins directly? You can go to the shop or buy online. The only problem here is the storage (bank or private safe, house...). You do your maths.
5. Some firms offer the purchase and the storage in their safes under your name. It is a very efficient way of buying, but don’t feel confortable recommending specific names.

Remember if you hold stocks, it could be a good idea to own some gold, taking advantage of the negative correlation.



We are going to be incredibly brief today:

1. Better dollars than euros. We see EURUSD < 1.

2. Gold is doing its job protecting us.

3. We are expecting a last movement down in the stock market under the previous minima. If that happens, it could be a good moment to buy the BEST stocks possible (see this post).


If we want to buy..., which stocks?

Here, we are not going to solve your doubts about the World collapsing or recovering. It is your decision to think one way or the other. However, if you believe there will be a recovery at the end of this year or next year, perhaps, it can be a very good opportunity to buy some high-quality shares which were unavailable some months ago (extremely high P/E ratios).

This is going to be a dense article, so let us start saying that these moments can be excellent to rebalance your portfolio and/or changing from funds to good shares.

Second question that arises is when we should start buying -please, again, if you believe the pandemic will get under control. We have not good solution for that. Be ready to receive the worst news in the US, etc.. Perhaps, starting in May, we can commence with a program of partial purchases. In any case, to find the best trigger, just remember:

The time to buy is when there is blood in the streets. Even if it is your own." Baron Rothschild.

Third, our target in SimplyNoRisk is not to get the best returns, but to suffer the least, therefore our stock picking is very defensive. We believe the following sectors can be good options:

Utilities: JXI ETF,

Healthcare: Parkway Life REIT, IXJ ETF,

Food and beverages: Diageo, Coca-Cola, XLP ETF

Technology: Alphabet, Verizon.

Others: Deutsche Post.

And to finish, please, don’t gamble: the travel industry is doomed. The recovery might not come for many cruise lines, airlines, hotels... Also be careful with malls, restaurants, bar chains.