By Evaldo Albuquerque, Editor, Exotic FX Alert
Dear Sovereign Investor,
Imagine two guys, John and Pedro. They both need to borrow money from you.
John is practically bankrupt. But he has never defaulted on any loans before, so John has a great credit score. With this high credit score, John expects to borrow money from you at a low interest rate.
In stark contrast, Pedro is in great financial shape. But he has defaulted on loans before, so his credit score is poor, and he’s prepared to pay you a higher interest rate for the loan.
Who would you lend money to?
If you’re like most investors, you would pass up the higher interest rate from Pedro and lend money to John instead. You would see that higher credit score and think John is the “safest debtor” (even though he’s nearly bankrupt).
John represents the U.S. Treasury. Pedro represents many emerging market countries that have improved their fiscal situation in the past decade or so and now offer higher rates.
Today, I want to show you why lending money to such emerging market countries is a much more strategic and profitable way to build your retirement fund.
More importantly, I’ll show you why U.S. Treasuries are anything but “safe”…
The U.S. Has Raised Our Debt Limit 74 Times
While everyone is focusing on Greece, another much larger country is getting very close to defaulting on its bonds…
The United States.
According to the U.S. Treasury, if the Congress fails to raise the debt ceiling, our country will default on August 2nd.
Congress created the debt ceiling back in 1917 to give the U.S. Treasury the ability to issue debt without asking Congress for permission. But the Treasury can only borrow up to a specified amount, so debt doesn’t get too out of control.
But the ceiling hasn’t really prevented that from happening. According to the Congressional Research Service, they have raised the debt limit 74 times since 1962. And they’re about to raise it once again.
Republicans can’t agree with Democrats on a deficit-reduction plan. But both sides agree the debt ceiling has to be raised. Nobody wants to be blamed for a U.S. default.
So at this point, it’s very likely Congress will raise the debt ceiling by a small amount, but they won’t create any long-term deficit-reduction plan.
In other words, Washington will just buy more time – like they have been doing for the past 50 years.
And this has important implications for your investments. Let me explain…
Why the Status Quo Is Bad for Your Retirement
When Congress raises the debt ceiling once again, they will just be maintaining the status quo. They won’t take any long-term austerity measures to fix our debt situation.
That status quo is dangerous to your retirement income.
It means the U.S. will continue on the path of losing its AAA status. We need that triple-A rating from all the rating agencies to keep our overseas investors.
If we lost that rating, the value of the Treasuries will take a big dive.
The status quo also means the dollar will continue its long-term downtrend, and you will continue losing purchasing power.
The lack of any long-term fiscal plan also casts a cloud of uncertainty over businesses. They can’t make important decisions, such as hiring and investing, if they have no idea how the tax environment or the U.S. dollar will look like in a couple years.
In other words, the status quo means the U.S. will just keep digging itself in a deeper hole. It means the dollar will continue to plunge. It means the Fed will have to keep interest rates near 0% indefinitely.
This is not a pretty picture if you rely on Treasuries for your retirement income. The good news is you don’t have to. There are better options.
Looking for Safer Options in “Risky” Places
In the 90s, investing in emerging market bonds was not for the faint of heart. You had a very real chance of never earning your money back – even if you held those bonds to maturity.
But those days are long gone.
Bonds from some emerging markets are looking much safer than debt from many developed nations. Countries such as Peru and Indonesia, for example, have a much healthier fiscal situation than the U.S.
Besides safety, these bonds offer much higher yields. Right now, Indonesia pays 6.88% on their 5-year bonds. Peru pays 3.40%. South Africa pays 7.50%.
Compare that to the meager 1.6% the U.S. will pay you to hold a 5-year Treasury – and hold your money in sinking U.S. dollars for five years.
Currency diversification is just one more reason to invest in foreign country’s bonds.
Besides a higher yield, you get the safety of investing in stronger currencies than the U.S. dollar. So you basically get paid to diversify away from the declining dollar.
With all these benefits, you would think that most investors would be looking abroad for higher interest plays for their retirement. But somehow many continue to invest in U.S. treasuries looking for safety.
Don’t make that mistake. It’s much easier to build an income stream outside the U.S., far away from the U.S. dollar.
Editor, Exotic FX Alert