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Date: June 1, 2011
Subject: The Currency I’m Buying on Every Correction

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The Currency I’m Buying on Every Correction

Karibu (Welcome) G&G Readers,

Imagine it’s the year 2035. An American citizen is packing his/her bag and moving to another country for a better life.

He/She’s tired of working for the government three days a week just to pay his taxes. And he/she can’t stand the fact that his/her dollars buy less and less every year.

Just a Few Years Ago, This Would Have Sounded Crazy…

Now is this an absolute certainty? Now, it’s possible that America could turn things around by then. But from everything I’m seeing, the current government is just repeating the same mistakes of past administrations. Our country continues to spend way beyond its means.

As long as we continue on this same irresponsible path, I can’t be optimistic about America’s future. So in 20 years or so I wouldn’t be surprised if my son or daughters moved to Brazil for better opportunities. A few years ago, I would never have said that (in fact I would have called you crazy if you told me that!). But things have changed.
This latest financial crisis has blurred the definition between developed and developing nations.

Countries like Brazil, India, and China are looking much stronger than more developed U.S., U.K. and Europe. This major change in the global scenario is important because it will lead to significant currency movements.

Here are a few things you should keep in mind during the next few years.

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U.S. Debt Will be a Drag on Growth

The U.S. government has prevented a major depression, but only at a terrible cost. The government debt is simply getting out of control. In the book, This Time is Different, writers Ken Rogoff and Carmen Reinhart documented that government’s debt begins to erase long-term growth once it goes beyond 90% of gross domestic product (GDP).

Their research shows that the average growth performance of developed economies drops by around 1.75% per year when debt breaches that threshold. Overall, U.S. government debt now stands at 97.7% of projected 2011 GDP. And that doesn’t even take into account the massive guarantees by government-owned Fannie Mae and Freddie Mac.

The IMF projects the ratio of debt to GDP to surpass 100% by 2014. This is not good for the dollar. And is one of the reasons why the Brazilian real will appreciate against the dollar in the long-term. But there are many other reasons.

What’s so great about the Brazilian Real?

The dollar has such a poor long-term outlook, that currencies from emerging markets with strong fundamentals will appreciate against the dollar in the long run.

Among those nations, Brazil is one of the strongest. This country will continue to attract investment capital from all over the world in the coming decades. That extra cash will force the local currency higher.

So why do investors everywhere want a piece of Brazil?

First of all, Brazil grew by a steady 7.5% last year. So far, this year, Brazil is expected to grow another 4.5%. So it’s a safe investment opportunity for investors around the world searching for long-term plays.

On the fixed-income side, Brazil’s relatively high interest rates and stable economy make its bonds look even more attractive to global investors (especially during this sovereign debt crisis).

On the equity side, stocks should perform well on the back of benign economic growth outlook. Also, there’s a lack of leverage in the private and public sector.

In other words, no big risky plays that led to financial blow-ups – that’s a definite plus.

Besides portfolio inflows, the country will also continue to attract foreign direct investment, especially from China, which views Brazil as a key supplier of commodities.
Brazil is also rich in oil, so it’s drawing commodity investors from around the world.

In addition to all that, massive events like the World Cup in 2014 and Olympic Games in 2016 will act as a magnet for foreign direct investment.

It Only Gets Better with More Inflation

Governments around the world have tried to print their way out of this financial crisis.
With all this extra cash floating around economies, it’s very likely that we will see higher inflation coming soon. In periods of high inflation, investors flock into commodities to hedge against the loss of purchasing power.

The Brazilian real is already a commodity currency with strong fundamentals, so inflation can only push it higher. Because of all these strong fundamentals, the Brazilian currency is looking very strong. I view any significant pullbacks in the Brazilian real as an excellent opportunity for long-term investment.

With China trying to cool its economy, Europe’s sovereign debt crisis, and the Fed withdrawing some stimulus, I expect to see a lot more market turbulence later this year. Those events that will shake the market will provide good opportunities to buy the Brazilian real for the long-term.

Bottom line: Buy the real on any corrections. I know I will be.

If you are a GGIS subscriber…I’ll let you know when. If you aren’t a GGIS subscriber…why not? And, best wishes to you.

If you need a one-on-one consultation to learn how to implement these investments or any other on the GGIS portfolio, feel free to contact me to setup an appointment.

Until the next time!

Metta (Wishing You the Best)

Asar Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
757-251-0174 office
866-361-3872 toll free fax

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LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.


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