It’s easy to see why this latest ad from Karim Rahemtulla has driven a lot of questions our way: The headlines are all about safety and protection and “zero downside” … just what a lot of folks want to hear when the market is volatile.
But what are they actually talking about? And is it really “only open during a 30-day window from June 16 to July 14?” I’ll walk you through it and explain what the ad is talking about.
The spiel is in service of Karim Rahetulla’s Beyond the Dollar service, and the order form sums up the idea pretty well:
“Congratulations! You’re about to gain access to a ‘Secret Investment’ offering a zero downside and massive potential upside investment opportunity.”
Well, “secret” is a word we don’t like much around here — and this is not a secret investment, it’s just one that perhaps you haven’t heard of. Thankfully, your friendly neighborhood Gumshoe is on your side… let’s get into the details.
The basic premise is similar to a lot of other ads: DOLLAR FALLING! YOU NEED TO BE AFRAID! Here’s a bit, again from the order form:
“Soon, very soon, a falling U.S. dollar could trigger an unstoppable chain reaction that could wipe billions of dollars in wealth from America’s retirement funds.
“Here’s your chance to escape the carnage…
“And ‘exchange’ a few of your dollar bills for assets that move in the exact OPPOSITE direction.”
Are you worried yet? Well, it’s one of those “entry level” newsletters, only $49 a year, so you can subscribe if you feel like it — this newsletter is essentially based on betting the US dollar has peaked and will decline against everything else because of our debt burden, unfunded obligations, and falling status in the world, and a lot of people love reading that stuff (I don’t know how the letter has performed since it launched — Rahemtulla has been around for many years, working for several different Agora-affiliated newsletters… most of his teaser picks have been in energy and other commodity stocks, so they’ve done terribly on our “buy and hold” tracking spreadsheets but we don’t know when he might have sold them). But don’t subscribe just to find out this “secret”… that we can share with you for free. (If you’re in the biz, you probably call these “front end” newsletters — those are the newsletters that publishers try to break even on, bringing in folks for $29 or $49 or $79 or whatever the lowish price is, because that group of entry level subscribers is their prospecting pool for the really profitable “back end” newsletters that cost $200, $1,200, $5,000. The person most likely to subscribe to a crazily expensive newsletter is the person who recently subscribed to a cheaper one.)
This is the chart of the trade-weighted dollar index since the early 1970s, by the way — just to remind you that, yes, the dollar can move up and down considerably against other major world currencies… and it is near the highs of the last ten years or so.
Let’s get the hints from the ad so we can be feed them to the Mighty, Mighty Thinkolator and get our answer…
“For Investors Who Hate Stock Market Risk…
‘The First ZERO DOWNSIDE Investment!’ ….
“We’ve arranged for a select few to uncover the secrets of a “Perfect Investment”…
“Essentially, it’s a ZERO DOWNSIDE, MASSIVE POTENTIAL UPSIDE opportunity.
“Here’s an extremely rare investment where 1) your principal is 100% protected. And 2) you get a chance to pocket high double-digit gains in what I believe will be the No. 1 most lucrative investment sector over the next five years.”
And Rahemtulla echoes a lot of the fears that you’re probably feeling about the market:
“My analysis indicates the stock market is at a historically rich valuation.
“A long-overdue correction is imminent.
“Last time things were this bad, the crash of 2008 sliced more than 50% off the Dow’s total value.
“As if things weren’t bad enough, now the November election is coming at us with breakneck speed … throwing even more anxiety, frustration and desperation into the mix.Are you getting our free Daily Update
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“As that day approaches, your money had better be miles away, tucked away safe and secure.”
What else do we get by way of clues?
It’s not a government investment, so we’re not talking about Treasury Notes. And he says that your principal is protected all the way up to $250,000 by the FDIC, “just like a savings account.”
So that means this is a bank product, and most likely a Certificate of Deposit. The FDIC doesn’t insure other things.
And he makes more of those “too good to be true?” assertions:
“… unlike a savings account or government bond, you have the opportunity to collect massive returns… perhaps as much as 10 times that of “normal” stock market returns.
“Mind you, there is NO maximum cap on your upside earnings with this opportunity. You could say the sky’s the limit… and I’ll share some actual earnings on similar products in just a moment.
“Sound too good to be true? Well, it’s not.”
And the catch? Why would you subscribe to this newsletter to learn about something like this? Here’s what Rahemtulla says:
“I’ve arranged this special situation with the group that made this investment possible – through a paid marketing relationship we developed with it.
“As such, they’ve given us access to the opportunity.
“But you can only get in on this extraordinary investment opportunity during a short 30-day window from June 16 to July 14.”
And then he goes on to make the point that commodities are starting to recover, including mined stuff as well as oil and gas, and that this will move the dollar lower and give you an opportunity to profit from something linked to those commodities…
“Here’s how it works…
“In short, with this investment, you put your money in a special commodity-backed way to make money.
“From there, two things can happen.
“1) Everything I’ve told you comes true. Commodities go up over the next few years. (That’s what happened with a similar version of this investment previously, to the tune of 97%.) And in that case, you keep the full gain.
“2) I’m wrong. Commodities drop. Let’s say it’s a worst-case scenario and they lose 90%. Now, let me be clear about this… in that case, you would still not lose one penny. Your principal would be 100% protected – in fact, it’s protected up to any amount by the group that made this investment possible. And it’s also backed by a $250,000 guarantee from the U.S. government.”
So what’s he talking about? This is, sez the Thinkolator, one of the MarketSafe CD offerings from Everbank… which are, essentially, restrictive long-term CDs that give you exposure to some other investment in lieu of paying you a rate of return.
And there’s only one of those products on offer right now, and it happens to have a funding deadline of July 14… so this is the 5-YR MarketSafe Currency Comeback CD from Everbank.
And no, you don’t have to subscribe to Rahemtulla’s newsletter to get access — they’re advertising this CD to the public, and it’s on their website. Anyone can buy in as long as they have at least the $1,500 minimum investment.
So what’s the deal? This is a CD whose rate of return won’t be calculated until the end of the 5-year funding term, and that return will be based on the movement of five different equally-weighted currencies against the dollar. You can check out the term sheet here for the basic info, here’s the sales pitch from EverBank:
“Here’s an opportunity designed for the times. It’s the all-new 5-year MarketSafe® Currency Comeback CD. Available now through July 14, 2016, this CD brings together five equally weighted currencies poised for success: Australian dollar (AUD), Canadian dollar (CAD), Chilean peso (CLP), Mexican peso (MXN) and South African rand (ZAR). So why now for these currencies? Simple. These are commodity-driven economies and currencies that could benefit if today’s relatively low commodity prices begin to rise again. Let this bold CD be your one secure path to any and all potential upside growth by these currencies over the CD term. The clock is ticking on this opportunity, so act soon.”
So what’s the catch?
Well, the principal protection is real, and EverBank is really a bank and a member of the FDIC (I have a checking account with them, and have dabbled in some of their currency products in the past). So the catch, really, is that you have an opportunity cost in tying up your money for five years… and you could end up with nothing but your principal back and owe some taxes along the way (for IRS purposes you’ll owe “deemed interest”… you’ll probably be considered to be earning what EverBank pays on regular CDs, which would be 1.75% for the 5-year Yield Pledge CD they sell — I’m not a tax expert, so don’t trust me on that, but there will probably be a tax obligation along the way before maturity — likely not a huge one, since regular rates are so low).
The opportunity cost, if your alternative was to put this money into a CD or savings account because this is money you want insured for principal protection, is about 8.9%. That’s what you would earn over five years from a 1.75% CD — so if you bought a $1,000 CD, after five years you’d have $1,089. That $89 is the money that EverBank is being compensated to take on the risk of exposing you to five foreign currencies for five years, and they’re probably backing that risk on their part by entering some kind of swap agreement with some other institution or insurance company based on the exchange rate between the dollar and those other five currencies on July 21, 2021.
They also are much more restrictive with this CD than most CD providers you might be accustomed to — if you take out the cash early, you lose the principal protection and all potential return, and there will be a penalty in the form of an early withdrawal charge… even if you close the CD because of the owner’s death.
The term sheet from EverBank lays out some possible scenarios for returns, ranging from a 0% “CD Performance” payout at the end to a 4-7% payout. I have no idea what the likelihood of that being the real potential range of payouts might be, those are just examples.
Note that the most lucrative example they provide in their term sheet, which has all five of those currencies rising against the US dollar but none of them moving really dramatically, ends up with a return that’s slightly lower than you would achieve from a regular 5-year CD (8.9% is what a 5-year CD nets you if you buy it today, the high return example from EverBank is 7.3% based on calculations like a 2% rise by the South African Rand and a 12% move by the Canadian Dollar).
Essentially, the calculation is whether those five currencies, on average, will have a lower value in US$ terms on July 21 2021 than they do on July 21 2016. None of the dates in between matter, and each currency gets a full 20% weight in the calculation — so if the South African Rand revalues and drops by 40%, for example, the others would each, on average, have to rise by 10% to make up for it before any positive return could emerge.
Whether this appeals to you will depend largely on whether you can afford to forego the income from the principal for five years as you wait to see whether your investment nets any return, and whether you want some specific exposure to those five currencies. Those are all commodity currencies, so there is some possibility that if commodities rise in value, those currencies will also rise in value — that doesn’t mean they’re specifically backed by commodities, but the Aussie dollar, for example was worth more than the US$ for a brief while in the 2011-2012 boom years for iron ore. I’d say that there would have to be a real commodity boom and a resurgence in those countries’ economies for this to be a huge winner, and it would have to be timed pretty nicely — if there’s a boom in those currencies next year and then the boom busts a few years later, you wouldn’t have any exposure unless the gains are there on July 21, 2016. So I certainly wouldn’t count on the 97% returns that Rahemtulla tosses around… that would mean those currencies on average rose 20% against the US dollar between two specific dates five years apart. It’s possible, I suppose, but I don’t know what the probability is.
But yes, the principal protection is real — and the principal protection is in US dollars for this product, so you don’t have to worry that falling currencies would mean you take a hit on your principal (though the principal protection is in nominal dollars, so inflation should mean that your dollars will be worth a bit less when you get them back — the potential worst “real” downside would be high US$ inflation over the next five years and a US$ that doesn’t, on average, fall versus the other currencies, though the inflation risk is perhaps not dramatically different than the risk you’d take on with most other five-year fixed term CDs).
EverBank has been around for a while, and has offered up a dozen or so of these MarketSafe CDs, based on everything from commodity prices to indexed stock returns to Japanese REITs, and I haven’t heard any complaints about them not abiding by the terms… but I also don’t know what the returns have been, or whether the average MarketSafe CD has been profitable or unprofitable for participants.
Here’s a bit more from Rahemtulla’s argument about why the US dollar is going to fall against these five currencies:
“It’s a Race to the Bottom, and the USA Likes to Win!
“In my opinion, we are fast approaching a monetary ‘tipping point.’
“That moment may have arrived already.
“The U.S. Dollar Index topped out last December, which is also when the prices of gold and silver lifted off from their five-year lows….
“Fed manipulation and the desire of central banks everywhere to devalue their currencies is approaching a fever pitch…
“Europe has done it. So has Japan.
“Americans hate losing any race, so…
“IN THIS RACE TO THE BOTTOM, THE AMERICANS WILL NOT BE BEATEN!!
“Janet Yellen and her cronies at the Fed will get their “secret wish” too.
“Despite claiming she’ll raise rates when the time is right, I’ll be surprised if she gets more than one through.
“Every single month she sits on her hands means the U.S. dollar falls against international currencies.
“Now we have a bubble in the dollar.
“It’s about to get ugly.”
So what’s the best possible outcome, if we use the past decade of commodities bull market to assume what will happen with those foreign currencies? I just checked the performance of those currencies against the US dollar from the dollar’s high point (most of those currencies’ low points) on or around October 21, 2008 and going out five years.
The Canadian Dollar rose about 18%, the Chilean Peso rose about 35%, the Mexican Peso was almost exactly flat, the Australian Dollar was up about 40%, and the South African Rand was up 20%.
The upshot? If you had held this during what looks to me just by eyeballing charts like it was the best possible five-year period during the past ten years for a CD based on the average of those five currencies (I could be a little off on that, and there were certainly better 3-year periods, and better five year periods for one or two of the currencies if you cherry pick a date to favor one over the others), the five year return on the CD would have been about 22% — which annualizes to about 4.4% a year. Better than a regular CD, for sure, but not life changing.
That’s just an example from the past decade to show what the performance would have been from a similar CD if opened at a very opportunistic time. That doesn’t mean the next five years will be as good as the 2008-2013 period for those currencies, or that it won’t be far, far better.
There is no ceiling on the possible returns if all of those currencies rise dramatically against the dollar, I just think it’s important to keep in mind that the historical returns, based on picking what looks to me like the best five year time period over the past ten years, are not all that dramatic. Currencies are certainly in flux, and the US dollar has been moving up dramatically for a couple years, so there’s certainly room for more dramatic changes, but I wouldn’t count on doubling your money.
Personally, I’d be willing to bet that all currencies will be less valuable in five years than they are today, because that’s the path of all fiat currencies over the long term as they gradually lose value to inflation… governments like inflation in general, as long as it’s relatively contained, and most are in serious debt so they like it even more than usual these days.
But I’d hesitate to risk much on betting that five specific currencies will rise against the US$ over a specific time frame. Of course, with this particular product you’re not risking a lot because of the principal protection — but the opportunity cost (what you could do with that money otherwise over five years) is real, even with the current low-rate, low-inflation opportunities, as is the burden of having your money tied up for five years with real penalties for early withdrawal.
So… does that sound like the kind of investment that piques your interest? Have other options that you prefer to bet on a falling dollar? Have any experience with Karim Rahemtulla’s macro predictions to share? Think there are particular currencies that will rise or fall over the next few years? Join the conversation with a comment below.