CDs in US$ safe?

[ricktoronto]

Compounding won't help enough

Ricktoronto,

Most of your coments are right. However, you must keep in mind that these interest rates are compounded, and that if devaluation is your major issue you could always get US$ CDs. The interest rate on those is still much more than the current rate of US Treasury bonds, granted the additional risk is also much more.

Jojocho

to prevent what is already a less than real return vs. US$ . Also, since I said pesos were a mug's game and said nothing about US, it is because I was not suggesting US$ was a bad idea. In fact the only alternative is the US$ at a rate of only 5-7% per year interest or more is better.

Devaluation is the total point of my post and your comment of a so called sh...load sounds great (as does the other suggestion of putting some money in pesos) until you realize you are losing money with long term peso investments.

In fact any shorter term accounts/CD's with, of course even lower rates, are even worse. There will probably be a point where US$ left in your mattress for a year would be worth more in a year than a 10% pesos 1 year account.

 

[GNYC]

Rick, How much of a devaluation in the Peso do you see?

What do you think the ratio of USD to RSD will be in a year from now? Two years from now?

What are your concerns if any about the banking industry due to issues that may arise within the government?

If things get so bad with the Peso can't the whole DR banking industry fold?
If that was ever the case USD accts in DR banks would be in as much danger as RSD accts.

Having USD in US banks or US bonds is the only real security.
Money markets are a close second.

Everything else is a casino its a matter or weighing risk vs. reward.
Unfortunatly none of us have a crystal ball.

GNYC

 

[Escott]

In the last 10 years pesos has been the better bet. The peso has NOT depreciated against the dollar more than the difference you got in interest in peso again the dollar.

Hindsight is 20-20, but we all cant be monday morning quarterbacks. The peso has gone to shit because of the bad/poor policy of the Central government. Who would have guessed?

Dollars seems to be the safer investment these days considering the depreciation of the peso no matter how much more % you get on it. Long live the dollar.

The question is whether the dollar is safe in the DR in the long run. If the economy turns to shit like it did in Argentina you all are going to suck hind tit including me, maybe.

 

[ricktoronto]

Beats Me

Rick, How much of a devaluation in the Peso do you see?

Hard to say but what you have seen in a year speaks to why the rates are 26% on one currency and 5-7% on the other.

The rates can set the exchange or the exchange sets the rates or you would have interest rate arbitrage. I am not sure if there is much if any forward market for the peso, if there is then you can get an idea of what the future rates will actually be , but if long term forward rates are still 19% apart you'd have to expect 19% devaluation.

If it was lower then you could invest in pesos, borrow in US to do it, repay the US$ loan with the matured pesos and keep the difference. In a liquid money market this type of arbitrage canot happen so the rates are predicting the future purchasing power of the peso vis a vis the $.

What complicates it is government policy to support the peso outside of market forces alone,or the risk or possibility or exchange controls. Not that this will happen.

Ceterus paribus, if the forward view was that the rates were equal (e.g. the lower US$ rate was made up for just by the expected devaluation) then investors would probably still pick the US$ because it is a stronger ,e.g. 'safer or more liquid" currency to begin with.

If the gap was large enough then you might pick the peso, keeping in mind you also would need to have either a) a future use for pesos or b) a free ability to convert the pesos back to US at maturity.

 

[mondongo]

ricktoronto, the difference in short term rates between the DR and the US does not necessarily correlate with the expected devauation. Take for exmaple the entire decade of the 90's. The average yearly DR$ depreciation was under 4%, yet the difference in short term rates was ofter more than triple that number.

A lot of astute investors might have taken advantage of that situation.....and just might be trying to convert their DR$ holdings back to US$ before there is an even larger depreciation.

 

[sjh]

3rd world currency exchange rates rarely move smoothly. the last few years of relative stability were bound to end, especailly with the new government. We should expect the peso to have a lot of catching up to do. Take all those high interest rates subtract off the USD rate and the deflation rate for that year at the time and sum up the remainder by year. that should give you a _very_ rough estimate of where the correct peso valuation should be.

Those people who have been taking advantage of high DOP interest rates should cash out now BEFORE the devaulation hits.

Think of the "DotCom" situation in the US of the last few years.

 

[Paul Thate]

I must be really stupid.I don't understand any of the stuff you experts are all talking about.
I did go the peso and it seems to work for me , in so far as I live here on the beach in and I live the life here , not only talk about as a lot of you do.

Lets say I start with 250 000 dollars and I spend 4000 dollars a months
at whatever exchange rate I will live well here.
In a year I spend 48 000 dollars and my capital is more or less gone in 5 or 6 years.
As the income on US $ is taxable and very low. Unlike all the experts I lost 35 % in real value on all my US$ investments as well. The experts bought microsoft at 10 netscape at 12
bailed out of all the tech stocks before the collapse
I did none of that.
The concept of buy low and sell high while desirable
is foreign to me .It seems the experts do it all the time.
Now I take my US $ 250 000 which I converted at 17
and invest that at 20 plus monthly.
Now I have close to 70 000 peso a months.I live as well now as in the US $ case above .
When deposit rates fluctuate between 14 to 25 i still live well
and my capital remains. This scenario can go on for 10-20 years
And I don't care where the exchange rate is going.
Within reason ofcourse.but even if the exchan rate goes to 50
it still should work.
And when that happens my corporate pension will kick in.
and again I will live well here.

All calculations are grosso modo.

So experts in what likely scenario am I in trouble.??

The closing down of the financial markets I took into account.

If that happens you will get total chaos, and living here would
not be any fun. And a new retirement place has to be found.

 

[sjh]

If the peso goes to 25 in lets say the next month.....
you will have lost 20% of your buying power for foriegn goods. Assuming that local inflation will will match the currency deflation, you will then be out 20% of your buying power for local goods too..

first, you invested 250K at 17 exchange. that is 4250K pesos.

That 250K is now worth 212K USD as of todays exchange
(assuming you spent the interest.) If the peso goes to 25 in the next one or two months your net worth is now 170K.

sure you made 70000 pesos last month, but 70000 peso could suddenly be the 2800 USD instead of 3500 USD by next month.

Thats a 700 $ drop in income and a loss of 42K USD in net worth.

If the peso hits 30:
income is now 2333 USD and net worth is at 141K.
that is a 1167 USD drop in income and a net loss of 109K from your intial investment


Do the math anyway you like. If the exchange drops to 25 in the next month or two, you are going to be burnt.

 

[sjh]

I ran the numbers through Excell

Assumptions:
you started august 2001
starting capital was 250K USD exchanged at 17
monthly interest rate 1.647% (21.6% APR)
spending 70000 pesos a month

your current net worth 420K pesos or in USD is 210K at exchange of 20:1

if the peso goes to 25:1 in lets say December your net worth would be 419K pesos or 168K USD

if the peso goes to 30 in December your net worth would be 140K

Thats pretty expensive living for retirement

If you cut your expenses to only 35K/month and the peso stays at 20 till december your net worth in December will be 241K

if it goes to 25, networth = 193K
if it goes to 30, networth = 160K


Your actual income is FAR less than you think it is

 

[Paul Thate]

you convert my monthly peso income each time. why ?
I have only peso expenses.
compare it only to the buying power. what happens in all your scenarios to my buying power?
my grocery bill , bar bill .
can i still live here and pay my bar bill next month or next year.
and if I cant nobody here can.

since I live here I saw the exchange rate going from 15 to 20 and my monthly expenses have not changed much.
Restaurant prices were more or less stable.
Grocery prices as well. May be I buy a little more carefull
but i believe my food cost is actually lower this year over last year.
In your example you talk about exchange rate going to 25
from the present 19.. and you compare that to a drop in my buying power of 20 percent.
well from 15 to 20 is about the same move but my buying power did not drop 20 percent.

 

[sjh]

The exchange rate and the price of consumer goods and services does not move in lock step with each other.

The first things to change in price will be imported goods and services.... eventually domestic prices will follow.

things that will change:
gasoline, propane
Cars
whiskey (imported)
canned food
diapers
electronics (computers,TVs Invertors, batteries)


things i predict will remain mostly the same price...
presidenta (it is made locally)
rum
locally grown rice and beans
maid service
local fruits and veggies
cheap women

 

[Paul Thate]

The exchange rate and the price of consumer goods and services does not move in lock step with each other.


things i predict will remain mostly the same price...
presidenta (it is made locally)
rum
maid service
local fruits and veggies
cheap women

well then I should be allright you just mentioned my daily expenses

ande not neccessarely in that order either.

 

[sjh]

I am sure the local fruits and veggies are at the top of the list.

 

[Andy B]

In our hotel and restaurant expenses we've already seen a recent increase in prices due to the devaluation of the peso: everything from vegetables, propane gas to cook, cleaning supplies, wages (costs the locals more to live, so we have to pay them more), gasoline for the Cherokee and especially in construction materials: in the two months we have been building a new duplex unit prices have risen across the board so much so that we wish we had bought everything when we started in September.

If someone doesn't think the current financial crisis in the DR won't affect them whether they live here or just visit, then they need to have their head examined. EVERYTHING will cost more and only so much of this increase can be absorbed before the situation becomes critical. In the tourist industry alone, we're rapidly losing our reputation as an inexpensive place to vacation and this is starting to hurt us dearly (and will continue to hurt us until things stabilize). The DR has enough of a negative image to overcome as it is and a hungry, unhappy and unstable populace certainly won't help matters.

 

[JOHNNY HONDA]

Andys right when it comes to building materials its been nuts ,i wish i would of bough all the cement and blocks in one shot.

 

[sjh]

I believe cost of cement is closely tied to oil prices.... I am sure someone has better info on this, maybe DMS

 

[JOHNNY HONDA]

Godamn,i knew them camel jockeys were responsible ,i say nuke em!!!!

 

[Andy B]

Cement is made with a process using heat generated in oil burning furnaces, hence the increase in the cost of cement when the price of oil goes up. A 100lb bag of cement went up 5 pesos from the middle of September to the end of the first week of October. Block went up 1 peso. And although the price of wood (remember all of it is imported) hasn't risen yet, it is already overpriced at an average of over $16rd per board foot for grade B-C, #2 pine. The same 2x4 stud that costs less than $2usd at Home Depot is over $6usd at the local ferretaria even though it is several grades below the Home Depot product.

 

[sjh]

Thanks andy... I will tuck that piece of information away in my head somewhere....

From what i have seen, most of the construction lumber in the DR is Southern yellow pine which is imported from the US.

what is the cost of a 100lb bag of cement and the cost of a block?

 

[Andy B]

Although a lot of lumber in the DR is southern pine, the stuff I recently bought was milled in Maine and still had a tag that said "B-C Caribbean" on it. That's how I knew what crummy grade the wood was besides all the knots and other imperfections. And believe me it was crummy. I've worked with wood all my life, built boats and things, and the DR has the worst wood I've ever seen. Most of the lumber here won't even make the reject pile at a respectable mill.

Cement was going for $98 to $100rd per bag in mid-October and 6" block was $9rd per block. 8" block is about 3 pesos higher about $11.5 to $12rd.