How to earn 12.28% in a 4.5% World
- 54 Comment
It has been a while since I’ve provided some juicy financial advice so here goes. Even the most prudent individual that keeps his or her money working at all times will find some periods where they have some funds that they just need to park. More often then not we end up parking our money in the bank in a checking account or perhaps a short-term CD. Free parking is only in Monopoly. If you are parking your funds in a bank checking account odds are you are eeking out a mere 1-2% at best. You are not even keeping up with inflation. If you park your funds in a 3-6 month CD, most likely you are earning no more than 4.5% (U.S. average). So what are you to do if you wish to not just keep up with inflation, but to beat it? After all our goal should be to increase our spending power not maintain it.
The answer is Iceland Bonds. I know what you’re thinking. This guy Dax is crazy. I don’t have time or the contacts or knowhow to invest in Iceland Bonds. Well you don’t need to. No, Dax is not going to take your money and invest it for you. Far from it. I will recommend to you the same thing I did 3 months ago. Buy an Iceland currency-denominated CD from Everbank. You will earn at present exchange rates 12.28% APY. They sell many foreign-currency denominated CD’s, but the one you want to get is the Icelandic Krona.
Icelandic Krona to U.S. Dollar historic exchange rate. The Icelandic Krona is appreciating.
I’ve done thorough research and there are several reasons to buy the Iceland CD from Everbank:
- Iceland currency is actually appreciating against the dollar. This not only reduces your exchange rate risk, but you will probably add another 1/2 to 1% to your return and make up to 13.28% as I did on my CD.
- The short-term is also a plus. Having your money tied up for such a short-term enables you to plan out your expenditures while not locking in your funds with longer term financial instruments to gain higher rates.
- Iceland is not a 3rd world country. It is one of the least corrupt nations according to the CIA factbook and is a stable country. The currency has been extremely stable overall compared to other nations. In fact if it ever joins the European Union their currency appreciation should accelerate considerably.
- Iceland has a stable economy, but they are paranoid about inflation. To keep it in check, they pay high rates on their government bonds. These are government bond-backed CD’s not municipal or corporate bonds that are backing these CD’s.
- The bank is a stable, heavily regulated U.S. bank. I’ve banked with Everbank from around 2001-2003 and again in 2007. The only reason I left them the first time is to chase yield. Service and range of financial instruments is superb. You can even open a Metals trading account. I will blog more about that in an upcoming entry.
- The most important reason: Dax Desai purchased it. My CD is about to mature and I will be adding more funds to it. My money is where my blog is.
So there you have it. Make 12.28% (or more) with Dax Desai and Everbank.
54 Comments on this post
Trackbacks
-
Bryan @ One Mans Goal said:
Hmm… Can’t say that I ever thought about Icelandic bonds… Who has?
I’ll definitely look into this, thanks for the advice!
July 20th, 2007 at 2:05 am -
Don Lloyd said:
Dax,
Very interesting, but some questions,
Iceland has a stable economy, but they are paranoid about inflation. To keep it in check, they pay high rates on their government bonds. These are government bond-backed CD’s not municipal or corporate bonds that are backing these CD’s.
1. I may well be dense, but what is the mechanism by which paying high rates on government bonds tends to keep inflation in check? ( I suppose that the high rates can siphon away business investment and depress the economy and its demand for labor and other production factors, but this seems strange).
2. Why would Iceland pay high rates on its government bonds as opposed to a competitive market rate determined by supply and demand?
3. Assuming that the CDs are issued by Everbank, the government bonds that ‘back’ them may well have lower nominal rates of return than the CDs and Everbank may be speculating that a continuation of exchange rate trends will allow it to pay the higher CD rates without taking a business loss itself. Is anything known to contradict this?
4. What are the additional tax considerations, payable to Iceland or the US, if any, for a US investor.
Thanks, Don
July 23rd, 2007 at 10:24 pm -
Dax Desai said:
You’re not dense. We’d have to do some bouyancy tests or something to say you were.
pThese are good pointed questions.
1. You are correct in that raising interest rates causes less borrowing to invest in the economy. This in turn slows down business growth (which is assumed to be overheated). This is the very mechanism that the U.S. government uses to control inflation here as well albeit our rate movements are in 1/4 percent increments.
2. The higher the rates the more money you suck up out of the system. Think if you had the option of borrowing from the bank at 6% so that you can earn 8% in some investment and government bonds were at say 6.5%, you’d still be better off borrowing to get the .5 % return. In contrast if you have a ridiculously high government bond paying more than you can make from your borrowing/investing, why would you invest when you can just buy a bond?
3. I asked. The buyer is assuming currency risk, not Everbank. They are not speculating on the exchange rate at all. In fact the underlying bond is more like 13.5%, but Everbank is paying 12.28% to account for their purchase/administration costs.
4. For the U.S. investor, you would report it as interest income on your tax return much the same as you would report interest income from your bank. This is by no means a way to avoid taxes.
These were 4 great questions Don. If you have any topic of interest, please feel free to comment or email me directly.
July 24th, 2007 at 3:49 pm -
Don Lloyd said:
Dax,
Thanks.
Do you have an address for future Icelandic Krona vs dollar exchange rates and graphs and historical graphs over longer time periods?
Thanks, Don
July 25th, 2007 at 3:49 am -
Dax Desai said:
fxstreet.com is a great site for forex charts/history.
July 25th, 2007 at 10:34 am -
Don Lloyd said:
Dax,
Dense here again. I don’t seem to be able to find any reference to Iceland at all on the site.
Thanks, Don
July 25th, 2007 at 1:22 pm -
j said:
Dax
Is this the so called carry trade?
Could you explain more why Island krona? Other countries pay even more…
Thanks.
July 28th, 2007 at 11:31 am -
Dax Desai said:
No this is not the Yen Carry Trade.
Here’s an example of a “yen carry trade”:
A Trader borrows 1,000 yen from a Japanese bank and converts the funds into U.S. dollars and buys a bond for the equivalent amount. Assume the bond pays 4.5% and the Japanese interest rate is 0%. The trader stands to makes a profit of 4.5% (4.5%-0%). Assuming the exchange rate stays stable the trader makes 4.5%. If the exchange rates move in the wrong direction he will lose money.
The Iceland CD is a U.S. CD that buys Iceland bonds. There is no borrowing involved. It is simply an easier way for an American to buy these bonds through a bank without the hassle.
Which other countries do you know of that pay higher rates that are stable countries and not 3rd world? I don’t invest where there are wars or political instability.
July 28th, 2007 at 11:58 am -
JN Oberg said:
I have a quick question too…
I read up on the Icelandic krona and I saw that there was inflation of 6+% in 2006 and it should be higher in 2007. If you were to convert dollars into krona, earn 12.28%, and then convert it back, you would NOT be affected by the decrease in pruchasing power of the krona, right? Or would the currency depreciate to reflect this fall in pruchasing power, resulting is a real return of 12.28% – 6% (inflation)?
This is really interesting, but I’m always suspicious of a free lunch. Have you been doing this for sometime and have you realized the 12.28% return?
July 29th, 2007 at 7:07 pm -
Dax Desai said:
With their high inflation, they will have to keep their interest rates high to combat it. What this means is more money should be flowing into the country such as my deposits. Their currency should hold against the dollar. The dollar is by no means a strong currency right now as we all know. It is hitting record lows against all major currencies.
While it is true if you were living in Iceland the real return = Nominal Rate – inflation = 6.28%, if you are living in a low inflation nation like the U.S. your rate is much higher. You will get the same nominal rate, just subtract your nation’s inflation rate to derive your real rate. Right now the U.S. inflation rate is 2.79% so your real rate is 12.28-2.79=9.49%.
U.S. Inflation statistics gathered from inflationdata.com.
July 30th, 2007 at 9:01 am -
G.S. said:
I´m an Icelander and in my bank I buy in a money market fund which has given 15,3% (per year) for the last 6 months. See here in Icelandic (Fund no. 9): http://www.glitnir.is/Markadir/Sjodir/
And here in English: http://www.glitnir.is/English/Personal/Funds/Bonds/Money/
The annual inflation rate is 3,5% now for the last year it was higher or up to 8-9%, because of prices of real estates going up and the unexpected weakness of the crown (kronur – ISK) from March to June 2006. According to the inflation rate now: 15,3%-3,5% equals 11,8% real rate per year. The risk would be currency risk as the crown is really strong. Estimates says it will fall in the 3Q of next year. Danske Bank (Danish Bank) says it will fall sooner, even for the next months: http://mediaserver.fxstreet.com/Reports/ec9a150d-8773-45c5-988d-d8a08a4fb198/57bda287-0241-466d-80ea-e62a6522a3d5.pdf But this bank is constantly preaching he fall of the Icelandic economy as a revenge act as Icelandic investors have been buying everything in Denmark.
As for the Icelandic stock market I encourage you to look at the data of the Icelandic banks, they have grown 100% the last year, showing large profits and will continue to grow.
Landsbanki.is: http://www.landsbanki.is/english/
Glitnir: http://www.glitnir.is/English/
Kaupthing: http://www.kaupthing.is/?PageID=3433
August 3rd, 2007 at 6:14 am -
Arnold Shuster said:
If I were to invest in an Iceland CD, I would ncessarily be converting US $ into Iceland Krona. Is there a way to buy US Dollar Futures with Iceland Krona to hedge against loss if the Krona goes the wrong way and loses value vs. the US Dollar.
Please adviseAugust 7th, 2007 at 1:38 pm -
Adventures In Money Making said:
Dax, do you still have money in this?
do you think the Kroner will continue to appreciate against the depreciating US dollar?
August 28th, 2007 at 1:20 pm -
Lenny W. said:
Would it be a little risky to invest in the Krona CD now that the dollar has sold off significantly against it?
October 30th, 2007 at 1:50 pm -
Dax Desai said:
My CD has matured and at this time I would hold off on putting money in an Icelandic CD. I like to see significant upside on the exchange back to Dollars. Right now I don’t see significant upside, though there probably is a point or 2. I’ll find you guys another vehicle.
Personally I’ve had 2- 3 month terms with this instrument for a total of 6 months. It has been a profitable ride, but it is probably time to move to something else for now. The easy money on the Dollar devaluation is gone.
November 4th, 2007 at 9:54 pm -
sal moceri said:
How does one earn 12.8% on a cd? Am very interested please get back.
November 10th, 2007 at 3:39 pm -
Derek said:
Hey Dax, hows it going. You think its safe to get the icelandic cd now, and if not why would you not get it. I am 22 years old, I have been trading in the options for the past year, loosing, I want to put some money in something a little more stable. for this cd you must have 10,000 min right. or can you have less.
thanks,
DerekNovember 15th, 2007 at 9:31 pm -
Dax Desai said:
Yes I do.
The sub-prime mess has far from unwound and these fears should keep the dollar depressed for some time. Also the Fed will most likely have to cut at least .25 or .50 soon. That will put further downward pressure on the dollar. Considering the Iceland CD is a 3 month instrument, I feel it is safe to open one now.
Good luck and please feel free to comment again letting me know how it goes 3 months from now if you choose to open it.
November 16th, 2007 at 2:55 pm -
Dax Desai said:
Just another addendum for Derek -
“Slowing economic growth and credit concerns likely will undermine flows into U.S. corporate bonds and equities, undermining the U.S. dollar,” said Gabriel de Kock, currency economist at Citi Markets and Banking, in a note to clients.
-From Reuters.com
November 16th, 2007 at 3:28 pm -
John Jin said:
Dax Desai:
You are right. I plan to save some of my money to everbank in 3 month currency cd. I think dollar will continue fall.November 19th, 2007 at 8:43 am -
Robert Tjia said:
Dax,
I’ve been looking at Everbank’s Iceland CDs for several months now. I never took the plunge because my understanding was that the ISK is a somewhat illiquid currency and therefore exhibits short term price volatility that could easily wipe out the 12% interest gain as you convert back and forth from USD. Can you elaborate on how good a conversion rate you got (going in and out of the CD)?
December 3rd, 2007 at 11:09 am -
John Jin said:
I have not jumped in. I am going to park my money in money market (5.5% for 3 money) and waitting for the good exchange rate. My ideal rate for now is around $1=63. If Fed continue cut US rate and then $ sinks. I plan to stick to it for longer term (2 or 3 years).
I am worrying whether or not Everbank could bankrupt due to involving subprime. I believe they did.December 4th, 2007 at 10:42 am -
Dax Desai said:
Here’s a quote from Frank Trotter, big cheese at Everbank:
Many people have asked about EverBank in the context of the happenings in the markets over the past several weeks. I would like to take this opportunity to make a couple of clear statements for customers and market watchers:
EverBank is a diversified financial services company engaged in retail and commercial banking, investments, and the production and servicing of mortgages. We have a balanced revenue stream that does not depend either solely or substantially on any one line of business. EverBank is in a strong capital and liquidity position. Results through second quarter this year include an ROE of 16%, and a capital raise in June that enhanced our already strongly capitalized position. EverBank does not originate or own sub-prime mortgages. EverBank is rated “Green Three Star” by Veribanc, and “Superior” by IDC. It has been and is the practice of EverBank not to seek additional return by taking on substantial credit risk; we have a conservative portfolio and are proud of the performance history of our high quality assets.
December 4th, 2007 at 2:25 pm -
Mauro Dal canto said:
I have an IRA with Fidelity, a conversion from my previous 403b. Is it possible to buy this Iceland CDs into my IRA? How would that work?
Thanks, Mauro
December 22nd, 2007 at 2:11 pm -
Mark said:
I’m glad u made money on this so far.
I would call this a HIGH RISK investment though.
so I would suggest people to stay away from it, until they are very familiarized with all the risks involved. Once they know whats really going on, than they can decide on their own, cause this is High Risk..The Islandic Krona, in a 3-month period, Average True Range is prolly somewhere along 12% versus the US. Dollar…
Island will give u 14% thats apr.. thats over a 12 month period.. so lets cut that down to 3.4% or so in 3 months.
That means that the actual Islandic Krona versus US dollar movement makes up 75% or more on whether you make money or lose money.. yes, lose, you could easily lose a good chunk of money.
So for the most part this is just betting the KRONA outperforms the USD.. with some hedge coming from the interest you collect.. but still..
very risky.. EVERBANK.. kind of pushes this out as a safe bet CD, but there is nothing safe bet about it. Iceland economy is hurting right now, and its a very small island, wild things could happen, even hyperinflation, that depreciates their currency very fast, and wipes out a good chunk of your investment when you convert back to USD
December 23rd, 2007 at 9:11 pm -
JOHN JIN said:
I sent money to everbank last year and waited the good rate for better exchange rate for ISK (iceland krona). The money market rate I was parking was 5.5%. My money had been everybank for 5 days last year and they only paid me 1 day interest for last year. I called everbank and they didn’t give me any reasonable answer. Thank god I din’t jump in any curreny CD there and I am going to close my account right away. I have to advise everyone to be very carefully to deal with this bank. There is a lot of hidden issues.
January 31st, 2008 at 10:08 am -
Charles Bell said:
With the dollar plummeting against European currencies, why would the Icelandic K. go from 12% APY to under 9% now? Thanks
March 13th, 2008 at 1:40 pm -
Dax Desai said:
Charles – While it is true the dollar is plummeting, you must consider that the underlying economy of the currency in question also plays a part with interest rates. Iceland propped up their interest rate due to inflation fears.
Inflation is dropping and their economy is cooling. Money is starting to flow out of the country or at least not flowing in as fast. Due to this their currency has dropped against the dollar. Anticipating further corrosion perhaps is why Everbank is giving only 9%.
March 17th, 2008 at 8:15 pm -
MoneyLoser said:
That Icelandic CD is now earning 5% with no change in the Central Bank rate and a 30% depreciation in the currency from its lows.
I am bleeding badly on this one.
March 21st, 2008 at 5:58 pm -
investor said:
Dax:
Thanks for your very insightful comments on the Iceland CD from Everbank.
I was routinely getting 12%+. Now it has dropped to 5%.How can you explain this when the Iceland govt has increased interest rates to 15%. In other words, Everbank is paying 10% less on the CD, what you could probably get if you opened a local Iceland bank account (if that were possible).
Is this the time to bail out of Iceland CD or do you recommend that we hold for a few months hoping currency appreciation against the dollar?
Many thanks again.
March 30th, 2008 at 6:44 pm -
anthemra said:
well the ISK has tanked 20% since January …
lowest against the dollar since 2001my Everbank ISK CD matures April 15
gotten a little better since Iceland raised interest rates to 15%
but I’ve still lost about 15 % of my principle … due to the conversion rateISK has appreciated against the dollar 4 out of the last seven years and only lost ground twice in the Q2
should I rollover the CD and hope in regain my principle in Q2 ?
does anyone know what is going on there? does anyone really know anything
except the Icelandic banks? Everbank certainly does not give out any meaningful information except to note that the ISK is very volatile..duhobviously alot of accounts were cashed out in Q1.
I read where Bear Stears had set this up ahead of time and Icelandic banks were going to sue them ?Moody’s also downgraded the ratings of Icelandic banks even though all objective evidence says they are extremely solvent and stable with no exposure to the sub-prime mess in the US…
sounds like the crooks on Wall Street are at it again ………..
any current information would be most appreciated (no pun intended)
-RW
April 7th, 2008 at 1:13 am -
Dax Desai said:
Anthemra – I feel there is something fishy with the Krona value right now. I would stay out of it and not roll into it again. Since you are using Everbank I assume you have at least $10K in it. Consider rolling into financials via the XLF. I think the financials are ready for a good run. In my opinion, the least resistance for financials is up. Consider XLF for a 10-15% gain over 90 days (similar to the Iceland Krona play, but with more control over when you exit and with how much profit).
How about that Potash! I hope you read my post on POT back in Feb. I recommended it when it was $149 and it is trading up over $176 now.
April 7th, 2008 at 10:08 am -
John Jin said:
Thanks God. I didn’t jump in this currency CD. I put my money in money market. I withdrawed all the money from everbank. I knew everbank playing some tricks.
There are some very stable stocks paying more than 12%
divident. I purchased some. such as ERF, PVX, PGH, PWE.
There is a broker with 10 time free trading per month. It works very fine. I am enjoying do some trading.April 7th, 2008 at 2:18 pm -
anthemra said:
I’ve noticed the ISK is rallying against the dollar. It has gone up in Q2 relative to the USD in four out of the last seven years and stayed the same one year.
April 11th, 2008 at 1:08 am -
Dax Desai said:
Anthemra – I think the easy money is gone now for ISK. If you see a rally in ISK you should probably try to cash out into dollars. Though the dollar is weak I suspect there isn’t much more on the downside. I think there is some space, but not much left.
April 11th, 2008 at 8:51 am -
Living Off Dividends & Passive Income said:
I think the AUD, CHF & YEN are better bets than ISK right now.
April 11th, 2008 at 11:46 am -
JIMMY said:
i have a bank accounts both in Iceland and Denmark.
Is there any risk of Glitnir going bust ,i cant seem to find much info online.with the ISK being so low and food and gas prices going up i cant see how Iceland is gona get through this.
anyone know any better
July 12th, 2008 at 11:05 am -
Angel of Death said:
How are those ISK CDs doing right now?
AOD
October 7th, 2008 at 6:10 pm -
Spouting Horn said:
I KNEW there was a catch to these CD’s! The old adage still rings true…the higher the rate of return, the higher the risk.
I’m very glad I didn’t buy any of these crap ass cd’s!
October 8th, 2008 at 9:10 am -
Bob said:
LOL Angel of Death! I came here to post that very same question!!
October 8th, 2008 at 9:36 am -
Dax Desai said:
@Angel,Bob,Spouting Horn – I made money on my Iceland CD’s. It was a short-period of 90 days that made it attractive. Once I cashed out, I reassessed and did not repurchase though the rate was still high at the time.
As with any investment you should constantly revisit and reanalyze. Right now I’m holding 100% cash and trading with about 10% of that as I see daytrading opportunities. Can the VIX get any higher??
October 8th, 2008 at 1:55 pm -
Dax Desai said:
Right now I’m going long income real estate. My company is focusing on multifamily to be precise. 12-15% returns there in the South at least. My clients love me.
October 8th, 2008 at 1:56 pm -
Angel of Death said:
Okay Dax, you win this time!
…but keep your long POT positions & I will get you eventually…
Kisses,
AOD
October 8th, 2008 at 2:14 pm -
Dax Desai said:
@AOD – I got out of my POT and yes I got burned on it. I held because it didn’t make sense and ignored my own rules.
I’m happy to say I’ve probably traded POT 30-40 times positively. The hits I took at the end were humbling though. Now I’m trading the Volatility Rodeo.
October 8th, 2008 at 8:00 pm -
Perpetual Bull said:
Congratulations greedy yield chasers. Iceland has entirely collapsed, and you’ve lost about 70% (seventy percent) on your “easy-12%” investment. What’s next for you, emerging market bonds? There is no such thing as free money.
October 16th, 2008 at 3:07 am -
Dax Desai said:
@Perpetual Bull – I don’t think there’s anything innately wrong with chasing yield. This investment was a 90 day investment. As with any investment you have to periodically reevaluate it. Those that didn’t do their homework lost money. Those that did made money. I made money for 90 days and avoided the losses by not rolling my funds over.
October 17th, 2008 at 12:22 pm
Carnival of the Capitalists…
Carnival of the Capitalists for July 23, 2007…
[...] How to Earn 12.28% in a 4.5% World by Dax Desai of Dax Desai. Have some business funds that are currently unused? Dax shows you how to make them work for you, earning above average interest. [...]
[...] higher than the current U.S. rates and you have a winning combination. If you had invested in the Icelandic Krona CD you would be sitting pretty right now as the dollar continues its decline. My Krona CD was set to [...]
[...] my last 3 month Iceland CD matured, I rolled it over. It is slated to mature in early October. I have been bearish on the [...]
[...] How to earn 12.28% in a 4.5% World [...]
[...] Dax Desai gets the award for the most creative investment tactic I have ever heard of. You can learn about it in How to earn 12.28% in a 4.5% World. [...]
[...] How to Earn 12.28% in a 4.5% World Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages. [...]
[...] How to earn 12.28% in a 4.5% World Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages. [...]