The U.S. dollar is having a tremendous run. A 10% move is significant for a currency like the dollar. So, the fact that it’s made its way that much higher is a big deal. Typically, you’ll see the dollar measured against the euro, but now the dollar-yen trade has really taken on a whole new weight of gravity in terms of the yen moving lower and the dollar moving higher.
The Japanese basically are saying that they’ll pull out all the stops to get inflation rates up toward 2% and get the Japanese economy and export market moving. The debt of Japan is currently about 225% of GDP. So, it’s already pushing the envelope — and that’s where you can start to have problems in terms of trying to put out more debt to pay for all the stimulus. It will be interesting to see how that shapes up.
Over in the eurozone, the European Central Bank is faced with the same uncertainty. The ECB is seeing the latest data show consistent contraction of the key measures over there: the ISM, the PMI and other types of business-confidence numbers. That’s really where we’re starting to see a contraction of growth numbers and inflation numbers in Europe as well.
Now compare that to the U.S., where economic reports are generally showing progress and the greenback has a lot of potential for further appreciation. I expect that the appeal of U.S. dollar-based assets will keep U.S. equities as go-to avenues for growth and income, especially with so much downward pressure on interest rates. Along those lines, here are two high-yield funds that are uniquely positioned to benefit from this environment.
First up is the Legg Mason BW Global Income Opportunities Fund (BWG), a debt fund that takes advantage of strength in the dollar to invest about 50% in foreign assets and generate a current 9% yield. BWG came down a little bit when the emerging markets were hit in October, but it has leveled out right in the mid- to low $17 range. BWG looks fine here, and I see it as a really nice way to play the strong dollar against the weaker foreign currency trade that is currently dominating the forex markets right now.
Let me also call your attention to the DoubleLine Income Solutions Fund (DSL). DSL is Jeff Gundlach’s fund, and he’s considered to be one of the smartest people in the entire bond-market universe. DSL is paying 8.5% right now. Jeff Gundlach has taken advantage of using the strong dollar to invest in the foreign markets, those that have good sovereign-debt ratings as well as the potential for really good exchange currency swaps.
Both of these funds pay monthly and are trading pretty much within a one-point range for the last few months; DSL is currently trading right around $21. The International Monetary Fund has been lowering the outlook for global growth.
As long as there’s no inflation out there, we have still a case for a decent fixed-income market…as long as you’re not way out on the yield curve, and I really don’t see that as a threat right now. Right now, the U.S. dollar just buys more out there on the market than it would if it were not up 10% against everything else in the world. So, it’s a great time to invest in foreign assets — and BWG and DSL certainly are doing it right.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.