Currency Trading

Chicken Little Thinking Is Dangerous--Here's How To Hedge The Real-World Currency Issues You'll Deal With Living And Investing Overseas

April 13, 2010, Somewhere In Malaysia: As a private investor or retiree overseas, you should consider two long-term questions. First, how to diversify out of the U.S. dollar or other currency? Second, how to protect yourself against currency moves where you live right now.

Dear Live and Invest Overseas Reader,

"An economist I know," writes Retirement Planning Expert Paul Terhorst, "someone who should know better, wrote to me about the dollar. This man teaches economics at a university. Yet he wrote:

"'Since the U.S. money supply was doubled recently. I suspect that, within a year, the value of the dollar will plummet.'

"I call people who use words like plummet, crash, crisis, depression, and so on Chicken Little. Chicken Little went around saying the sky was falling. This economist and others insist that Chicken Little was right, the sky is falling on us, and the dollar, markets, bonds, real estate, you name it, will be wiped out.

"I tend to be more optimistic. As Warren Buffet says,' We'll come out of this one. We always do.'

"Chicken Little in this case implies that doubling the money supply alone will cause the dollar to plummet. But many other factors move currencies, too. The dollar jumps whenever the Fed hints at raising interest rates. The dollar also goes up when investors get the feeling the U.S. is coming out of the recession sooner rather than later.

"Also, you have to consider the dollar's competition. You can buy the euro, for example, or maybe the yen. But Europe and Japan are doing terribly. Greece hovers on the verge of default, with Portugal and Spain close behind. Investors openly wonder whether the euro will make it at all. And who would want to invest in Europe, anyway? European countries offer the most hostile investment climate in the developed world. Ugly.

"Or take Japan, and the yen. Japan's bubble popped in 1989. They've yet to get on track. Their stock market remains stuck, real estate stuck, lending stuck. The yen stays high because Japan refuses to act to get the country out of a hole.

"So it's not so much how bad the U.S. does, it's how bad the U.S. does compared with the other guy. And the other guy's problems seem to be getting worse, while the situation in the U.S. has started to improve.

"Finally, more than any other factor, speculative feeling moves the dollar. Some US$3 trillion move through the exchange markets every day, way more than called for by import/export needs. Hedgers, swappers, and speculators play this market in a frenzy. Who knows which way the feeling will go?

"I conclude that private investors--you and me--should stay away from trading in foreign currencies. Leave short-term trading to the bankers. No matter what the scheme, no matter how good your software, no matter how honed your instincts, you'll fail at this.

"Rather, you should consider two longer-term questions. First, how to diversify out of the U.S. dollar or other currency? Second, how to protect yourself against currency moves where you live right now?

"First, how to diversify. I have four specific current buy recommendations for how to do this that I share with subscribers to the Overseas Retirement Letter in my column in this month's issue (in production now).

"Meantime, how to deal with currency moves where you live.

"This may be the more important issue. After all, if you live in Turkey, your main concern is what the Turkish lira does. You care little about what the U.S. dollar (assuming this is your 'home' currency) does in other parts of the world. You're concerned about the dollar in your part of the world.

"Unfortunately, most parts of the world have turned hostile for those with U.S. dollars. If you retired in Thailand, you've seen the baht move against you. Twelve years ago, you got 50 baht to the U.S. dollar. Five years ago, you got 41 baht. Now you get only 33. In Brazil, the real has gone up, and so has the peso in Mexico.

"In some cases, you have good options for protecting against these local moves. Again, I share specific recommendations in my Overseas Retirement Letter column this month.

"These days, most Third-World countries are keeping interest rates low, way below inflation, meaning you can't look for much return from money on deposit locally. Also, putting money into local banks many places in the world exposes you to sovereign risk, the risk that the government does something nasty. For example, Argentina confiscates private bank deposits every now and again. You'd never want to keep serious money in an Argentine bank.

"When your local currency falls, you can take advantage by buying consumer durables like washing machines or cars. With the weak peso in Argentina in 2004, Vicki and I even built a house, taking advantage of low construction costs. We filled our wine cellar in 2004 and 2005. Now that the peso has become overvalued, and Argentina expensive, I just drink down my stock."

Kathleen Peddicord

Editor's Note: If you're not yet an Overseas Retirement Letter subscriber, become one now to receive Paul's column in full, including his related buy recommendations, which will be featured in this month's ORL issue, in production now.

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Kathleen Peddicord

Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter.

Her book, How To Retire Overseas—Everything You Need To Know To Live Well Abroad For Less, was recently released by Penguin Books.