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Beware the Central Banker

For expats living in Thailand, what has hit them the most has been the strength of the Thai baht and the weakness of their home currencies. Euros that were worth 45 baht last year are now worth 35 baht. Pounds that were worth 55 baht are now worth 48 Baht. Aussie dollars that were worth 30 baht are now worth 25 baht.

This has put a real dent in a many expat’s purchasing power. Those that didn’t bring their money over last year are now getting a lot less than a year ago. It has really hurt condo buyers that locked into contracts and are making payments in Thai baht.

What in the world is going on?

The reason behind this is that the world’s currencies are in a race to the bottom. Every central banker and his brother are trying to outdo one another in terms of QE, or quantitative easing. What this means is that the world’s central bankers have turned on the printing presses and are printing as fast as they can.

Before QE, currency rates were based on a country’s GDP growth and trade flows. Now those factors are no longer as important. It’s more important what the next move will be from the US Federal Reserve, the European Central Bank, the Bank of Japan, or the Bank of Thailand.

Why is the US Dollar so strong?

The reason for the US dollar strength is the economic data out of the US has been rather strong. What that means is the Federal Reserve is on the verge of having to raise interest rates to keep the economy from overheating. A country like the US that is about to raise rates makes its currency much stronger than for instance the euro, where the ECB is embarking on QE to reduce rates. Since US rates are about to go up, investors would rather hold a higher-yielding currency like the US dollar.

The strength in the US dollar is the prime reason why gold prices keep going lower. As the US dollar has gone up, gold prices have gone lower. This is because only one of the two can be the world’s reserve currency. In times of panic, people either want to hold US dollars or they want to hold gold. Right now, “King Dollar” reigns supreme. The strength of the US dollar has also hurt other commodities like oil that are priced in dollars. A stronger US dollar makes oil cheaper. It doesn’t take as many dollars to buy a barrel of oil.

How low can it go?

What’s on everyone’s mind right now is how much lower can the euro or the yen go? From my years of experience, no one knows. What I mean by that is that currencies are known for their trending capabilities. In other words, once a currency starts going lower, there’s no clue how low it can go because everyone jumps to one side of the ship. Right now, that ship is tipping over as everyone dumps their euros and buys dollars.

What’s an investor to do?

Because of the central banks, currency risks are a factor in every investment decision. Just ask any Russian condo buyer that signed a contract last year and is making payments. I’m lucky in that my investments are in US dollars and that’s the place to be right now. For the foreign investor from Australia, Europe or Japan, it’s important that they buy an ETF where the currency is hedged.

For instance, I own the WisdomTree Japan Equity Hedged ETF. This ETF is up over 35% in the past year. On the other hand, if I would have bought the iShares MSCI Japan ETF, I’d be up only 14% because the yen has weakened so much against the US dollar. This is a big difference and why currencies are a factor that cannot be ignored when making investment decisions.

It’s important for you to get a handle on your currency risk and make the right investment decision. That’s why it’s more important than ever to have a trusted financial advisor. Investing is more complicated than ever and in the case of investing in Japan, it’s the difference between making 35% on your money in one year and making only 14% in one year. Which one sounds better to you? Call for a free portfolio review.

Don Freeman,BSME is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket. He has over 15 years experience working with expatriates, specializing in portfolio management, US tax preparation, financial planning and UK pension transfers. Don can be reached at 089-970-5795 or email: [email protected]

How to Plan and Pay for an Expat Child's Education

By far the biggest potential financial headache for a young expatriate family is paying for the cost of an expat child’s education. After all, even large multinationals are increasingly scoffing at hiring expatriates with children or offering pay packages that include paying the full costs of international school fees – which can easily top $10,000 to $20,000 or more per child per year or as much as a university education.

What You Need to Pay and Why Are International Schools So Expensive?

If your employer is not going to pay for the full cost of your expat children’s education, be aware that tuition is only one expense you may incur as there could be other separate bills for transportation, mandatory school uniforms, extracurricular activities, school books and school lunches. You may also be required to sign a “debenture” or rather provide a school with a non-interest loan for as little as a few thousand dollars to as much as $30,000 for the duration of your child’s education. And while scholarships or discounts may be available (e.g. one spouse volunteers to work at the school), do not assume such tuition breaks will be offered to you.

So why are international schools so expensive? The best international schools will have expats as teachers who teach small classes, are usually located in upscale areas and provide high levels of security – characteristics that add to the cost of your child’s education. Remember, you get (or should get) what you pay for when it comes to an international school.

Paying for International Schools

Even if you have an employer paying for most of your expat child’s education, make sure you know and understand what education expenses your employer will pay for (e.g. most likely basic tuition) and what ones your employer won’t pay for (e.g. books and school lunches). Likewise, you should make sure any severance package or clause is enough to cover tuition payments so you are not forced to withdraw your child immediately from school should you unexpectedly be terminated or transferred.

If you are completely on your own when it comes to paying international school fees, remember that these fees will likely rise well above and beyond the rate of inflation and the interest rates most investments are paying – especially as wealthy Asians increasingly opt to send their children to Asia’s international schools. In the worst case scenario (short of the whole family returning home), you may need to plan on homeschooling your children (which will require big sacrifices by you and your spouse) or even sending them back home to complete their education.

Don’t Forget to Plan for Your Child’s University Education

If paying for your expat child’s basic education is not enough to worry about, you will also need to start early to save, invest and carefully plan for their university education – which becomes more complicated for long-time expat families.

For example: If you are an American expat who intends to send your child to a state college at instate tuition rates, be aware that you may need to reestablish residency for your family or for your child (by sending them “home” for high school) in order to qualify for lower instate tuition rates. Be careful about re-establishing residency for your whole family as it could also make your income subject to state income taxes, even if you continue to reside abroad; and don’t forget to take advantage of various tax deferred investments accounts intended for education expenses.

Finally and if your family have been expats for a long time, you might want to go as far as to consider other more radical options for giving them a university education rather than sending them back home. Many universities in Australia and New Zealand will now accept US Department of Education backed loans and other forms of financial aide from other countries while foreign universities have increasingly set up campuses or programs in Asia targeting the region’s middle and professional classes. Such education options might prove to be better and more affordable alternatives for you and your children’s university education.

Don Freeman, BSME is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket. He has over 15 years experience working with expatriates, specializing in portfolio management, US tax preparation, financial planning and UK pension transfers. Don can be reached at 089-970-5795 or email: [email protected]

HEADLINES [click on headline to view story]

Update April 27, 2015

Beware the Central Banker

Update April 21, 2015

How to Plan and Pay for an Expat Child's Education