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Post: Brett Arends’s ROI: Looking for a cheap retirement spot? Europe is a good deal for Americans

I’m currently visiting London, and thanks to the turmoil on the foreign exchange markets I feel about as rich as Rockefeller.

The British pound, which in 2007 cost $2.11, is now hovering around $1.11. At one point the pound plunged toward actual parity, as the new British government announced financial measures that caused a crash in sterling and in British government bonds.

Everything here seems cheap to me. A friend here is a Conservative member of Parliament. I sent him an email, asking him to thank new Prime Minister Liz Truss and new Chancellor of the Exchequer Kwasi Kwarteng for me personally.

I haven’t heard back.

Remarkably, even Apple’s

newest iPhones now cost less to buy in London than in New York, Los Angeles, or even in places in America with no sales tax, thanks to these crazy exchange rates.

The top of the line iPhone 14 Pro Max with 1 terabyte of storage will cost you $1,599 stateside, but will cost U.S. visitors to the U.K. only $1,460 once they reclaim the national sales tax, known as VAT or Value Added Tax, when they leave the country. (The British government has just restored this sales break for tourists.)

That’s not a huge savings, but it’s astonishing that there is any savings at all: As someone who has been back and forth across the Atlantic for more than 40 years, I cannot ever recall a time when British prices were even remotely competitive to U.S. prices, let alone cheaper.

And it’s not just the pound, of course. The euro, which 15 years ago cost as much as $1.60, is now worth less than $1: The lowest level since 2002. A friend just moved to rural France, where he is now living in style for very little.

And 1,000 Japanese yen, which just over a decade ago would have cost nearly $14, will now set you back less than $7. The yen hasn’t been this low against the dollar since the late 1990s.

The skyrocketing dollar—and collapsing foreign exchange rates, including the pound, euro, yen and others—isn’t just of interest to tourists thinking of buying a new iPhone. More important it’s good for retirees, and future retirees, in three different ways.

The first is that this makes this a good time to book that European vacation you may have planned. Nobody knows where and when the dollar will stop soaring or other currencies will rebound, but you don’t need to travel right now to take advantage of current exchange rates. You can book a vacation for next spring or summer, and simply transfer some dollars into euros (or pounds or whatever) now. You can also lock in current exchange rates, if you want, in your IRA, 401(k) or other investment account by purchasing the relevant exchange-traded funds. The Invesco CurrencyShares Euro Trust

buys euros. The equivalent British trust
which I own, buys pounds. There are others, such as a yen trust
Swiss franc trust
and so on.

The second, which may be of some interest to readers, is that if you’ve long thought about retiring overseas—to Europe or anywhere else, for that matter—this is also a good time to think about it. The same principles apply: You don’t have to make the move now, so you can simply swap currencies now and move some time in the future. Will the dollar keep rising and foreign currencies keep falling? Quite possibly. Nobody knows how or when this trend will reverse. The thing that should really matter is your own financial situation and your own goals.

The third, and maybe simplest, way to take advantage of current exchange rates is to look at investing more of your retirement funds in international assets. This calculation comes courtesy of Ben Inker, co-head of asset allocation at Boston money managers GMO.

In his latest quarterly investment letter, Inker reports that the U.S. dollar is now nearly as expensive versus other currencies as it was during a brief bubble in the mid-1980s, and actually about where it was back in 1971, before Richard Nixon closed the convertibility to gold.

According to GMO’s own analysis, which includes more than just purchasing power parity, the dollar is now heavily overvalued against the yen and the euro, and overvalued against the pound. GMO’s own calculations date from Aug. 31, and these currencies have fallen further just since then.

Incidentally, the valuation gaps are even bigger compared with certain emerging market currencies, such as the South Korean won, the Polish zloty and the Turkish lira.

GMO’s calculations, going back 50 years, show that in general the wise move is to invest in the equity markets of countries with cheap currencies, and especially if those markets themselves are pretty cheap. This doesn’t guarantee success, Inker writes, but it tilts the odds in your favor. If the currency recovers, you get some uplift. If it doesn’t, the country’s stocks tend to benefit from higher exports and earnings.

“Equity investors in countries with overvalued currencies have two ways to lose and those with undervalued currencies have two ways to win,” Inker writes.

For the U.S. (and some other countries such as Australia and Canada), the dollar is now so expensive that it threatens stock market returns. “The Euro area and Japan, by contrast, have currencies that are sufficiently cheap that it should be a real help to their markets. The simplest way for that to play out would be for the cheap currencies to appreciate and the overvalued ones to fall over the next few years. But even if that doesn’t happen, Europe and Japan look poised for stronger earnings growth than the dollar group.”

GMO calculates that when you look at currencies and stock market valuations, Japan, the euro area, Sweden and South Korea are cheap on both measures. Cheap is good.

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