Tag Archives: china

How to Read the Panicky Market

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Some of the most entertaining times to be a long-term investor are those periods when short-term investors are looking over their shoulders for an excuse to sell.  They’re convinced that the market is going to go down before they can get out, and so they jump on any bad news that comes across their Bloomberg screen.

And, of course, Friday was a marvelous time to see this in action.  With all the economic drama playing out in the world, there were plenty of opportunities to panic.  The Greek Prime Minister has resigned!  Sell!  China devalued its currency a few days ago by 2%!  Head for the hills!  Chinese stocks are tanking yet again!  Get out of American stocks while you can!  The Fed might raise short-term interest rates from zero to very nearly zero!  It’s the end of the world!

Of course, a sober analyst might wonder whether a change in governance in a country whose GDP is a little less than half the market capitalization of Apple Computer Corp. is really going to move the needle on the value of U.S. stocks—especially now that Greece seems to have gotten the bailout it needs to stay in the Eurozone.  Chinese speculators are surely feeling pain as the Shanghai Composite Index goes into free-fall, but most U.S. investors are prohibited from investing in this tanking market.  If the market value of PetroChina, China Petroleum & Chemical and China Merchants Bank are less valuable today than they were a week or a month ago, does that mean that one should abandon U.S. stocks?  Does it mean that American blue chips are somehow less valuable?

What makes this dynamic entertaining—and sometimes scary—is the enhanced volatility around very little actual movement.  You see the market jump higher and faster, lower and faster, but generally returning to the starting point as people realize a day or two later that the panic was an overreaction, and so was the false exuberance of realizing that the world isn’t going to come to an end just because we’re paying less at the gas pump than we were last year.  Despite all the jitters investors have experienced over the past nine months, despite the drop on Friday, the S&P 500 is only down about 4% for the year, and was in positive territory as recently as August 19.

If you want a broader, more rational picture of our current economic situation, read this analysis by a long-term trader who now refers to himself as a “reformed broker” in Fortune magazine: http://fortune.com/2015/08/20/american-economy-worries/  He talks about the “terrible news” that it hasn’t been this cheap to fill your gas tank in over a decade, and business that rely on energy to manufacture their goods are now forced to figure out what to do with the excess capital they’re not spending on fuel.

Oh, but gets worse.  American corporations are struggling under the burden of enormous piles of cash they don’t have a use for.  They may have no choice but to return some of that money back to shareholders in the form of record dividends.  Of course, you read about the risk to corporate profit margins.  It seems that unemployment is so low that wages for American workers are going up, and that could raise consumption and demand for products and services.

Meanwhile, contributions to 401(k) and other retirement plans are up dramatically, housing starts and the construction sector are booming, America’s biggest global economic competitor (China) is reeling, and the Federal Reserve might decide that it no longer has to keep short-term interest rates low because the emergency is over and the economy has recovered.  The author apologizes (tongue in cheek) for bringing us all this terrible news, but hey, we can always sell our stocks and get out until conditions improve.

Right?

Nobody would be surprised if the U.S. stock market suffered a 10% or even a 20% short-term decline, this year, or perhaps next year.  But what can you do with that information?  Nobody would have been surprised if this had happened at any point in the long bull market that doubled your stock investments, and nobody can predict whether Friday was a signal that the market will take a pause, or if Monday will bring us another wave of short-term euphoria measured mostly in sighs of relief.  And if you don’t know when to sell in this jittery market, how will you know when to buy back?

These short-term swings provide entertainment, but very little useful information for a mature investor.  If you aren’t entertained by watching people sell in a panic and then panic-buy their way back in when they realize things aren’t as dire as the headlines made them out to be, then you should probably watch a movie instead.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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Shifting Share

If you want to see global economic history in a single colorful graph, check out this one, produced by The Atlantic magazine.  It shows the share of global GDP for various countries since the year 1 AD.

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What you see in the early years might surprise you.  India accounted for almost 40% of global GDP during the height of the Roman Empire, and China accounted for another 30%.  Europe and the U.S. didn’t make up more than 50% of total world economic activity until the mid-1800s, and the rise of the U.S. economy is—visibly—one of the great economic stories of all time.

The shifting economic heft is not hard to explain.  Before the Industrial Revolution, the size of a country’s economy was measured by the size of its population; there wasn’t a lot of leverage due to technology or innovation.  When technology began expanding the impact of some nations’ citizens but not others, there were significant shifts.  Notice that the U.K. was basically invisible on the global economic landscape until the late 1600s, and became significant as the steam engine and manufacturing technology was born in its cities.

That leverage continues.  Today, the U.S. makes up 5% of global population but generates 21% of its GDP.  Japan, Germany, the U.K. and European countries generally are punching above their population weight, although less so than in the middle of the 1900s.  Meanwhile, the Asian countries (minus Japan) account for 60% of the world’s population and just 30% of its GDP.

Will that last?  Probably not.  You can see the same technological leverage starting to work in favor of China, which is on track to enjoy the world’s largest GDP, as it did in the 1700s, while the U.S.’s share of the world’s economy is slowly eroding.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Source:

The Economic History of the Last 2,000 Years in 1 Little Graph

That headline is a big promise. But here it is: The economic history of the world going back to Year 1 showing the major powers’ share of world GDP, from a research letter written by Michael Cembalest, chairman of market and investment strategy at JP Morgan.

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Devaluation Panic

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Investors across the globe were sent into a panic recently when the Chinese Central Bank devaluated the nation’s currency, the yuan. The U.S. market lost more than 1% of its total value, oil prices fell and global shares plummeted on news that China decided to make its currency two percent cheaper than it was before.

You actually read that right. Headlines raised the prospect of a global currency war, and there were hints in the press that nations might resort to trade barriers, which would slow down global trade in all directions. If you’re following the story, you probably didn’t read that the Chinese yuan, even after the devaluation, was actually more valuable against global currencies than it was a year ago in trade-weighted terms. Nor that China actually intervened in the global markets to make sure the devaluation didn’t go any further in open market trading.

The background for the devaluation is China’s slowing economic growth and its recent stock market volatility. The country is on track for a 7% growth rate this year—three times the U.S. rate, but sluggish by recent Chinese standards, and quite possibly unacceptable to the country’s leaders. You probably already know that the Chinese stock market climbed to impossibly high levels earlier this year and then fell just as far in a matter of weeks. As you can see from the accompanying chart, the Chinese government marched into the chaos with a heavy hand, outlawing short sales, banishing hedge funds to the sidelines, suspending margin calls and even buying stocks directly in an effort to put a floor on prices. The theory was that the devaluation was part of this intervention, since it would make exports cheaper and boost sales, raising profit margins of those companies whose stocks were recently free-falling.

 

A more nuanced view of the situation is that the recent depreciation is a small step to keep the yuan’s value in line with those of its peers, not a dramatic shift in exchange-rate policy or a part of the Great Shanghai Market Panic. Indeed, if you look at the accompanying chart, you can see that China’s percentage of world exports has been steadily growing for this entire century, without any need to add the stimulus of a weaker currency.

A scarier scenario, which nobody seems to be talking about, is that China’s endgame goal is to make the yuan the reserve currency for global trade—replacing the U.S. dollar. China is already lobbying to join the list of reserve currencies recognized by the International Monetary Fund. The new exchange rate is more in line with basic economic fundamentals, strengthening the argument that the yuan is not under the total control of an interventionist central government. But so long as China imposes strict limits on the amount of its currency that can flow into and out of the country, and attempting to manipulate its own stock market, this will be a difficult argument to make.

Sources:

http://www.economist.com/news/finance-and-economics/21661018-cheaper-yuan-and-americas-looming-rate-rise-rattle-world-economy-yuan-thing?fsrc=scn/tw/te/pe/ed/yuanthingafteranother

http://www.bloombergview.com/quicktake/chinas-managed-markets

http://finance.yahoo.com/news/global-markets-china-devaluation-hits-165238168.html

http://www.bloomberg.com/news/articles/2015-08-13/china-citigroup-agree-there-s-no-need-for-big-yuan-devaluation

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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New Government Waste Ad Scares and Misleads

The ad starts with a Chinese Expo, a fully modern Chinese society of the future (where all the Chinese are rich) and ends with the speaker stating that the Chinese “owned most of their debt” and the catch phrase “so now they work for us”.

A catchy ad, no doubt.  But completely misleading.

First, China does not own most of the U.S. debt, in fact the vast majority of debt is held by the American public (rather its banks).  Second, even if China DID own a majority of our debt, wouldn’t they be the one’s with the problem?  Third, is it really wise to hold out a communist nation who manipulates their currency and is literally building ghost towns to maintain growth the paragon of virtue the U.S. should strive for? I think not.

But the biggest myth propagated by this ad is that we actually owe anything to the Chinese or that we are beholden to them at all, we are not.  When the Chinese send us their goods (exports) we send them our cash (Dollars), the Chinese use these dollars to buy U.S. goods (imports, but not many of them), Oil and other commodities. The remainder of the dollars sit earning no interest.  Think of these dollars like your own dollars sitting in a checking account.  When you have excess money in your checking account you move it to a savings account, which earns interest.  The process of moving money from your checking to your savings is similar to that of the Chinese moving their dollars into Treasury Bills, Bonds and Notes.  They are moving from a non-interest dollar account to an interest earning dollar account (Treasuries).  Both are U.S. Debt obligations, but only one pays interest.  We could pay off all the Chinese debt by a simple accounting move, transferring the Chinese “Savings Account/Treasuries” to the Chinese “Checking Account/Dollars”.  The Chinese DO NOT FUND our deficits.

The United States is a sovereign monopoly issuer of its own non-convertible currency and all of our obligations are denominated in our own currency (this is a very different situation than the Weimar Republic of Germany).

What I am not saying is that there is not government waste, there is, a ton of it. I am all for eliminating government waste – however the scare tactics and outright lies add nothing to the debate.  This lies do harm as the populous is led to believe something that isn’t true.

Let’s get rid of government waste, and do it honestly.

For a complete understanding of our monetary system I suggest The Pragmatic Capitalist blog.

Scott Dauenhauer, CFP, MSFP, AIF

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