Here's a painful, and sometimes funny, look at how key legislative decisions are made in Washington, D.C., which you are encouraged to share with your friends: http://www.ritholtz.com/blog/2012/03/how-lobbyists-run-washington/?utm_source=dlvr.it&utm_medium=twitter
If you want to fix the problem of rising costs in the U.S. healthcare system, or at least reduce the looming Medicare/Medicaid entitlement burden, there's a surprisingly easy solution. In Washington policy circles, it has been estimated that more than 80% of all the dollars spent on healthcare in the U.S. are incurred in the last nine days of a person's life. Many times, the money is spent keeping a person alive in a vegetative state, prolonging an incurable illness or painful conditions where there is little to no chance of recovery. The money is not just wasted; it may actually be used to prolong suffering when recovery is not an option.
It doesn't have to be this way. In an ongoing blog on the Forbes website (http://www.forbes.com/sites/carolynmcclanahan/2012/03/07/how-to-die-like-a-doctor/), emergency room physician and financial planner Carolyn McClanahan tells us that doctors are among the best at avoiding this dismal fate at the end of their lives, by taking a few simple precautions.
Dying like a doctor, she says, starts with understanding that we all get sick and die. Most people know this, but don't realize it deep-down, which is why individuals who experience near-death experiences--making death a more prominent part of their awareness--often choose to live more vital and productive lives thereafter, determined to make every second count. As McClanahan says: "when we live with no regrets, death isn't scary."
Doctors also see first-hand the situations where an unconscious person goes through a battery of procedures that keeps them alive until Friday when they otherwise would have died the previous Tuesday. McClanahan recommends that laypersons get a closer look at the transition from life to death by volunteering at your local hospice.
Finally, doctors understand the power of documentation. They make sure they have a living will that describes how they want to be treated when faced with a serious accident or illness. They'll have an advance directive which provides written instructions regarding their medical care preferences.
In an earlier blog post (http://www.forbes.com/sites/carolynmcclanahan/2012/03/02/doctors-do-die-differently-how-we-make-certain/), McClanahan says that it is best to focus on outcome rather than actions. Her favorite example is the routine question: "Do you want CPR?"--which, she says, seldom works at the end of life, will crush the bones in your chest and will become just another charge on the "superbill" the hospital sends the insurance company after your death. If, instead, you turn the question around, and make it: what type of lifestyle is acceptable to you?--then you might answer: "as long as I can use my brain, even if I can't move, I want to be kept going." That means you would be okay being a quadriplegic, but don't want to be kept alive in a persistent vegetative state.
Both of these documents will be entrusted to members of the family, or placed in a safe place that is accessible to your loved ones. They'll go alongside a medical power of attorney, which empowers a friend or relative to make financial decisions when you are unable to. Doctors also know to designate a health care agent who understands their wishes and will act accordingly when the hospital medical team presses for permission to keep them alive when there is little chance of recovery.
McClanahan tells the story of her own father, who was diagnosed with lung cancer. The doctors recommended chemotherapy and radiation. When he decided to forego this painful treatment, the doctors were indignant, and predicted he would be dead within six months. He lived three more years, and the hospice was a blessing at the end. He was one of the few non-physician Americans who had the knowledge and the documentation to die with dignity.
Like a doctor.
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Tuesday, March 20, 2012
Thursday, March 15, 2012
'CLIENT-LAST' ADVICE
In professional circles, we often talk about a "client-first" attitude, which is shorthand for giving your clients the same quality of financial advice as you would give your mother. It's a useful shorthand way to navigate through a financial world that is still beset by incentive payments, expensive rewards for sales production, under-the-table or soft dollar incentives and a host of other ways that product vendors try to buy their way into your portfolios.
"Client-first" simply means that the client's financial success and well-being comes before all other considerations. It's what you would expect from a doctor or other professional, and many of us believe that you have a right to expect the same level of care from your financial advisor.
Most professional advisors think this is all a bunch of baloney. Wall Street firms and sales organizations are very good at hiding the real agenda behind their advice, and do a masterful job of hiding the profits they skim off the top when you take their recommendations. This is why it was so startling when, in a New York Times opinion piece, Goldman Sachs executive director Greg Smith essentially pulled the curtains back and showed how Wall Street really works.
Smith declared that he was resigning from the venerable brokerage firm--perhaps Wall Street's most highly-respected organization--because, in his view, its culture is all about putting the client's interests last. "To put the problem in the simplest terms," he writes, "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."
Pulling the curtain aside a bit further, he said that the criteria for promotion and success was not "leadership" or "doing the right thing." Instead, he said, "if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence."
How do you make money for the firm? Smith outlined three ways. A Goldman broker or executive can rise in the ranks by "persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit." (Just what you want to buy for your retirement portfolio, right?) Or, alternatively, "get your clients--some of whom are sophisticated, and some of whom aren't--to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned," said Smith, "but I don't like selling my clients a product that is wrong for them."
Pulling the curtain back still farther, Smith said that "It makes me ill how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as 'muppets,' sometimes over internal e-mail... Will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact."
He said that the most common question he gets from junior analysts about derivative investments is: "How much money did we make off the client?" He wonders what the effect will be on that junior analyst who sits in the meeting rooms hearing senior executives talk about "muppets," "ripping eyeballs out," and "getting paid."
You can read Mr. Smith's comments in their entirety here: http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&hp, where you will also see a nice illustration of vultures at feast. He predicts that companies--and people--who care only about making money will not be able to keep the trust of their customers.
But is this true? Chances are, most people reading this eye-opening article will be hearing about these things for the first time, and may not believe it's true about THEIR broker. Millions of people routinely trust their brokers and the big firms that buy Super Bowl advertisements, never seeing this messy view on the other side of the curtain, unknowingly chipping in their retirement dollars to the outsized Wall Street bonus pools.
You find yourself wondering: who's going to tell those "muppets"--your hard-working friends and neighbors--that their broker is quietly, invisibly, cleverly putting their interests last?
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
"Client-first" simply means that the client's financial success and well-being comes before all other considerations. It's what you would expect from a doctor or other professional, and many of us believe that you have a right to expect the same level of care from your financial advisor.
Most professional advisors think this is all a bunch of baloney. Wall Street firms and sales organizations are very good at hiding the real agenda behind their advice, and do a masterful job of hiding the profits they skim off the top when you take their recommendations. This is why it was so startling when, in a New York Times opinion piece, Goldman Sachs executive director Greg Smith essentially pulled the curtains back and showed how Wall Street really works.
Smith declared that he was resigning from the venerable brokerage firm--perhaps Wall Street's most highly-respected organization--because, in his view, its culture is all about putting the client's interests last. "To put the problem in the simplest terms," he writes, "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."
Pulling the curtain aside a bit further, he said that the criteria for promotion and success was not "leadership" or "doing the right thing." Instead, he said, "if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence."
How do you make money for the firm? Smith outlined three ways. A Goldman broker or executive can rise in the ranks by "persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit." (Just what you want to buy for your retirement portfolio, right?) Or, alternatively, "get your clients--some of whom are sophisticated, and some of whom aren't--to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned," said Smith, "but I don't like selling my clients a product that is wrong for them."
Pulling the curtain back still farther, Smith said that "It makes me ill how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as 'muppets,' sometimes over internal e-mail... Will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact."
He said that the most common question he gets from junior analysts about derivative investments is: "How much money did we make off the client?" He wonders what the effect will be on that junior analyst who sits in the meeting rooms hearing senior executives talk about "muppets," "ripping eyeballs out," and "getting paid."
You can read Mr. Smith's comments in their entirety here: http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&hp, where you will also see a nice illustration of vultures at feast. He predicts that companies--and people--who care only about making money will not be able to keep the trust of their customers.
But is this true? Chances are, most people reading this eye-opening article will be hearing about these things for the first time, and may not believe it's true about THEIR broker. Millions of people routinely trust their brokers and the big firms that buy Super Bowl advertisements, never seeing this messy view on the other side of the curtain, unknowingly chipping in their retirement dollars to the outsized Wall Street bonus pools.
You find yourself wondering: who's going to tell those "muppets"--your hard-working friends and neighbors--that their broker is quietly, invisibly, cleverly putting their interests last?
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Wednesday, March 14, 2012
THE LAST GREEK HEADLINE?
Most of us have heard way too much about the finances of a relatively small member of the global economy: Greece, and its debt crisis. Recently one economist described the Greek debt default as "the slowest-moving train wreck in history."
But now, the constant parade of headlines may be over. On Friday, March 9, holders of more than 83% of Greece's government bonds agreed to exchange their nearly-worthless holdings for new bonds. In effect, they have forgiven 74% of the bonds' value--wiping out roughly $138 billion off of Greece's debt burden--a number that could rise as a series of "collective action clauses" force the remaining 25% to go along with the deal. The swap agreement also opens the door for the other European finance ministers to approve a $173 billion bailout package for the ailing Greek economy.
Of course, even with the debt forgiveness and bailout package, Greece is far from out of the woods. An article published by the British Broadcasting Corp. (BBC) reports that the country still plans dramatic government spending cuts, which is deepening an already-severe recession that saw a 7.5% reduction in Greece's GDP in the final three months of 2011. But the risk that Greece's problems will metastasize into a global financial meltdown seems to be greatly diminished.
One of the most interesting, and unreported, aspects to the crisis was the underlying fear that that European banks were secretly holding massive levels of credit default swap exposure on their books, many of them specifically written to insure losses on Greek bonds. Derivatives contracts similar to these, written on collateralized home mortgage bonds, were so prevalent in the 2008 market meltdown that, when counterparties started making claims, it brought the global financial community to its knees. For inexplicable reasons, banks and financial institutions are not required to report their exposure to these contracts, so until Friday, nobody knew which lender might be on the hook for more than their institution was worth.
When the International Swaps and Derivatives Association, after a brief conference, decided to classify the deal as a "credit event," European regulatory authorities held their breath. When the Moody's rating agency declared that, by its definitions, Greece had defaulted, it cemented a contract-holder's claim to be repaid in full. (Standard & Poor's followed suit a day later.) But when the claims were presented, it became apparent that the derivatives payouts could be as low as $3.2 billion, a tiny fraction of the losses that banks incurred on their Greek bonds. Instead of an earthquake, the derivative swaps triggered a loud popping sound.
Which is perhaps the last sound you'll hear about Greece and its reckless borrowing binge.
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
sources: http://www.bbc.co.uk/news/business-17308804
http://www.washingtonpost.com/business/markets/asian-stock-markets-rise-as-chinas-inflation-eases-greek-debt-deal-nears-completion/2012/03/08/gIQAN0BH0R_story.html
http://www.cnbc.com/id/46702123
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
But now, the constant parade of headlines may be over. On Friday, March 9, holders of more than 83% of Greece's government bonds agreed to exchange their nearly-worthless holdings for new bonds. In effect, they have forgiven 74% of the bonds' value--wiping out roughly $138 billion off of Greece's debt burden--a number that could rise as a series of "collective action clauses" force the remaining 25% to go along with the deal. The swap agreement also opens the door for the other European finance ministers to approve a $173 billion bailout package for the ailing Greek economy.
Of course, even with the debt forgiveness and bailout package, Greece is far from out of the woods. An article published by the British Broadcasting Corp. (BBC) reports that the country still plans dramatic government spending cuts, which is deepening an already-severe recession that saw a 7.5% reduction in Greece's GDP in the final three months of 2011. But the risk that Greece's problems will metastasize into a global financial meltdown seems to be greatly diminished.
One of the most interesting, and unreported, aspects to the crisis was the underlying fear that that European banks were secretly holding massive levels of credit default swap exposure on their books, many of them specifically written to insure losses on Greek bonds. Derivatives contracts similar to these, written on collateralized home mortgage bonds, were so prevalent in the 2008 market meltdown that, when counterparties started making claims, it brought the global financial community to its knees. For inexplicable reasons, banks and financial institutions are not required to report their exposure to these contracts, so until Friday, nobody knew which lender might be on the hook for more than their institution was worth.
When the International Swaps and Derivatives Association, after a brief conference, decided to classify the deal as a "credit event," European regulatory authorities held their breath. When the Moody's rating agency declared that, by its definitions, Greece had defaulted, it cemented a contract-holder's claim to be repaid in full. (Standard & Poor's followed suit a day later.) But when the claims were presented, it became apparent that the derivatives payouts could be as low as $3.2 billion, a tiny fraction of the losses that banks incurred on their Greek bonds. Instead of an earthquake, the derivative swaps triggered a loud popping sound.
Which is perhaps the last sound you'll hear about Greece and its reckless borrowing binge.
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
sources: http://www.bbc.co.uk/news/business-17308804
http://www.washingtonpost.com/business/markets/asian-stock-markets-rise-as-chinas-inflation-eases-greek-debt-deal-nears-completion/2012/03/08/gIQAN0BH0R_story.html
http://www.cnbc.com/id/46702123
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Monday, March 5, 2012
CHINA, ITS CURRENCY & THE GLOBAL ECONOMY
Which move will it make to address pressing issues?
Right now, there are dozens of mutual funds and ETFs devoted explicitly to investing in China’s impressive emerging market. Even with the risk of asset bubbles, the promise of China is simply too tantalizing to ignore for many.
The question is whether its economy can maintain its powerful momentum in 2012. If not, the impact on global investors could be significant.
Is China headed for a soft landing… or a hard one? Recent data out of the PRC has given economists pause. China’s official manufacturing index fell to 49.0 last November, indicating sector contraction; since then, it has barely crept above 50 (51.0 in February, 50.5 in January). Its red-hot GDP cooled slightly to 8.9% in Q4 2011 following a series of interest rate hikes by the People’s Bank of China to try and rein in inflation. Still, consumer prices are on the rise in China – the inflation rate rose 0.4% in January to 4.5%.1
Other troubling signs emerged in January: a 23.8% monthly drop in auto sales, a fifth consecutive monthly dip in property prices, a third straight monthly decrease in foreign direct investment, and month-over-month declines in exports and imports.2
While China has one of the best debt-to-GDP ratios in the world – 16.3% at the end of 2011 – that ratio may reflect the “official story” rather than the reality of its “hidden liabilities”.3
What if the yuan appreciates? Until recently, this was the trend. The People’s Bank of China elected to loosen the yuan from the dollar about two years ago, and the currency now “floats” within a narrow band. In February the yuan reached an all-time high versus the U.S. dollar (6.3287). The PBC projects about 3% appreciation for the currency in 2012.4
An even stronger yuan would alter the exchange rate between China and the U.S. and theoretically lessen American consumer demand for Chinese imports. If the yuan continues to appreciate against the dollar, there may be three macroeconomic effects. One, American firms would have to pay more for Chinese goods they buy. Two, American companies might try to source out new suppliers and cheaper factories in nations like India, Thailand and the Philippines – or they might even direct some dollars back into our own manufacturing sector. None of this can be done overnight, so in this scenario our trade balance with China could worsen before showing any long-run improvement.
A fast-appreciating yuan would mean more purchasing power for the rising Chinese middle class, less emphasis on exports in China’s economy, and some deflation – and a little price deflation might be welcomed by China’s citizenry. However, a gradually appreciating yuan (on the level of 2-3% annually) might amount to the best-case scenario for the global economy and investors.
What if the yuan depreciates? China is poised for political change in late 2012 - a Communist Party congress will occur and Vice President Xi Jinping is in line to become the nation’s new leader. Will the new administration elect to reverse any yuan appreciation? 2
For some time, China has bought dollars in the forex markets to keep the yuan undervalued, and that has served as a tonic to its export-driven economy. A weak yuan policy (and low labor costs) also helped to encourage direct foreign investment in China. Weakening the yuan again would drive up the cost of imports for the Chinese consumer, and China would be prompted to boost exports anew – implying more economic growth, less unemployment and renewed price advantage in global markets – in other words, an antidote to a slowdown.4
The cloudy near-term future of the yuan makes investing in China something of a wild card. While some economists think a stronger yuan would be good for the world economy in the long run, the fear of a hard landing (and its impact not only on the Chinese economy but the world economy) may prompt the nation’s leaders to move in a different direction.
Chinese government researchers have told Reuters that the PRC has set a target of 7.5% growth for 2012; the PRC usually sets GDP targets it can comfortably meet, so results might exceed projections. Even so, growth might not approach the 9.2% GDP China saw in 2011. In February, Standard & Poor’s gave China a 10% chance of a hard landing in 2012 (5% GDP) and a 25% chance of a “medium landing” (7% GDP).2,5
Which way in? If you are thinking about investing in China, keep in mind that its economy has a relatively high inflation rate. This may encourage Chinese companies to overstate or overestimate factors like sales growth, operating margins, debt-to-asset ratios and fixed asset turnover. So while an individual investor may at first be enticed by a large-cap international Chinese company, he or she may opt for an ETF or index fund after further consideration. Quite a few stock market analysts think these vehicles provide sensible entry into China for the small investor.
Citations.
1 - www.chinadaily.com.cn/china/2012-03/02/content_14735838.htm [3/2/12]
2 – www.forbes.com/sites/gordonchang/2012/02/20/rearranging-the-deck-chairs-on-the-ss-chinese-economy/ [2/20/12]
3 – www.forbes.com/sites/gordonchang/2012/02/26/how-will-china-pay-off-its-debt/ [2/26/12]
4 – www.cnbc.com/id/45788856/Yuan_at_Record_High_vs_Dollar_On_Track_for_4_Gain_in_2011 [2/9/12]
5 – www.nasdaq.com/article/sp-sees-china-soft-landing-as-most-likely-scenario-20120202-00090 [3/2/12]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Right now, there are dozens of mutual funds and ETFs devoted explicitly to investing in China’s impressive emerging market. Even with the risk of asset bubbles, the promise of China is simply too tantalizing to ignore for many.
The question is whether its economy can maintain its powerful momentum in 2012. If not, the impact on global investors could be significant.
Is China headed for a soft landing… or a hard one? Recent data out of the PRC has given economists pause. China’s official manufacturing index fell to 49.0 last November, indicating sector contraction; since then, it has barely crept above 50 (51.0 in February, 50.5 in January). Its red-hot GDP cooled slightly to 8.9% in Q4 2011 following a series of interest rate hikes by the People’s Bank of China to try and rein in inflation. Still, consumer prices are on the rise in China – the inflation rate rose 0.4% in January to 4.5%.1
Other troubling signs emerged in January: a 23.8% monthly drop in auto sales, a fifth consecutive monthly dip in property prices, a third straight monthly decrease in foreign direct investment, and month-over-month declines in exports and imports.2
While China has one of the best debt-to-GDP ratios in the world – 16.3% at the end of 2011 – that ratio may reflect the “official story” rather than the reality of its “hidden liabilities”.3
What if the yuan appreciates? Until recently, this was the trend. The People’s Bank of China elected to loosen the yuan from the dollar about two years ago, and the currency now “floats” within a narrow band. In February the yuan reached an all-time high versus the U.S. dollar (6.3287). The PBC projects about 3% appreciation for the currency in 2012.4
An even stronger yuan would alter the exchange rate between China and the U.S. and theoretically lessen American consumer demand for Chinese imports. If the yuan continues to appreciate against the dollar, there may be three macroeconomic effects. One, American firms would have to pay more for Chinese goods they buy. Two, American companies might try to source out new suppliers and cheaper factories in nations like India, Thailand and the Philippines – or they might even direct some dollars back into our own manufacturing sector. None of this can be done overnight, so in this scenario our trade balance with China could worsen before showing any long-run improvement.
A fast-appreciating yuan would mean more purchasing power for the rising Chinese middle class, less emphasis on exports in China’s economy, and some deflation – and a little price deflation might be welcomed by China’s citizenry. However, a gradually appreciating yuan (on the level of 2-3% annually) might amount to the best-case scenario for the global economy and investors.
What if the yuan depreciates? China is poised for political change in late 2012 - a Communist Party congress will occur and Vice President Xi Jinping is in line to become the nation’s new leader. Will the new administration elect to reverse any yuan appreciation? 2
For some time, China has bought dollars in the forex markets to keep the yuan undervalued, and that has served as a tonic to its export-driven economy. A weak yuan policy (and low labor costs) also helped to encourage direct foreign investment in China. Weakening the yuan again would drive up the cost of imports for the Chinese consumer, and China would be prompted to boost exports anew – implying more economic growth, less unemployment and renewed price advantage in global markets – in other words, an antidote to a slowdown.4
The cloudy near-term future of the yuan makes investing in China something of a wild card. While some economists think a stronger yuan would be good for the world economy in the long run, the fear of a hard landing (and its impact not only on the Chinese economy but the world economy) may prompt the nation’s leaders to move in a different direction.
Chinese government researchers have told Reuters that the PRC has set a target of 7.5% growth for 2012; the PRC usually sets GDP targets it can comfortably meet, so results might exceed projections. Even so, growth might not approach the 9.2% GDP China saw in 2011. In February, Standard & Poor’s gave China a 10% chance of a hard landing in 2012 (5% GDP) and a 25% chance of a “medium landing” (7% GDP).2,5
Which way in? If you are thinking about investing in China, keep in mind that its economy has a relatively high inflation rate. This may encourage Chinese companies to overstate or overestimate factors like sales growth, operating margins, debt-to-asset ratios and fixed asset turnover. So while an individual investor may at first be enticed by a large-cap international Chinese company, he or she may opt for an ETF or index fund after further consideration. Quite a few stock market analysts think these vehicles provide sensible entry into China for the small investor.
Citations.
1 - www.chinadaily.com.cn/china/2012-03/02/content_14735838.htm [3/2/12]
2 – www.forbes.com/sites/gordonchang/2012/02/20/rearranging-the-deck-chairs-on-the-ss-chinese-economy/ [2/20/12]
3 – www.forbes.com/sites/gordonchang/2012/02/26/how-will-china-pay-off-its-debt/ [2/26/12]
4 – www.cnbc.com/id/45788856/Yuan_at_Record_High_vs_Dollar_On_Track_for_4_Gain_in_2011 [2/9/12]
5 – www.nasdaq.com/article/sp-sees-china-soft-landing-as-most-likely-scenario-20120202-00090 [3/2/12]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
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