More on the Economy

Investment Analysis Clubs Saul’s Investing Discussions
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For those of you who may have missed or not clicked on this interesting Post of the Day by Fast Mike, he presented another view on how China and the rest of the world economy may impact the U.S. His summary paragraphs:

Which brings me to the point, if you’re still with me: The global economy is sliding into a recession. If the healthier economies, like the US and the UK raise interest rates too soon, it will draw money away from those already slowing export economies, when, globally, financial sectors are starving for yields. If the Fed continues to ‘jawbone’ rates up it will be just as bad and will quicken the recessive process as next September draws near.

Further, it seems that what is happening to Australia and New Zealand with their top trade partner China, is being paralleled by what is happening with the Canada, Mexico and the US. Demand for finished and intermediate goods for the USA’s top trade partners are declining.

This indicates that the US economy is slowing, not speeding up. The domestic data may indicate otherwise, but the fact remains that the US’s closest trade partners are going hell’s bells out trying to stimulate domestic demand to make up for declining export demand.

If this keeps up, by the end of 2015, the US and the UK will be on the cusp of a recession and China, Japan and the Pacific nations will be in recession.

The link to the whole post if it’s not still listed As Post of the Day in the right hand column:

http://caps.fool.com/Blogs/about-that-canadian-rate-cut/1063…

D.

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Which brings me to the point, if you’re still with me: The global economy is sliding into a recession. If the healthier economies, like the US and the UK raise interest rates too soon, it will draw money away from those already slowing export economies, when, globally, financial sectors are starving for yields

The referenced export economy here is China. But I don’t understand how raising interest rates in the US will draw money away from China. Are we going to buy fewer imports from China if interest rates rise in the US? I doubt it. It won’t suck American investment dollars away from China, because Chinese law restricts foreign investment to begin with, there’s nothing to be drawn away. So how’s that work? How does rising interest rates in the US actually draw money away from China?

As for China being an export economy, the Chinese government has been working for years to wean China from dependence on exports. They have been fostering a consumer economy and there’s evidence that their efforts are paying off. Unlike the US, the Chinese are actively engaged from a policy perspective in growing their middle class because they understand that it takes middle class to have vibrant internal economic activity.

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Unlike the US, the Chinese are actively engaged from a policy perspective in growing their middle class because they understand that it takes middle class to have vibrant internal economic activity.

China has tried to copy US market ingenuity for some time and yes they manipulate excessively according to many experts savvy in Asian affairs. At this time, there is a VERY tenuous financial situation in China with stock market losses, stocks haulted and massive real estate default risks and massive leverage by the commoner. China is not and has never been transparent in its financials…for example, try getting a straight answer on the banking situation liabilities, etc.

As to the middle class, remember this is defined as those people making between US $10,000 to $60,000 per year. Try telling those in the U.S. making less than $30,000 per year that they are middle class…cost of living is just much less in China. In reality, they are “middle” as long as they stay in China.

But Brittle, you raise a good question as to why interest rate hikes here in U.S. would hurt emerging markets. A few studies I have read suggest emerging market stocks may do better in that environment as compared to US.

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How does rising interest rates in the US actually draw money away from China?

High interest rates attract foreign investors looking for high-yield returns on their investments. They flock to the US and drive the dollar higher.

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As for China being an export economy, the Chinese government has been working for years to wean China from dependence on exports. They have been fostering a consumer economy and there’s evidence that their efforts are paying off. Unlike the US, the Chinese are actively engaged from a policy perspective in growing their middle class because they understand that it takes middle class to have vibrant internal economic activity.

This is very true and risky for us American. Where are we going to get cheap products once the Chinese people consumes internally? Fewer products here mean Inflation!

LegoAbs

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First I’d like to thank everyone for such a robust and well thought-out and argued state of the economy discussion. It has been fantastic to read the varied perspectives and personally are informative to me as I continue to grow and define my investing strategy.

But I don’t understand how raising interest rates in the US will draw money away from China.

I believe conventional wisdom would state that as interest rates rise in the US, money will flow into the US because the increasing yield provides increasingly better risk/reward calculations. The long low interest rate environment has caused people to be yield starved and thus have traded via a popularized “risk on/risk off” strategy in which its currently “risk on” and people are taking on more risk for the same or worse yield. As interest rates rise, investors may be able to find the yield they need with minimal perceived US based risk rather than abroad.

Of course there is the other trading concept of flight to security. As political and/or economic crisis has rippled globally, capital has fled to the US dropping US treasuries to all time lows (e.g. 10 yr Ts below 2.00%) twice in the last 5 years. As rates rise, these investors would continue to invest in the US. They are already here to minimize risk and with rising rates they would be incentivized to purchase again because their yield will simply increased. (albeit I’m ignoring what rising rates do to already purchased debt instruments, but only focuses on new purchases)

I don’t think the investment landscape is as simple as interest rates rising in the US are a good or bad thing inherently. As with everything its a mixed bag and heavily influenced by global fluctuations which makes macro economics IMO so difficult to analyze and predict.

Some investors are yield driven and others are driven by risk management. If we as investors can understand the direction of yield and risk we’ll be as close as possible to understanding the macro winds that blow.

While influenced by macro winds, I believe as others have previously said, a strong investment strategy is one where company specific data is analyzed to understand company specific abilities to grow revenues and earnings. If a company doubles its earnings over a certain time period, there is no question investors will gain. The question is by how much given macro economics, sentiment and multiple expansion/contraction.

Age is a critical factor in investment philosophy: how many cycles have you seen and how many cycles do you reasonably have left / can withstand financially, emotionally, etc.

I’m 33 so relatively speaking young even though I’ve been investing for over 15 years. As a result of finding Saul’s board close to inception, I’ve been pairing down from 50 stocks to hopefully something more manageable 20-30 or maybe less. My investment style has been unfocused and without enough financial analysis. I’m looking to change that by absorbing as much as information, experience and wisdom as possible (especially on this board) without forgetting that thinking differently (e.g. temperament, contrarian, etc) is perfectly acceptable and a pathway to outsized gains.

Eric

Thanks again to everyone for creating the community that this discussion board is and most certainly will be moving forward!

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This is very true and risky for us American. Where are we going to get cheap products once the Chinese people consumes internally? Fewer products here mean Inflation!

Agreed, I think China’s internal consumption as well as Chinese workers demanding higher wages will export inflation throughout the world.

However what about the idea of the world simply finding the next country/population to become the exporting nation. Couldn’t it be another Southeast Asian country (Indonesia?) or perhaps a country in Africa? All that is required is access to cheap human capital and access to international shipping routes. Political stability is a must in order for the required large investments to occur, but isn’t the China story simply one of cheap human capital.

Eric

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