January 30, 2014

January 30, 2014

Is This a Normal Correction? 

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The Chinese Banking Scare.  Is It Overdone?

Financial media were buzzing last week with news about troubles in China’s unofficial, or “shadow,” banking sector.

We’ve watched China for a long time…

We’ve been China-watchers for decades, and besides our own observations, we also have a set of analysts whose work we have come to respect because of their insights and their track records. 

  • What prompted last week’s worries? 
  • What is the central government doing about shadow banking? 
  • Would default have been good news? 
  •  We discuss Xi Jinping and his actions against corruption.

China Flag.jpg

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Argentina:  Protecting Reserves, and Letting the Peso Crash
“This Is Not an Administration That Respects or Understands Market Pressure”

Another item we believe is not worthy of panic is last week’s collapse of the Argentine peso (apologies to readers in Argentina, who have probably been close to panic for quite some time).  Argentina is too small an economy to be worrisome on its own.  But it is instructive to investors with a global view.

Last week, Argentina’s central bank threw in the towel.  It no longer has enough dollars on hand to defend the exchange rate of the peso.  The chart below tells the story:

No Longer Enough Cash On Hand to Protect the Peso

Argentine reserves and<br />
Source: Financial Times

Can Japan Open the Doors to Foreign Workers?

Japan is not an economy that’s open to foreign workers.  Just over one percent of the workforce consists of foreigners, as compared to 36 percent down the road in Singapore.  The Japanese population overall is aging, and actually shrinking — down by about a quarter of a million in 2013.

This long-term trend is one of the deep-rooted problems that Prime Minister Shinzo Abe is dealing with as he tries to jump-start Japan’s economy.  Although we’ve followed Japan’s demographics for a long time, we were surprised to read last week that among Japan’s construction workers, a third are aged 55 and older.  That’s a statistic that puts the problem in sharp relief.

Abe has spoken about the need to open Japan to qualified immigrants.  But talk is cheap, and the Japanese people are deeply skeptical.  Generally, they like a homogenous population — and they fear that immigrants will take their jobs.  Japan has welcomed many aspects of Western art culture and popular culture.  But its resistance to foreign workers runs deep.

Of course, as we discussed last week, there are potential pitfalls in the acceptance of many immigrants, such as Chinese and Koreans, because of historical traumas.  But even Korea, a country that also has a reputation for deep reserve about foreign workers, has expanded its proportion of immigrant labor to 2.8 percent, and is expected to reach 6 percent by 2030.  So it can be done.

What will be the breaking point?

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We hope you have found our weekly global market commentary useful in keeping you informed about the global macro landscape and navigating the complexity of the financial markets. 

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In 2014, we expect many events and developments that U.S. investors need to consider.  Do you have a seasoned investment advisor able to position your portfolio for any opportunities or to employ a defensive strategy in case of a significant market correction?  

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Guild Basic Needs IndexTM

2013 Was A Tame Year – On The Inflation Front

Earlier this month, the U.S. Bureau of Labor Statistics published the inflation data for December and all of 2013.  The items contained in the BLS’s Consumer Price Index (CPI) were up 0.3 percent in the month of December.  At first blush, it struck some people as a large number as extrapolating a series of 0.3 percent monthly increases would get you to a nearly 4 percent annual inflation rate.  The truth is that the prices of the hundreds of items tracked in the CPI’s ‘basket’ of goods can be erratic, and you can’t extrapolate individual monthly data points.  2013’s 12-month inflation number was a quite tame 1.5 percent — well below the Federal Reserve’s 2 percent target.

Actually, the inflation measure that the Fed members watch more closely than the CPI is the Personal Consumption Expenditures (PCE) price index, and it has been running even lower than CPI.  Even though the central bank has plenty of room — from an inflation perspective — to continue to be accommodative, the central bank has announced in the past two months that they will be scaling back their quantitative easing (QE) by $10 billion per month.  So after yesterday’s announcement from the Fed, they will ‘only’ print $65 billion each month to buy treasuries and mortgage backed securities.  This does not mean an end to the cheap, easy money that can lead to rising prices in the future.

What’s Next?  Rising Inflation, Dreaded Deflation, or More Disinflation?

The Fed is watching the data.  Consumers are not just watching the inflation data; they are living with it (and many might take issue with the notion that rising prices haven’t been a problem).  Investors are also most certainly watching inflation data as a change in inflation expectations will have a profound impact on the prices of stocks, bonds, commodities, and other assets.  At GIM, we were not content to just watch the data.  We created an index that can give us a unique peek into the sources of inflation.

In contrast to the government calculated, and smoothed, and adjusted, CPI and PCE indices, we look for inflation in the U.S. economic system with our Guild Basic Needs Index (GBNI).  The GBNI is not intended to track the population’s spending patterns; it measures the changing prices of essential living expenditures.  As the prices of these essential, basic needs change, the impact is felt by all American individuals, businesses, governments, etc.  

The categories and their values within the Guild Basic Needs Index are fixed.  There is no seasonal adjusting, smoothing, or replacing of components as you will find in the CPI or PCE.  The established and essential nature of the four GBNI categories — Food 30%, Clothing 10%, Shelter 30%, and Energy 30% (including items used for heating, cooking, and transportation).  Our index construction may not represent exactly what consumers spend their money on, but every American needs these items regardless of price, and changes in price of these items will ripple throughout the economy.  In addition to these letters, you can track the GBNI at www.gbni.info.

Since 2000, prices of essential needs in the GBNI have increased over twice the pace of CPI.  Don’t dismiss the gyrations in the prices of basic needs.  The gyrations affect behaviors.

GBNI<br />
December 2013 .jpg

Track our analysis in these letters at www.gbni.info.

Market Summary

We discuss the U.S. stock market, the emerging market, and Europe in our premium global market commentary.  Upgrade today to read our full analysis.


In Last Week’s Global Market Commentary, We Also Discuss:

  • Banks and Commodity Trading
  • Are Reforms In Europe Too Little Too Late?
  • Emerging Trend: Positive Economic Data in Japan
  • Who Will Be the New Military Flash-Point?

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