The nothing to see here folks, let's move it along crowd are telling us that Chinese demand is not waning using the British buying as support for their argument. This could be true but why the change? I posted a question on the EconomPic site; I asked if this is a political game of creating the appearance of less demand, did they really think they would fool anyone? Their previous activity reflected in the indirect bidding was what it was and it seems like it took ten minutes for the world to figure out that they routed their buying another way so what was the purpose if that is what happened?
Of course the conclusions about the UK could be correct but it does not make sense to me. The notion of China buying less in the future or letting what they have mature without rolling it over is something I've mentioned a few times as opposed to some sort of mass dumping which I think is unlikley. Lately it seems like the rhetoric from the Whitehouse has been that they plan to put more pressure on China to let the yuan float freely.
If you want to say that the yuan should have never been pegged I might agree (not sure) but it was pegged and maintaining the peg has required China to buy an awful lot of US debt at a time where the US is issuing increasingly more debt as far as the eye can see. The US needs all sorts of countries to buy its debt. If China actually gives the Whitehouse what it thinks it wants in terms of the exchange rate then it will be buying less US debt (maybe a lot less maybe not much less, I don't know) at exactly the time when the US needs more buyers with deeper pockets.
The table comes from Mike Shedlock. State pensions are in a world of hurt. PEW says the state pensions are collectively in the hole for $1 trillion. The assumed returns remind me of the online calculators people use to plug in 15% returns. I imagine the numbers on the tables come from consultants and the like and while maybe 7.25% might be right over certain long timeframes the per year numbers will be lumpier, that is just how markets work.The lesson for individuals should be to leave a healthy margin for error in your plan. If you have to get 8% you may be in trouble.
On a lighter note Market Vectors launched the Egypt ETF (EGPT). Market Vectors along with GlobalX seem to really be trying to fill gaps in market coverage which I find encouraging. It should be no secret that I believe portfolio success in the new decade will require accessing "new" segments as was the case last decade. I will probably do a little more of a detailed write up for theStreet but here is a good recap of the story in Egypt (fundamentals of the country not how the fund integrates into a portfolio).
Egypt has plenty of risk factors to consider but not game over risk factors like the US, Western Europe or Japan. It seems pretty clear that life on the ground there will improve even if in fits and starts and I believe the country will become more important in the world economic order. We'll see.
The other bit of new ETF news is from EG Shares and its China Infrastructure ETF (CHXX). I'm turning in an article on that one to theStreet today so without frontrunning that I will say that it is light on things like roads, airports and sea ports (about 4% if I'm counting correctly) and heavier than I expected on solar stocks which looks like about 7.5% of the fund.
Maybe I am wrong but I think my thoughts about avoiding Chinese financials are gaining traction and so funds that offer the chance to do that should be a plus but I think the real estate exposure in CHXX needs to be taken into account and decided on by anyone interested in the concept.
16 comments:
If you have to get 8% this coming decade you most likely are in trouble
China has been buying more debt from their other trading partners to maintain the same kind of trading advantage over them as it had with the US but this "beggar thy neighbor" policy is not going over well as you may imagine.
However one explanation for reduced purchases of US debt is the possibility that China might already be experiencing chronic hyperinflation and is edging towards a devaluation its currency rather than allowing it to float. Yeah, I know, crazy: Everyone knows the RMB should be higher against USD but this article at http://tinyurl.com/yg23f4s (ht naked capitalism) is causing me to (re)analyze my assumptions (usually a good exercise regardless).
Needless to add that a devaluation of the yuan, as unlikely as that may seem, would really put the cat among the global portfolio pigeons.
How do you create a shortened (tin) url like RW did in the above post?
the idea that the yuan could go down is also floating around out there as well. I don't think that argument wins out anytime soon.
anon to make a short url go to bit.ly and follow the instrux. VERY easy.
Yuan going down makes no sense. If it happens a trade war becomes more likely. That would be totally horrible, but we may get one anyway.
Roger,
WSJ reports that the tracking error of ETFs missed their respective index by an average of 1.25 percentage points. This error is more than twice the .52 percent reported for 2008.
It seems to me large tracking errors of this sort diminish the appeal of trying to invest at the sector level. Any thoughts?
Here's the article http://bit.ly/9HQOCk
Thanks for the short url tip.
maybe it would be a turn off for using sector funds but why investing at the sector level? one can use stocks.
unacceptable tracking error is in the eye of the beholder and so if that tracking error is too large for you then i can't disagree. however some funds barely trade and the extent to which those might skew the stats in the study are worth thinking about.
a rhetorical question; given that XLF dropped 80% or so would the extra basis points of tracking error have been worth it in avoiding the sector as it imploded?
I understand. Reading the article made it seem like the broader the index, the lower the tracking error. The inference being that the narrower the index the greater the tracking error. My thinking is perhaps that underperformance at the sector level is worse than accepting the performance of the broad index and using your 200 DMA/inverted yield curve strategy. Individual stocks too dangerous/risky for my abilities.
Like many things in investing, these sorts of errors only appear in hindsight.
If you want to say that the yuan should have never been pegged I might agree (not sure) but it was pegged and maintaining the peg has required China to buy an awful lot of US debt at a time where the US is issuing increasingly more debt as far as the eye can see. The US needs all sorts of countries to buy its debt.
@Roger and really hoping RW will chime in:
U.S. government debt is completely, utterly IRRELEVANT.
Did that grab your attention? :)
That seems to be what this guy's (Bill Mitchell, see link below) economic/monetary theory is:
http://bilbo.economicoutlook.net/blog/?p=8147
Came across his blog last night from a Dr. Jeff post:
http://oldprof.typepad.com/a_dash_of_insight/2010/02/deficit-perspectives.html
Spent about 90 minutes on his blog. I think the word radical views would be an understatement. I can't possibly summarize his theory. I'm not sure I fully understand it (MMT/Chartalist) yet myself but the upshot seems to be government debt DOESN'T MATTER, it is just a convenient political fiction as the government that issues its own fiat currency is the creator and source of all funding. They don't have to raise debt, they can simply "print/creat money" by crediting the bank accounts of whomever the government owes money to.
I must say on an initial pass much of what he argues seems logical, but something seems off. Why go through the machinations of raising debt if you can simply pay all expenses with newly created money?
I read the same Jeff Miller article and spent far less time than you on Bilbo. I'm pretty sure that monetization has been done before in world history with bad results. The definition of inflation is increasing of the money supply which then causes higher prices. Mitchell's argument is one I have heard before at some point but it makes no intuitive sense to me that from the big picture it can be correct. Yes more money can be printed--this prevents a true default, I have said that before but the trade off is an effective default.
It is possible that Mitchell is, to quote an episode of Deadwood, having a conversation I cannot hear but from where I sit open ended monetization makes the US a less attractive investment destination and maybe even a less attractive place to live.
Mike C
If you print money with no restraint inflation will go through the roof. The dollar will eventually trade at wheel barrow full for 1 euro. And Toyotas will cost a few million a piece.
Savers get penalized the most. TANSTAFL (There ain't no such thing as a free lunch). If you follow these individuals who believe there are no consequences to debt or printing money you could lose your shirt and in extreme cases your country. For example Germany's printing of excess money which made their currency worthless led to the rise of Hitler.
Greatest growth in an economy comes from low positive levels of inflation assuming you measure it correctly and do not ignore things like rising house prices Like the US did.
MikeC, it's quite logical and factually accurate as far as it goes but Roger's point is also valid: As I think I've commented before, a country that controls its own currency has much wider latitude WRT debt loads than any other entity so analogizing to the debt of households, corporations, states, etc is a misleading and largely pointless exercise except for generating the political talking points we can't seem to escape these days.
If federal deficit spending becomes structural (chronic and growing in good times or bad) then national debt inexorably rises over the years to a level where increasing numbers of investors no longer want to buy it unless the risk of holding it is compensated for by a greater return which means interest rates have to rise. Keep that up long enough and carry cost chews up so much GDP that, even if deficits are brought under control, investors start to worry that a country cannot grow fast enough to keep default at bay.
When the currency in question is a major global trading and reserve currency like the US then that "point" is probably very far out* even from these levels but perhaps not as far out as we would like if our growth rate remains sub-par.
*When I say "far out" I mean much further on the time horizon than fear-mongers would have it -- e.g., real interest rates are currently still negative even though the longer end is showing steepeners -- but unlike the days when the country was growing fast and the horizon could be treated as virtually infinite I would say it is possible to see the curve of the US's economic earth now (that was one reason I recommended the "End of Influence" book a couple posts ago). JMO
When rational cool heads prevailed the European Union decided national debt could not be increased by more than 3% a year maximum. That debt levels must be kept in check by expected growth in an economy and not allowed to grow wildly.
Now you here a bunch of BS as to why it is ok for the US to go very deeply in to debt. In the short run you can run up debt, but in the long run it will strangle a country and leave it with few options, stagnated growth, or worse.
Think about it. If debt was a free lunch for nations everyone would have been doing it for decades.
......Think about it. If debt was a free lunch for nations everyone would have been doing it for decades.......
Huh??? Everyone has been doing it for decades. furthermore, everyone will continue to do it for decades. The trick has been and will be to not make it look like that.
A perhaps naive question: Why does a return of 6-8% seem OK for a pension portfolio, while 4% is the expected return for a personal portfolio?
because pension portfolio pays no tax?
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