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  • China & Fed Lift-Off Dominate Market Trends - Why?

    Is it just me, or does it seem like the global markets are preoccupied with two things: China’s economy and when the Federal Reserve will raise US interest rates? Sure, there are other things going on, but these two topics seem to be driving the financial markets more than any others this year.

    In that light, we will begin today with a look at China’s latest economic report last week which received mixed reviews among economists. While China’s economy is slowing, growth is still officially near a 7% annual rate. Even if it’s only 5-6%, as many believe, a recession is not likely in China anytime soon.

    Following that discussion, I will touch briefly on the Fed’s policy meeting that began today and ends tomorrow. Most Fed-watchers, including me, don’t expect any surprises tomorrow, but you never know. On the subject of the Fed, there is increasing talk about short-term interest rates going below zero. I’ll briefly explain what that’s all about.

    While China and the Fed seem to dominate the headlines and financial market trends, there is a very important report coming out this Thursday. That’s when we get the government’s first estimate of 3Q GDP. The pre-report consensus is at 1.7% with some estimates as low as only 1.0%. If correct, that means the strong growth in the 2Q (3.9%) did not carry over during the summer.

    Finally, I will close out today’s letter by summarizing the most interesting article I read last week.

  • On The Economy, Inflation, China & Odds For Fed Liftoff

    The investment markets remain fixated on whether the Fed will hike interest rates for the first time in almost a decade on September 17. Stock market volatility spiked in late August and so far this month, with most global equity markets in “correction” territory. It remains to be seen if the latest stock market chaos will cause the Fed to delay lift-off until December or later.

    Other than global equity market weakness and below target inflation, other factors that would lead the Fed to tighten are in-line, although last Friday’s unemployment report for August could have been stronger. Today, we will examine the August jobs report, the strength of the US economy in general, inflation trends and the outlook for the US dollar. We’ll also take a look at the latest disappointing economic news out of China.

    We’ll end today with a look at the Fed Funds rate futures market to see what the probability is for a rate hike next week. At the end of last week, Fed Funds futures indicated an 81% chance of a rate hike on September 17, up from a 74% chance in August.

    It’s a lot to pack into one E-Letter, so let’s get started.

  • China’s Stock Markets Imploded In June - Why?

    While the mainstream media has been obsessed with Greece over the last month or so, there has been scant attention paid to the fact that China’s high-flying stock markets unexpectedly have plummeted in June and were down around 30% through the end of last week.

    China’s exploding economy in recent years has made it the hotspot for global investors. Mutual fund families and ETFs have rushed to add exposure to the Chinese markets. China’s two major stock exchanges have seen their share indexes surge over 100% in the last year, drawing ever more investors to jump in. This includes many middle class Chinese who have never invested in anything before (many of whom have borrowed money to invest).

    Yet as noted above, in the last month, share prices on China’s stock exchanges have plummeted by around 30% as of the end of last week, to the surprise of just about everyone. The decline continued overnight (Tuesday).  Many investors don’t even know it yet since they have not seen their June account statements.

    With the world’s attention focused on Greece over the last couple of weeks, the China story has not made its way onto the media’s radars for the most part. For that reason, I will focus on the latest disturbing developments in the China story today.

    But before we get to the troubling news on China, let’s take a look at a few of the latest US economic reports – including the June unemployment report, the big jump in consumer confidence last month and the Gallup Job Creation Index which is at a new record high.

  • China Surpasses America As World’s Largest Economy

    For the first time in history, the People’s Republic of China’s Gross Domestic Product exceeded the GDP of America, as measured by purchasing power, in 2014. According to the International Monetary Fund, China’s purchasing power GDP hit $17.6 trillion last year versus $17.4 trillion in the US.

    This was an important milestone for both countries, and China will almost certainly expand its lead over the US in the coming years and decades. Yet that is not necessarily a bad thing for the US, as I will explain below. You probably didn’t hear about this in the media, and that’s why we will talk about it today.

    But before we get to our main topic, let’s look at a few recent economic reports of interest. The US economy has largely disappointed this year, with weaker-than-expected growth in sales, spending and production, with most of reports showing scant momentum.

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  • Our National Debt Is Scarier Than You Think

    Our national debt has now reached a record $15.6 trillion, thus eclipsing our gross domestic product of $15.1 trillion. Of this $15.6 trillion in debt, $10.8 trillion is held by the public (including investors, the Fed, state and local governments and foreigners), and the remaining $4.8 trillion is held by various government agencies and trust funds (including Social Security).

    Our national debt consists of Treasury securities ranging from 30-day T-bills to 30-year T-bonds. Surprisingly, the average interest rate on our national debt is now down to only 2.2%. The average maturity on our national debt is only 62.8 months. What this means is that 71% of our privately-held Treasury debt must be rolled over in the next five years. The US now surpasses Greece, Portugal and Spain when it comes to relying on short-term borrowing to finance our national debt.

    The question is, will there be ample buyers to roll over all this debt in the next five years? This may shock you but the Federal Reserve bought up 61% of all net Treasury issues in 2011. This makes the Fed the largest buyer of US Treasury securities! What happens when the Fed has to stop this practice? Higher interest rates come to mind, especially when you consider that foreign buyers of our debt have started to scale back their purchases. China, which is the largest foreign holder of our debt, actually decreased its holdings of Treasuries by $156 billion in the second half of 2011. This is scary!

    What, you haven't heard all this in the media? Of course you haven't. But I will give you the facts and the dangerous implications in today's E-Letter. Please read it carefully. We need to get this information to as many people as possible. Let's jump right in.

  • Will the US Dollar Lose "Reserve Currency" Status?

    The US dollar has been in a multi-year decline since peaking in 2001. While there was a temporary 'rush to safety' rebound in the dollar due to the global credit crisis in 2008, the dollar has resumed its long-term downtrend as of early March of this year. Now, more and more forecasters are suggesting that the dollar may lose its global "reserve currency" status if it continues to decline. Some are even calling for the establishment of an all-new global currency to replace the dollar entirely.

    This week, we will explore how the US dollar came to become the world's reserve currency and how difficult it would be to replace the dollar as the reserve currency, or replace it entirely with a new global currency. We will look at the major price trends in the dollar over the years and try to put the current decline into perspective. I will make the case that the US dollar will remain the global reserve currency for at least several more years. It should make for an interesting letter, so let's get started.

  • Thoughts On China, The Olympics & Investing

    This week, I turn our attention to this year's Summer Olympics which will be held in China beginning this Friday, August 8 and running through the closing ceremonies on August 24, assuming all goes as planned. China has long been a mystery to the rest of the developed world, and the Olympics will no doubt shed much light on China, its communist government and its culture. Our friends at offer an interesting analysis of China from a political perspective and what that might mean for the Olympics. With their permission, I have reprinted that analysis in the pages that follow - enjoy. Finally, if you are invested in China, you might consider taking some profits this week, just in case anything bad should happen during the Olympics....