[Drew]

In the spirit of Chris's thread...

• The Chinese yuan will finally strengthen against the dollar. Given the trade imbalance between China and USA, the yuan should be quite a bit stronger relative to the dollar than it currently is, which would in turn help balance the trade deficit by making Chinese goods less attractive (as the cost of chinese labor in USD terms would increase). It's not, and this imbalance has gone a long way towards growing the American deficit over the years. However, while this is a scenario that is broadly beneficial to China, I think it will change for two reasons by the middle of this decade. First, the world is currently in recession, almost everywhere but China, where while the government has taken steps to buoy up domestic demand, exports are still strong. While I feel a little silly using words like this in this context, there's a question of fairness in play, and if China is manipulating its currency to artificially increase export demand, then to some extent its economic growth is coming at the cost of other nations, and international pressure to allow its currency to float should grow. Secondly, there's a significant correlation between growing affluence and democracy. China is a single-party government, and as the country has grown richer there's been a growing demand, particularly amongst affluent urban youth, for greater democratic freedom. At some point, I think China is going to have to choose between the rate of economic growth it currently has, and putting on the breaks somewhat in order to retain power. Given their options, I'd be shocked if they don't chose the later.
• The price of gold will fall, probably materially, in the next 12-18 months. I don't follow the commodities market too closely, but it looks an awful lot like we're seeing a gold bubble right now. Chalk it up to historically low interest rates making conventional investments less attractive and spurring fears of runaway inflation, plus tea bagger nutjobs spreading fears about fiat currencies, but the price of gold has surged over the past year or so. Call it a hunch, maybe, but I think it's unrealistically high. I think that the sort of investor who would hedge against future inflation by investing in gold is, in today's political climate, the sort of person who'd also be likely to overestimate inflationary expectations, and furthermore I think it's likely that at some point in the next year or so the Fed will slowly begin raising interest rates, making other assets more attractive relative to interest-less gold and further pushing its value down.

That'll do for now, but I'll probably add to this in the next couple days.

 

[Reverend 7 Strings of Hate]

I expect the prices of shit to keep going up and workers wages to stay about the same. Which sucks :lol: but thats all that ever really happens consistantly

 

[79]

Drew, in your opinion what is the likelihood we'll all make it out of this okay, albeit not as "rich" as we were before? I'm not by any means an economic expert, so I have no idea. And trying to pay attention to the media's widely varying opinions is difficult for someone not well versed.

Ask me anything about technology, but when it comes to this shit, I'm lost. :lol:

 

[Reverend 7 Strings of Hate]

^it really seems to me other countrys are starting to be up commers and everyone is comming closer to evening out, so we arnt so rich anymore.

 

[Drew]

:lol:

Pretty good, Jeff. I think America's role as the financial hub of the world, basically, will change somewhat (the Euro is likely to become more prominant, as it should, I think), but we're not going anywhere. Unemployment claims are dropping faster than expected, the rate is currently stable, and the change in the rate is trending downward so it should start falling soon. The S&P500, even with the abysmal run from Jan-April, still returned almost 30% last year, and it looks like there are signs of life in the labor market. We've racked up a shitload of debt as a nation, and we need to take a long, hard look at how we can fastest pay that down, but overall I think the worst is behind us. Knock on wood.

^it really seems to me other countrys are starting to be up commers and everyone is comming closer to evening out, so we arnt so rich anymore.

How extensively have you traveled abroad? We're WAY above the global average standard of living, even in the developed world. And as for the emerging world, most of the wealth is concentrated in the hands of the very rich.

America's current standard of living is admittedly not currently sustainable, but even when we adjust to living within our means again we're still going to be way better off than much of the rest of the world.

 

[stuh84]

I expect many countries, including the one I am in, to not learn from their mistakes. People are still trying to live the same way they did before, and then get confused when they have no money left.

I wouldn't be surprised if the boom and bust pattern keeps repeating personally.

 

[Cancer]

America's current standard of living is admittedly not currently sustainable.

Can you expand on this, or provide a link that expands of this? Not disagreeing, just looking for more information.

 

[Drew]

Can you expand on this, or provide a link that expands of this? Not disagreeing, just looking for more information.

Well, I can expand on it, at least - the net savings rate for America is ever-so-slightly negative; that means people are spending more than they're earning. Even ignoring dispersion patterns in income brackets (I don't know this as a fact, but I'd bet heavily that most of the negative saving is concentrated in lower and lower-mid income brackets, and the upper-mid and upper income earners are net positive - the bulk of Americans are living way beyond their means, while the small minority who isn't are masking this somewhat simply because they make a fuck of a lot more than the rest) if you extrapolate that it's pretty easy to conclude that not only are Americans gradually sliding into debt, they're also going to be approaching retirement age with no retirement savings, and eventually will be too old to work, but too broke to not.

 

[Reverend 7 Strings of Hate]

How extensively have you traveled abroad? We're WAY above the global average standard of living, even in the developed world. And as for the emerging world, most of the wealth is concentrated in the hands of the very rich.

America's current standard of living is admittedly not currently sustainable, but even when we adjust to living within our means again we're still going to be way better off than much of the rest of the world.

But wouldnt you suppose if chinas money rises a little bit, then indias, then ect... and everyone else goes up a bit, it knocks off the edge america had. once again, sure its not going to level the playing field, but i would assume overall it would effect the country

 

[noodles]

The Chinese yuan will finally strengthen against the dollar. Given the trade imbalance between China and USA, the yuan should be quite a bit stronger relative to the dollar than it currently is, which would in turn help balance the trade deficit by making Chinese goods less attractive (as the cost of chinese labor in USD terms would increase). It's not, and this imbalance has gone a long way towards growing the American deficit over the years. However, while this is a scenario that is broadly beneficial to China, I think it will change for two reasons by the middle of this decade. First, the world is currently in recession, almost everywhere but China, where while the government has taken steps to buoy up domestic demand, exports are still strong. While I feel a little silly using words like this in this context, there's a question of fairness in play, and if China is manipulating its currency to artificially increase export demand, then to some extent its economic growth is coming at the cost of other nations, and international pressure to allow its currency to float should grow. Secondly, there's a significant correlation between growing affluence and democracy. China is a single-party government, and as the country has grown richer there's been a growing demand, particularly amongst affluent urban youth, for greater democratic freedom. At some point, I think China is going to have to choose between the rate of economic growth it currently has, and putting on the breaks somewhat in order to retain power. Given their options, I'd be shocked if they don't chose the later.

Being that I don't know enough about economics, I don't know how much I agree or disagree with this, so I'll just respond with some observations and let you tell me what it means... :lol:

China may not technically be in a recession, but that has a lot less to do with the government propping up the economy than we have been lead to believe. NPR did an excellent week-long piece on China around Christmas that described more of the practical effects of the global economic downturn.

A whole lot of people came out of family farms in rural China to work in the urban factories during the last decade. While they made peanuts, it certainly was better than what they were doing before: subsistence farming with hand tools, living in huts without water, sewage, or electricity. This is the same sort of peasant farming that been going on in China for centuries, meaning that a studio apartment and a factory worker's slave wage is still a big step up.

So, when the collapse hit, the factories responded the way any large corporation would, with wave after wave of layoffs. These people then returned, en masse, to the family farms they grew up on. The Chinese government then propped up the factories and apartment complex owners. If a large group of displaced blue collar workers started living on the fringe of society, growing enough rice and vegetables to sustain themselves, right here in the United States, I don't think we would view it the same way. :2cents:

The other interesting thing to come out of the series was an interview with a manufacturing company executive vice president, in charge of operations at one of these large factories, in the guise of anonymity. He said the problem with the Chinese is that they save their money, leading extremely modest and frugal lives. He wanted to see the urban areas continue to grow, and the Chinese to "become consumers, more like Americans. Chinese need to buy TVs, cars, and iPods." That "TVs, cars, and iPods" has stuck with me since then, and it makes me think that maybe this will turn out all right for the US in the end. After all, if the business executives in China get their way, the prices of their products are going to be driven up by demand, and suddenly importing goods from China won't be as advantageous as it is now.

 

[Elysian]

I think, and hope, that RIAA will bankrupt themselves because they are too slow to adapt and too quick to attack :lol:

 

[Drew]

But wouldnt you suppose if chinas money rises a little bit, then indias, then ect... and everyone else goes up a bit, it knocks off the edge america had. once again, sure its not going to level the playing field, but i would assume overall it would effect the country

You're confusing exchange rate with standard of living. They interact a bit, but they're not synonyms.

An exchange rate is simply the ratio between the value of once currency and the value of another, whereas the standard of living is more dependent on the purchasing power of that currency within the country.

Look at it this way. Say in America, a laborer needs about $500 a month to pay for shelter, clothing, and food, at a minimum. If he is going to work in an American factory making, oh, baseball bats, he needs to be paid at least $500 monthly for his work to make it work keeping that job, so the cost of the X number of baseball bats he produces every month, to his employer, is $500 (plus various other overhead-related charges from running the factory and managing him, but we'll ignore that for this example). Say furthermore that there's another baseball bat factory in China, and that a similarly productive chinese laborer can live off 5,000 yuan a month, and can be hired for about that, as well. Say furthermore that the exchange rate between the yuan and the dollar is 15 yuan per dollar.

So, in America, the laborer is making exactly as much as his living expenses, and is just breaking even. In China, the laborer is making exactly as much as his living expenses and also breaking even, as well. However, in America, the cost of producing that same quantity of baseball bats every month in China is $333.33 (5,000 yuan divided by 15 yuan per dollar), so the chinese imported baseball bats can be produced for a mere 67% of the cost of their American equivalents. This means Chinese baseball bats can be sold that much more cheaply while still being profitable, and the Chinese baseball bat export industry will surge, making the Chinese loads of money.

However, let's say that that exchange rate is being manipulated by the Chinese to keep their currency artificially weak, and that China finally, amidst growing international pressure, allows it to float. The yuan strengthens against the dollar, and now suddenly it only takes 10 yuan to buy one dollar. This means that the baseball bats being produced in China now cost the equivalent of $500 USD to make, and that for an American the cost of producing a baseball bat in China is exactly the same as it is in America. Since Chinese baseball bats still have to be imported (adding to the cost), now the American-made baseball bat is a much more attractive alternative, and Americans will spend money that formerly went to the Chinese baseball bat producers buying baseball bats in America, with the result being that the trade imbalance falls. If the yuan continues to strengthen to say 7 on the dollar (I'm making all these numbers up, by the way), then suddenly it's cheaper for the Chinese to import American baseball bats than to produce them themselves, and America will become a net exporter of baseball bats.

Now, how has the fate of the average laborer in each of these scenarios changed, as the exchange rate fluctuated? Not at all, they're still making exactly as much as they were, judged i their own currency. True, the American firm will likely begin hiring new workers, and Chinese workers will probably get laid off, but the actual cost of living isn't changed.

(this is a HORRID simplification, as not only would a trade imbalance impact the exhange rate as currencies were bought and sold to pay for delivered goods, but the cost of living would be slightly changed by the ability to import low cost goods, or the change in salary needed to attract more workers to a growing field, but you get the picture).

 

[BigM555]

The S&P500, even with the abysmal run from Jan-April, still returned almost 30% last year...

This is a matter of timing though. You would only have realized such a gain if you got in year ago. The S&P is still down 25% from it's peak in late 2007. People that were in at that time still have a LONG way to go before the previous losses have been recovered.

 

[Drew]

stuff

Dave - no arguments here. Two related observations - I saw an interesting piece somewhere (maybe the economist?) on an interesting statistical anomaly in the Chinese marketplace, where new car sales had surged during the stimulus, but oil consumption had actually fallen. It's notoriously difficult to get good economic data out of China (as the Communist party doesn't release much, and probably "edits" most of what they do), so there was a lot of speculation about what this meant, ranging from a switch to more fuel efficient cars from existing drivers, to people buying cars but as the price of gas went up mostly walking anyway, to state-owned businesses actually purchasing and stockpiling cars to artificially stimulate demand. I'll simply say that the first is a little odd (where do all the used cars go?) but not impossible, the second seems silly to me, and the third is seriously paranoid but I wouldn't put it past China.

And yeah, I think the Chinese are gradually realizing that they can't be an export-only society without having some domestic demand - the global crash's catastrophic initial impact on their export business sort of woke them up, I think.

 

[Reverend 7 Strings of Hate]

You're confusing exchange rate with standard of living. They interact a bit, but they're not synonyms.

^Drew, that makes complete sense actually :lol:

 

[Drew]

This is a matter of timing though. You would only have realized such a gain if you got in year ago. The S&P is still down 25% from it's peak in late 2007. People that were in at that time still have a LONG way to go before the previous losses have been recovered.

Oh yeah, of course. That's the nature of any high immediately before a recession, and while you're not wrong, that's no different than pointing out that anyone who bought in in, say, February of '03 is still up about 40%. When you start and when you end has a tremendous impact, but by convention people generally do pay attention to calendar-year returns when gauging the stock market performance in a particular year, and, despite large losses at the beginning of the year, 2009 really was a pretty solid one for the stock market.

 

[Reverend 7 Strings of Hate]

drew, i dont think your going to find someone on this board that is going to give you a stimulating conversation on your level in this area :lol:

 

[Drew]

:lol: I hope not, measuring and quantifying portfolio performance is what I do for a living.

 

[BigM555]

Oh yeah, of course. That's the nature of any high immediately before a recession, and while you're not wrong, that's no different than pointing out that anyone who bought in in, say, February of '03 is still up about 40%. When you start and when you end has a tremendous impact, but by convention people generally do pay attention to calendar-year returns when gauging the stock market performance in a particular year, and, despite large losses at the beginning of the year, 2009 really was a pretty solid one for the stock market.

Agreed but even considering the gain of 40% over 6 years, its only an average return of less than 7%. Hardly stellar. Better than you'd get in a bank account but its not going to get you that retirement condo in Maui. :lol:

For the vast majority of people you have to be in for the long haul. Most of the public have no where near the market aptitude to move things around on a regular basis without losing out to transfer fees and commissions. A lot of peoples portfolios were devastated by the drop since late 2007 and few knew of any safe havens. The damage that has been done to a lot of people's portfolios may never be recovered. I just find it is kind of misleading when you hear about how "well" the market has done. It's only really relevant to day traders and market insiders that could actually leverage it.

Edit: The really spooky thing? You can take the S&P back a full 10 years and it's still down almost 8%. Meaning any of us "long haulers" that have been in since then got squat out of our investments for the last decade (assuming market return). :noway:

http://money.cnn.com/quote/chart/chart.html?pg=ch&symb=spx&time=10yr&freq=1dy&charts=0&comp=&compidx=aaaaa~0&ind_compind=&uf=0&lf=1&ma=0&maval=60

 

[Cancer]

Drew, since we're here, I'd like to pick you brain on something, you said earlier something about "tea bagger nutjobs spreading fears about fiat currencies". Were you referring to current "theories" about the dollar's impeding crash, and the rush to buy gold by some who look to protect themselves from it? If so, what are you thoughts about the idea about the impending dollar crash?