China Surprises with a Devaluation of Its Currency

What it means. How It Affects Your Money

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China’s Devaluation Signals Important Trend

On August 17th, China announced a downward revaluation of the Yuan. The world seems very  concerned. While the US economy is doing about the same as it has been the last few years, the reality is the global economy is under a lot of pressure. Currencies are falling, recessions are breaking out and US export industries are already suffering.

Now China, which is number two in the world,  has taken the surprise measure of devaluation which can only mean they are under pressure too.

Surprisingly, China isn’t the cheapest place to make things anymore. In fact, right now labor in Mexico and a host of other countries  is cheaper than in China. Slowing economies and rising competition have caused China’s exports to decline 8% since last year. One remedy is to devalue their currency like so many other have.

How does a devaluation help their economy grow? If a Chinese worker is paid 10 yuan/hour that is $6.20. If the currency should fall 10% against the dollar, that 10 yuan/hour worker now costs $5.80 lowering the cost of their products. By devaluing, the Chinese hope to sell for lower prices and beat out Vietnam and Mexico for export business.

China’s devaluation was a surprise,  but devaluations are common these days. Why in just the last year, both the Japanese yen and the Euro have devalued at least 15% vs. the dollar. But that’s not all. Many emerging countries’ currencies are at or near record lows and falling.

The world is worried that China will buy less and try to sell more. China is the second largest economy in the world now and its impact is very large. It is said that in the last 15 years China used more concrete than the United States did in the 20th century. It has been China’s huge demand for commodities and goods since the financial crisis that has had the most positive affect on the world economy. That is reversing.

Now competition from  emerging countries with lower wages than China and the drop in exports has forced it to devalue the Yuan. In turn others will be forced to devalue even more. Within hours of China’s announcement, Vietnam allowed their currency to devalue for the third time this year. If currencies are in competition to chase each other down, you may ask down to where? Well that is a good question.

The Good and Bad for the US

For Americans, in the near term at least, devaluations mean prices for imported goods and commodities will fall and a dollar will go further.  Now that China has joined the currency devaluation club, we may even see negative inflation for a time. Remember, exporting countries are competing for the same business. They may continue to devalue further and further to win business.

The stuff we buy at Target may get a little cheaper. This sounds great but there are two downsides. China and most everyone else isn’t going to be buying as much equipment, food or Harleys from us going forward. Our products are getting more expensive for them. Some people here will lose their jobs because of fewer exports.

International trade is going to pressure wages in the US as most of the world’s currencies are devaluing against the dollar and as a result their wages are falling in terms of dollars. In fact, increasingly this process is pressuring wages and business everywhere from Europe to Asia to Latin America, from Spain to Singapore. The other downside is less immediate or certain, but not to be ignored.

Falling Currencies Have Triggered Defaults and Financial Crises Before

frieze-china-market-lead2Global financial risks are increasing. Many commodity producing emerging market countries, such as Brazil, Venezuela and South Africa, are falling into recessions and deficits. Some developed countries like Japan, Italy and Spain are as well. Brazil has borrowed $billions to host the World Cup last year and the coming Summer Olympics. It isn’t being discussed in the media but this huge country’s reliance on commodity exports is killing them now.  They have both huge debts to pay and huge economic and political problems as well. They also have borrowed a lot in dollars. That is a new problem.

Emerging countries accumulated record debts over the past 10 years and paying these debts is becoming more difficult. This time with so much debt denominated in dollars, even tougher.  

Global Borrowings in Dollars is a Risk Now

Emerging country recessions often do create crises. In 1997, Thailand’s currency crashed and subsequently a debt crisis broke out across Asia. Twelve months later, the crisis found its way to the US and the Federal Reserve had to intervene as a huge fund defaulted in New York threatening the entire financial system.

This time emerging market countries have about three times more debt than 1997 and the majority of it is due in dollars. Having to repay debt in dollars isn’t a good thing right now. Remember many countries’ currencies are at or are nearing record lows. That means it takes more and more Thai Baht, Brazilian Reals or South African Rand to buy a dollar. The value of those countries debts is increasing as the dollar increases. Unfortunately, this is happening as their economies fall into recessions.

The Global Economy Seems More and More Important

The pressure globally on currencies, prices, wages and foreign economies does and will affect us in some good ways but bad ways as well. China is the world’s second largest economy and their announcement that they too want to devalue their currency exacerbates this issue. We are one global super interconnected financial system now and how low is low enough for many currencies is yet to be seen and considered.

 

 

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Wealth Building Secrets of Middle Class Millionaires: A Financial Analysis

Can This Family Really Afford This Lifestyle?

Luxury in Driveway

In comfortable middle class neighborhoods across America there are families that are just getting by and those that are more than financially secure. The view of their lives from the street probably can’t tell you much. The attractiveness of their homes and the cachet of the autos in their driveway may not be an accurate representation of their wealth. In fact, middle class neighborhoods very often consist of families that are multi-millionaires, while others are carrying a lot of debt and have little equity. Surprisingly, you may not be able to tell which is which from the outside.

Unexpectedly, middle class millionaires are often not super high earners. They can be public employees, Main Street business owners and technicians. Outward appearances are misleading. Financial decisions often determine financial success more than huge earnings. Saving and investment are critical to middle class wealth accumulation.

Modest but Real Millionaires

John and Joan Anderson are in their mid 50’s and have a modest income of $125,000 a year. She is a teacher and he is a contractor. They are careful with their money and despite appearances, they are self-made millionaires.

The Andersons drive late model but paid for vehicles. Their home is nicely kept and typical for their neighborhood. John is a contractor so the upkeep and upgrades on their home were done without loans or great expense. They don’t hire lawn services or pet sitters. They avoid extra expenses like storage units, security services and house cleaners. They live well but without frills.

The couple saves money in many ways large and small. Her health benefits from the school help their budget a lot because John is self-employed and health care costs are very high for small businesses. John and Joan are masters at do-it-yourself and save a lot on home maintenance. Monthly bills add up so they have cut out the extras in their monthly outlays for cable and cell phones down to what they need. Their utility bills are reasonable; they have insulated their house well and use a programmable thermostat.

Consistent and sensible investors, the Andersons have three apartments from which they plow the rent in to pay off the properties. With the kids done with school, they now invest about $25,000 a year in their retirement plans. The value of his SEP and her 401k is already over $430,000 and the equity in their investment properties is $300,000. The equity in their home is $250,000. They have almost $1 million of equity in just these three categories. They are modest people but they are already worth a $million.

10 years from now they will be able to retire with multiple sources of income. Her pension and their social security benefits should payout about $85,000 a year. Income from their properties will net them about $25,000 a year. Finally, income from their IRA’s should comfortably provide them with $40,000 a year. Yes, that is more income than they have now. But they are happy living on much less than all that.

Crucial Choice For the Middle Class : Spend or Invest

Conspicuous consumption has the appearance of success. Ironically, in the middle class it very often undermines success. The luxury SUV in one driveway may announce success, but if it is leased, this status symbol is an expensive monthly liability. Buying new cars and holding on to them for 10 years or more, easily saves a family with two cars $6,000 a year over leasing. The choice is starker still when you take into account how they need to earn about $10,000 before taxes to carry that extra leasing expense. Most of that could have been deposited into a retirement plan.

The question is; does the family with high status cars really have the huge income required to spend many thousands a year leasing luxury vehicles and still build equity in their investments and home? The question is interesting, because ironically it is often the people who live most like millionaires that waste the chance to become one, while others in the same neighborhood who spend carefully and invest steadily really do attain that wealth.

Can you think of who might be the middle class millionaires in your neighborhood?

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Social Security: Waiting Until Later is Like Getting a Second Pension

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Susan Kasik is an office manager and will be 62 soon. She is considering retiring. Susan is healthy and ok with her job, but she just wonders if she can move on now to a life of days doing whatever she likes and nice vacations.

But Susan will probably live a really long time. Her statistical life expectancy is 85 years. Half of women her age will live longer. Being healthy and relatively affluent, Susan is particularly likely to exceed the average. Does she have the financial resources to live 30 or more years in retirement?

At 62 Susan can begin to take Social Security but should she wait?  She has an IRA that is over $500,000 and no mortgage, but Social Security will be an important part of her income and financial security. Let’s look at how much more Susan get’s if she waits to retire at age 70 when she can get the maximum benefit.

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Waiting to 70 Pays an Additional Benefit: It is like Having an Extra Pension

The extra $1,132 a month Susan will get amounts to $13,584 a year. She would need another IRA account with $250,000 in it to get that kind of income if she doesn’t wait. The best part; this is a real diversification from stocks and bonds that she doesn’t have to manage or do anything about.

* Illustration is hypothetical.  After age 80, Susan will have received more in total benefits by waiting until 70. By the age of 95, she will have received $196,222 more than if she had begun to draw at age 62.

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Ultra Low Interest Rates Have Hurt Retired Investors

Investors are increasingly focused on the task of finding retirement income. Sadly since 2009, one and two year CD’s have earned much less than 1% a year. On the other hand, inflation has been over 2% a year. The result has been a significant loss of principle as many retirees have had to cash in their CD’s to make up for the income shortfall. Since 2009, most CD’s have lost 6-10% of their purchasing value to inflation.

This graph illustrates that the interest rates on CD’s have been less that the rate of inflation (the black line) most of the time since 2005.

CD's Inflation
Many income investors have responded to the failure of CD’s in this ultra low interest rate world by investing in diversified income portfolios. Diversification smooths price fluctuations and puts money to work in places that provide income and sometimes appreciation as well. These portfolios are generating income above the rate of inflation and preserving purchasing power but they don’t have the fixed price guarantee of a CD. That is the tradeoff. Fluctuating account value with sufficient income or fixed account value with insufficient income.
It is believed by many respected analysts that in the next few years inflation is very likely to make a return. Income investors should be positioned for that. Diversified income investing can offer solutions should interest rates and inflation begin rising and can even look to profit from it. On the other hand, CD investors will have to keep investing short term in ultra-low interest rates until rates get higher. That means more of the same slow loss of purchasing power and draws on principle.

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Stock Markets Rising

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Pax Bernankus Must End

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Partying Like It’s 1999

Value and Diversification Have Been Forgotten Before

In 1999, stock market traders had their best year ever. The Nasdaq index doubled in value and small investors, institutional investors were chasing performance. The financial media fanned the flames showing the phenomenal returns realized by those who had concentrated their investments into the tech stock and growth stock craze and characterizing value stock investing and bonds as “has been” ideas.

Meanwhile, serious investors weren’t enjoying the party. They were not heavily invested in the growth stock boom since there was no justification to do so if value and income criteria were taken into consideration. In 1999, value investor Warren Buffet’s Continue reading

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Will Mortgage and Interest Rates Go Much Higher?

Can interest rates go higherCan interest rates go much higher?

For much of the past year the 30 year mortgage has been at 3.5% an amazingly low level. The ten year Treasury Bond has been also extraordinarily low between 1.5 and 2.0%. This has been not only amazing but necessary. Lately, however rates have risen to 20 month highs. It’s not ridiculous to wonder if interest rates CAN go any higher?

Normally, interest rates are Continue reading

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Income In Retirement – 3 Good Reasons NOT to plan for it!

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Seriously? Yeah, like when?

How many excuses do you have to NOT plan for your retirement? Do you even know how much income in retirement you will actually need? Have you ever sat down and crafted a plan to determine the kind of life you’d like to lead, not the kind of life you have to lead – based on the long term needs for cash?

We all have our excuses; and it usually comes down to fear of the unknown. Then people worry that it’s Continue reading

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Retirement Planning: Can Social Security Pay You More?

Retirement PlanningRetirement planning is about saving, investing and planning but who gives Social Security much thought? Well, it is there, isn’t it?  Yet how do you decide when is the best time to start taking benefits? Does everybody understand what they need to know about taking into account the benefit of a spouse or former spouse? Is it better to Continue reading

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