Replacing China’s Demand is Everything to the Global Economy Now

 Since 2008, China’s boom was fueled by $20 trillion in borrowing and in turn fueled the world’s recovery. Today, China’s bust means a dramatic decline in demand for exports to China. If  China doesn’t come back on line, where is that demand going to come from?


At the port of Long Beach, a near record percentage of containers go back to China empty these days. Commodity exporters, most notably Brazil, have seen a decline in excess of 35% exports to Asia, both Europe’s export engine, Germany, and the US’s export of finished goods and consulting fee income to China in 2015 are down significantly, weighing on industrial companies.

chart1china growth

This is what is ailing Brazil’s Economy

It is now apparent China’s building boom was financed with $trillions of debt that created an unprecedented demand for iron ore, coal, oil, lumber and grains. Commodity producing countries like Brazil, Canada, Australia and Russia boomed as a result. Since 2014 however, things have cooled in China and has resulted in a bust in commodity producing countries.

Only now has it become widely appreciated how dependent on leverage China’s rapid growth was. In only six years, the Chinese increased their total outstanding debt by about 400%.  That is how the ghost cities were paid for. But how will the ghost cities repay their debt? That is something the Chinese never discuss and is at the root of the uncertainty about China’s return to growth.

chert 22 china growth

China’s Debt Grew Faster Than Its Economy

One example of how problematic the bad investment in ghost cities was in the way they were financed. Emerging middle aged, middle class investors valued apartments as rock solid investments that they believed would provide above average returns. Developers sold these projects with income return projections that were very nice. Chinese demand for speculative real estate investments lead to over building and $trillions in suspect debt. It has been estimated that nearly 65 million Chinese apartments are currently empty. Today, small investors are stuck holding grimly on to their money losing empty apartments. They have to continue to simply pay the mortgages hoping for a turn around or that their son will use the apartment as proof of means to woo a wife. The consumption and investment capacity of these middle class investors is now heavily constrained by the burden of supporting their mistake.

For countries like Brazil, Venezuela and South Africa where debt, horrid politics and the crash in the profitability of their exports are all converging, the deepening recessions are increasingly leading them towards default on perhaps $trillions in debt and much of it is priced in ever more expensive dollars. The loss of a Chinese scale demand is the fulcrum of the growing crises in many emerging and developed exporting economies.

China’s boom was also a primary fuel for the US recovery that started over six years ago. The economy’s leading growth industries were meeting rising Chinese demand. As a result investment in manufacturing and energy, created 30% of the good jobs during the recovery. Both industries were the biggest beneficiaries of China’s burgeoning demand and now are seeing the most damage from the Chinese bust.

2016 is the year that global economic activity and demand must restart or a credit bust will begin to spread across commodity dependent emerging market economies. Where and how this occurs is not at all certain at this time, but given China’s huge debts and property mal investments, it doesn’t seem likely they will lead the next upturn.

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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 who 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 living an even more modest lifestyle than others who have status outward trappings but are carrying a lot of debt and have little equity. It is hard to tell who are the middle class millionaires from the outside.

Unexpectedly, middle class millionaires are often not super high earners but they are effective money managers and good investors. They can be public employees, Main Street business owners and tradesmen.  For the middle class, spending and investment decisions often determine financial success more than huge earnings. Savings and investment are critical to middle class wealth accumulation.

What is Middle Class? 

If the definition of the American Dream is still for a middle class family to live the good life and build financial security, then being middle class is a lifestyle. It may be modest, but it still requires a meaningful income and level of assets,

The median household income in America today is $56,300, which means half of households have a higher income than that and half have a lower income. The fact is, Americans tend to say they are middle class. That is true of median income households and households with five times the median income.

But the reality is housing, taxes, health and education are expensive today. A household income of $56,300 before taxes buys little anymore and it seems more reasonable to say a middle class lifestyle today requires an income of at least $75,000 going all the way up to $250,000. There are millions of families who have the income to potentially live the dream and attain wealth, but there are only a limited number who do both. Who are they and how are these Middle Class Millionaires created?

Modest but Real Millionaires

John and Joan Anderson are in their mid 50’s and have modest earnings 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 Anderson’s 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 teaching 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 phones down to just what they need. Their utility bills are reasonable; they have insulated their house well and use a programmable thermostat.

Consistent and sensible investors, the Anderson’s have three apartments from which they use all the the rent to pay off the properties. With the kids done with school now, they 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 1 $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.

Crucial Choice For the Middle Class : Spend or Accumulate

Conspicuous consumption has the appearance of success but ironically, in the middle class status seeking through consumption tends to undermine success. The luxury SUV in one driveway may announce success, but if it is leased,  is the most expensive way to own a car. For households with middle class incomes, spending $8 to 12,000 of pre tax earnings a year on a single vehicle comes at the expense of paying down debt and investing for retirement.

You may have know people who used to have it all. In the aftermath of 2008, there are many who lost their affluence. They had a business. They had new cars and a huge house. They were always in debt, but that was their private matter. They looked really successful.

But when the downturn came, the illusion came to an end. For many, 2008 was the worst possible outcome for middle class spenders. They just have too much debt when the bad times come and they lose most everything. But what is the best scenario?

Another couple with $125,000 a year in income like the Anderson’s can make different choices. With their income they can buy more house and do. They qualify for a $3,000/month, 30 year mortgage on a Mc Mansion. They can both drive luxury cars and take great vacations and do. They also run up credit balances and are able to maintain them. They can do this as long as the economy never burns them and they can do that up until the day they retire.

But they can’t build much equity on that 30 year mortgage and afford to invest in their retirement plans. They will always spend many thousands a year more than the Anderson’s on depreciating cars, higher real estate taxes and interest on consumer credit. They will have to work longer, whether they want to or not. They will have to sell their house when they retire since it will cost more than a retired couple can maintain. Most of all, they definitely won’t be millionaires.

To paraphrase the the Book of Matthew, “many are called but few answer”, there are many millions of middle class families who have the income and smarts to become millionaires, but not that many get there. Deferred consumption, doing it yourself and a commitment to heavy investing are required to get there.

Even today, with diminished investment returns appearing to baked in for the foreseeable future, it is entirely possible to achieve this. It is kind of fun really to ask yourself the question; who are the middle class millionaires in my my neighborhood?


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



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.



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!

retirement planning

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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