Financial Headlines Round-Up for 2015

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LOOKING BACK … In Review  

The Economist Explains’

Art

By Arthur Chalekian GEPC

[Elite Financial Partners]

Each week, The Economist blog expounds on subjects ranging from current events to economics, from philosophical or scientific issues to everyday oddities.

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Let’s take a quick look at a few of its headlines during 2015

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Why the Swiss unpegged the Swiss franc (January 18, 2015). Remember when the Swiss National Bank removed its currency peg last January? The Swiss franc realized double-digit gains in value and the Swiss stock market dropped.

Everything you want to know about falling oil prices (March 18, 2015). “The main reason for falling prices is increased supply from America thanks to its fracking boom, which has reduced its demand for oil imports. Other countries, notably Saudi Arabia, have been loth to curb supply lest they lose their share of the global oil market.”

Why so many Dutch people work part time (May 11, 2015). More than one-half of the working population in Netherlands is employed part-time – a higher percentage than anywhere else in the world. “This is partly a relic of prevailing Christian attitudes which said that mothers should be home for tea time and partly down to the wide availability of well-paid “first tier” part-time jobs.”

What Greece must do to receive a new bail-out (July 14, 2015). After challenging negotiations, Greece and its European creditors cut a deal, allowing the country to remain in the euro area.

China’s botched stock market rescue (July 30, 2015). Chinese stocks lost nearly a third of their value last summer. China’s authorities “resorted to heavy-handed measures to prop up swooning share prices, from pressuring banks to buy stocks to blocking big investors from selling theirs.”

Why is the Nobel prize in chemistry given for things that are not chemistry (October 7, 2015)? Apparently, five of the last 10 Nobel chemistry prizes have been awarded for pursuits that might better be described as biology. A possible explanation is “the diversity of chemistry prizes reflects the fact that chemistry is found everywhere…”

How the Fed will raise interest rates (December 14, 2015). Just as the Fed employed unconventional monetary tools to stimulate the economy, it is using new policy tools to try to increase the Fed funds rate.

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gas_pump_1

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Oil Prices

Down…down…down! Need we say more?

Assessment 

We hope 2015 has been a memorable and rewarding year for you, and we look forward to working with you, and the ME-P, in the New Year.

Conclusion

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3 Responses

  1. China 2016

    The People’s Bank of China (PBOC) started the New Year with a downward currency adjustment and fireworks followed.

    Last week, three distinct issues affected China’s stock market. First, the PBOC’s devaluation of the yuan (a.k.a. the renminbi), along with the knowledge the central bank had been spending heavily to prop up its currency in recent months, led many analysts and investors to the conclusion China’s economy might not be as robust as official reports indicated, according to the Financial Times.

    Not everyone was surprised by this revelation. During the fourth quarter of 2015, The Conference Board’s working paper entitled Global Growth Projections for The Conference Board Global Economic Outlook 2016 reported:

    “China’s economy grew much slower than the official estimates suggest in the recent years. During the last five years, our estimates suggest an average growth of 4.3 percent, which is substantially lower than the official estimate of 7.8 percent. In 2015, we project China to see an average growth of 3.7 percent, which is indeed lower than the official target of 7 percent.”

    Second, state-run media made it clear the Chinese government would not step in to spur growth. Allowing market forces to play out is a requirement of the reforms international investors have been demanding of China, according to Barron’s. The publication suggested Chinese President Xi Jinping is the victim of a Catch-22. The Chinese government took steps toward reform and international investors responded by selling shares in a panic:

    “Weaning China off excessive credit, investment and import-led growth in favor of services means slower growth. Markedly slower, in fact, than the 6.5 percent Beijing is gunning for this year. But Monday’s 7 percent stock rout shows international investors want it both ways. The rapid growth, innovation, and disruptive forces that capitalism produces? Yes. The downturns and volatility that come with it? Not so much.”

    The third factor was China’s new and very strict stock market circuit breakers, which were introduced on January 4th. The circuit breakers were intended to calm overheated markets, but they sparked panicked selling instead. When the Shanghai Shenzhen CSI 300 Index falls 5 percent, Chinese stock trading stops for 15 minutes. When the index is down 7 percent, trading stops for the day. A similar mechanism is employed in U.S. markets, which are far less volatile.

    However, trading is not delayed until the Standard & Poor’s 500 index has fallen by 7 percent, and it does not stop until the index is down by 20 percent. Last week, China’s stock markets closed twice as investors, who were worried the circuit breakers might kick in, rushed to sell shares.

    China suspended its circuit breakers on Thursday, and the PBOC set the value of the yuan at a higher level. That helped China’s stock markets, and others around the world, settle. China’s markets gained ground on Friday, although U.S. markets finished the week lower. Markets may continue to be jittery next week as “a tsunami of negative psychology driven by China” works its way through the system, reported Reuters.

    Arthur Chalekian GEPC

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  2. OIL

    Oil below $30 today. DJIA down 1,300 points in 2016

    Dr. David E. Marcinko MBA

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  3. What The Heck Going On In China?

    It seems every other day or so, another shoe drops in China that sends the world market into tailspin. What the heck is going on there?

    In 2008, the US was hit by the worst financial crisis since the Great Depression. Between 2008 and 2013, US industrial production contracted about 5%, Japan and Europe did even worse, they were down more than 10%. But China’s industrial production more than doubled during those five years. By 2013, it was 30% larger than that of the US.

    What give? Alas there was a stimulus package in China (with borrowed and printed money) to build high speed rails, airports, metros, ports, and more than a few ghost towns. This infrastructure building binge created a massive but artificial demand, while growing government debt to 280% of GDP.

    For a time, it was almost magical. China was growing by 10% while other countries were in recession and China was credited with saving the world economy.

    But this growth model is not sustainable: there are only so many ghost towns you can build before running out of ghosts. So starting about 3 years ago, China scrambled to find a new growth model that is based on domestic consumer demand (as opposed to export,) services (as opposed to manufacturing,) innovations and entrepreneurship (as opposed to government command and control.)

    Judging by anecdotal evidences and my personal experience, they are making good progress:

    • Movie theaters are growing like 50% a year. Box office revenue is about to surpass that of the US.

    • Apple is selling as many iPhone in China as in the US; GM is actually selling more cars there.

    • In the first 20 years since I immigrated to the US, I did not consume any Chinese entertainment. Lately however, Chinese TV programming and movie making have improved so much, I began to watch them.

    • In the first 20 years since I came to the US, I did not buy any Chinese branded or designed products. Lately, I bought a DJI camera drone. The DJI drone is the first time in modern history, a Chinese company started a whole new consumer category.

    • Outside of the US, China now boasts the most number of billion dollar startups.

    At the same time, industrial production is not growing, or may even be shrinking. This is a very healthy development. In fact, if its industry were to grow as it was a few years back, it would grow a UK every other year. Just imagine how many more ghost towns it would have to build just to absorb the added capacity. So not all slowdowns are bad. In this instance, the slowdown is much needed.

    How is this transition gonna affect the world economy? Well, it’s gonna hurt resource economies like Saudi, Russia, Australia and Brazil. But it’s gonna help advanced products and services economies like UK, Japan and the US. Did I mention the US is capturing 40% of all box office revenue in China?

    What about the out of control government debt? Most of the debt was borrowing by local governments and state firms from state banks. It’s basically the right hand borrowing from the left hand. Worst come to worst, there is always an accounting solution.

    The market maybe going crazy over China’s problems, you don’t have to.

    Michael Zhuang

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