One of these
things is not like the other… If you find yourself humming that old
Sesame Street standard when you think about financial markets and world
economies, you’re probably not alone.
To the consternation of many, the Dow Jones
Industrials Average and the Standard & Poor’s 500 Index rocketed to new
highs last week just as the International Monetary Fund (IMF) cut its global
economic growth forecast for 2013 and 2014.
Many in the media pointed fingers and announced,
“That’s the problem right there!” Of course, the fingers were pointing at Ben Bernanke
and the Federal Reserve which continued to dither about Quantitative Easing
(QE) last week. While it may feel good to lay blame, the Fed is just one tree
in the forest of market volatility and economic growth.
Let’s take a look at another section of the forest: emerging
markets. They are expected to power 60 percent of the world’s economic activity
by 2030. Yet, just last week, China’s exports slumped, and Brazilian and
Indonesian central banks raised interest rates (which generally slows growth). Turkey’s
central bank may do the same next week. Is slowing growth in emerging markets
the Fed’s fault?
While higher rates in the U.S. may hurt emerging
markets, many of those countries have problems of their own, including infrastructure
bottlenecks and excessive credit expansion. Last March, the Financial Times
quoted Deutsche Bank strategist John-Paul Smith who wrote:
“We believe that
2013 will mark the year when economists and investors focus on the underlying
imbalances within the Chinese economy and, accordingly, reduce their
expectations of sustainable growth over the medium term. The deterioration in
the perception of China is likely to have a very disruptive effect on (global
emerging market) equities...”
Smith’s forecast proved out. Early last week, the International
Monetary Fund (IMF) lowered expectations for China’s growth to the high-seven
percent range.
Of course, it’s not easy to predict the future.
Irrefutable evidence of that arrived a few days after the IMF’s report when Lou
Jiwei, China’s Minister of Finance, said his country’s growth rate could fall
to 7.0 percent or even lower. Economists gasped.
China’s official growth target (set by the National
People’s Congress) is 7.5 percent, not 7.0 percent or lower. According to The Wall Street Journal, “Such a sharp
downshift in China's growth would send ripples around the world economy,
hitting everything from iron-ore demand in Australia to sales of luxury
handbags in Hong Kong stores.”
in america, people
are still pulling themselves up by their boot straps. Three-fourths of the folks who participated in the 2013 U.S. Trust Insights on Wealth and Worth
(all of whom have $3 million or more in investable assets) made their money the
old fashioned way. They worked, owned businesses, and/or invested.
Most believe
they’re financially secure and feel confident about the future. While that
proved true for many aspects of financial planning, the study uncovered some unrecognized
risks, many of which have been created by a volatile investment environment and
changing tax laws. They include:
- Incomplete retirement planning. Although
the vast majority of those surveyed are very confident about having the
income they need during retirement, many have overlooked factors which
affect income and assets such as lifestyle expectations, out-of-pocket
healthcare expenses, long-term care costs, and others.
- Financial support for extended
family.
Almost one-half of those surveyed provide significant support to members
of their extended families (including parents, in-laws, siblings, and
grown children). However, the majority have not included that fact in their
financial plans.
- Conflicted emotions about investing. The
majority of survey participants said growing assets is more important than
preserving them today; however, they also said lowering risk is a higher
priority than pursuing higher returns.
- Tax law changes. A majority
of wealthy people do not understand the ways in which tax law changes may
affect their income, investments, or estates. Few understand the tax
strategies which may be available to them.
Weekly Focus – Think
About It
“Tell
me and I forget. Teach me and I remember. Involve me and I learn.”
--Benjamin Franklin, inventor and statesman
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