Via: China Financial Planning Authhor: cfp More Articles: http://www.chinafinancialplanning.com
Recessions are neither systematic nor consistent. They hit different parts of the global economy at different times – and travel from one economy to another at varying speeds. If you are an American expat in China, two of these trends could spell big problems for you.
1) Financial Market – Market Demand differential.
Financial markets (i.e.: Stock markets and interest rates) tend to LEAD the real market (B2C and B2B markets for products and services). The problem is, no one knows by how much – or even if the trends we observe today will be true tomorrow. What we do know is that financial markets are designed to reflect or ‘price-in’ all available data about future trends. They are supposed to have a predictive element. A CFO at an auto-maker will tell investors what his outlook for the first quarter of 2009 in the middle of fourth quarter 2008. It’s not insider trading – it’s his job to make pertinent information available (as long as his disclosures are made public to everyone at the same time, and that they are based on his best objective estimations). But the market for autos – and for auto-company employees – won’t feel the impact for another 4 or 5 months. Stock and bond markets react to the perception of change well before the actual change takes place.
In a recession, this manifests itself in a strange pattern that can throw novice investors for a very discomforting loop. If you have been watching financial markets, you probably noticed that all the major indices fell out of bed around Oct 9 and recovered significantly in the last 2 weeks. Great news – but it doesn’t mean that the recession is over. It just means that the market thinks that it has fallen enough right now, and will stabilize here for a while. Could the ‘Great Recovery’ – the El Dorado of the 21st Century – have already begun? Maybe, but hold on their Buffy. You’ve got a couple of other things to worry about.
If real market demand (i.e. – customers and clients who are ready, willing and able to spend real money on real goods & services) continues to fall, it could create a self-reinforcing destructive cycle of bankruptcy, layoffs and value-destruction. And last night’s data out of NY and Europe about the plunge in sales for manufactured goods seems to indicate that the worst of the news is in front of us. This presents households and small investors with 2 problems.
1. You could be facing layoffs or corporate bankruptcy even though the financial markets appear more stable.
2. The recession could be with us a long time after stock markets have started to rebound.
2) Cross-border recessions. Contagion or Dominoes?
The second timing differential you have to know about has to do with how fast recession spreads from one economy to another. The US and Europe went down at the same time because they are so closely correlated, or interdependent. The same financial fundamentals (over-investment in mispriced mortgage-backed debt) had the same effect on markets in the US and Europe. What about China? Well, that’s a great question. If you listen to Beijing and China’s business elite, then they’ll tell you that economic fundamentals are so different that there is little chance of a recession in China. But the mainstream view is that China is already knee-deep in a demand driven economic slowdown. And given the range of policy-options and controls that China is willing to use to influence its own economy, there is a great chance that that China’s slow-growth scenario could last far longer than the one in the US.
That could be an awkward problem for those of you whose job or business is tied to the Chinese economy. If that is the case, then you could be looking at a very unstable future where your household wealth is determined by one set of financial fundamentals, while your income and cash-flow is determined by a completely different set of drivers. In other words, you could find yourself still getting killed by global economic cycles in Shanghai well after NY has started to recover. That’s fine if buying patterns and economic relations remain constant after the downturn and we go back to business as usual some time in 2010. But it ruins you if after toughing out 2 recessions (the financial one in NY and the market-demand one here in Shanghai) over 18 months you wake up to find that Cambodia is the big new manufacturing base and that relations between China and the new administration have taken a turn for the worse (making things like visas, business registration and employee relations more difficult).
Financial Planning vs. Day Trading
None of these issues is a particularly big problem is you are independently wealthy and have access to unlimited funds unrelated to your salary or bonus. But for those of you who work to live, this presents a sobering set of investment options. It’s very complex and multi-faceted, but I’ll break it down for you in simple terms. Cash is good right now.
Yes, I know – you’re getting all kinds of phone calls from all kinds of strangers making all kinds of promises. They’re saying that now is the time – it’s a golden, once in a lifetime opportunity to jump into the market with both feet and take advantage of an equity market that has “been put on sale” by Wall Street. They may be right – but they’re not telling you that it could get worse or it could take a very long time for this strategy to pay off. And in the mean time, you may really need that money for other things – like food and shelter.
Most competent financial advisors tell you to keep a significant amount of cash on hand to meet emergencies. They usually throw around the figure of 6 months living expenses. This is the time to make sure you have that much – and more. China Expats live a particularly precarious existence, and you could end up changing not only your job, but your home and profession before this is all over. It’s important to stay liquid and keep your options open right now. Don’t lock up your funds, and make sure that you don’t invest any money you can’t afford to lose. If you are an experienced day-trader, then you should understand the risks investing in unstable, unpredictable stock markets. For those novices who truly believe this is a once-in-a-lifetime opportunity, I’ll make it simple – don’t invest any money you can’t afford to lose (or at least live without for a long time). Anyone who locks up their funds right now is taking a much bigger risk than they may have been led to believe.