Dollars and China

[Eagle43]

Bill Gates is betting against the dollar. How can I stay afloat if the dollar sinks? Warren Buffet is saying the same things. This could affect asset allocations and early retirement for sure.

On the other hand, I have long thought that this century will belong to the Chinese. They are booming and they are patient. Oh, and they are ruthless.

http://www.usatoday.com/news/opinion/2005-02-16-china_x.htm

Bill Gates is betting on America's decline and putting his money on China's rise. Or so the Microsoft founder seemed to say last month at the World Economic Forum held in Davos, Switzerland. "I'm short the dollar," he said. "The ol' dollar is going down."
At the same meeting, Gates linked his pessimism about the United States to optimism about China. He commended China as the great "change agent" in the world over the next 20 years and praised its "brand-new form of capitalism."

 

[Hyperborea]

Bill Gates is betting against the dollar.  How can I stay afloat if the dollar sinks?  Warren Buffet is saying the same things.  This could affect asset allocations and early retirement for sure.

It depends. Is your asset allocation like that of most Americans or at least like most Americans who even think about it? In other words is it 90% US with a 10% "dash" of international?

There is some research pointing to a world market cap weighted portfolio as being just about as good as being able to guess which market will do the best without having to guess and suffer the consequences of guessing wrong (either about results or timing). Such a portfolio would contain the Chinese market and if/when it becomes more significant it will contain more of it as a percentage of the portfolio.

Personally, I slightly overweight emerging markets (15% of my equities instead of the 10% cap weighting) much like I slightly overweight US small cap (5% extra instead of letting the total market fund cover it). The emerging market portion of my portfolio is covered by 2/3 general EM and 1/3 China. I would go to 1/3 general and 1/3 India if I could find a good enough India ETF / index fund. I'm using FXI - iShares FTSE/Xinhua China 25 Index Fund - for my China market exposure.

Another way to cover yourself is to get some inflation protection for your fixed income - TIPs or Ibonds. If (or perhaps it's really when) the yuan/dollar link breaks or at least shifts there will be inflation in the US. Right now the Chinese market is absorbing a lot of the inflation that would be occuring in the US.

 

[cute fuzzy bunny]

Yep, 1/3 of my holdings are foreign, split almost evenly between the vanguard europe, pacific and emerging market index. I also have a nice dollop of the vanguard foreign small cap actively managed fund.

The europe and pacific are in my taxable account, the emerging market and foreign small cap are in my IRA.

As far as China goes, they have one short term problem and one long term problem facing them. The short term problem is that their worker efficiency is almost in line with how much less they work for. In many job categories, productivity is ~20-25% that of the average in the US and Europe.

The longer term problem is that nearly the entire country lives so far below what we consider the poverty level that the minute their economy starts to *really* get going the workers are going to start demanding higher quality of life, which means higher pay, which means that economic advantage in production costs goes away.

Between those two, it makes China both a likely poor manufacturer and consumer for the short to intermediate term.

 

[Hyperborea]

As far as China goes, they have one short term problem and one long term problem facing them.  The short term problem is that their worker efficiency is almost in line with how much less they work for.  In many job categories, productivity is ~20-25% that of the average in the US and Europe.

If you look at history (though the numbers don't really exist for all of it unfortunately) it is pretty much analogous to the rise of the US.  The US economy became larger than that of Britain around 1870 but that was with a much larger population than Britain.  The income per capita was lower and so was the efficiency in the US.

 

[cute fuzzy bunny]

And you'll see that I said "short to intermediate term".

As you noted, it took 100 years for our economy to take hold and overtake the smaller british one.

And that was before the internet, cell phones, Porsches and expensive vodka.

In looking at emerging economies, the "gimme gimme look at that i want it!!!" phase kicks in fairly quickly. It usually doesnt result in improved productivity or workers producing more and higher quality products.

 

[Hyperborea]

And you'll see that I said "short to intermediate term".

As you noted, it took 100 years for our economy to take hold and overtake the smaller british one.

Hard to tell what one person means by "intermediate term". Anyways the current estimates are about 20 years until the Chinese economy is larger than that of the US. I imagine that the savings rate will drop some but I hardly think it will go to zero (where the US effectively is) from it's current 40%. Some dropping will be good for the development of a consumer market too.

 

[Mountain Mike]

A good diverse portfolio should contain between 5% and 10% precious metals. These would provide a store of value regardless of the economic, political, monetary, or other adverse conditions.

 

[cute fuzzy bunny]

I've got 5% of the vanguard precious metals fund as well! A mighty find performer the last six months or so.

Sorry Hyperborea, I should be more specific!

I think of short term to be 0-5 years, intermediate term to be 5-15 years and long term to be 15+ years. Sort of like bonds

Lets look at Russia for an analog, although they didnt have a socialist government still trying to suppress various activities. They looked like a potential boomer of an economy, lots of people went there to start businesses and forge partnerships. Then people started to "get stuff". Productivity took a dive. Organized crime ran rampant. A lot of those people who started doing business there got stabbed in the back. A lot of the 'big promising companies" turned out to be shams (Yukos for example).

Here we are ~20 years later, and Russia looks neither like a promising manufacturer or consumer.

But they'll get there...so will China.

Just not anytime soon...but thats my opinion, I am probably wrong! I did once say that the IBM PC had too many flaws to ever become popular, and that there was no way on earth we'd ever get high speed networking to run over unshielded twisted pair wiring.

Among other things.