The financial trauma of 2008 was so great that many investors still can’t get over it. The U.S. stock market has more than doubled in value since the dark days of early 2009, but ever since then there have been recurring predictions of another crash.
The latest reason given for fear is China. Specifically, the Chinese currency – the Yuan – has lost 3.5% of its value relative to the dollar in the last year. A recent commentary by Brian Wesbury of First Trust put this in perspective.
The Chinese pegged their currency to the dollar at a fixed rate from 1995 to 2005. Since then the Yuan has appreciated relative to the dollar by about 33%. That is until this year, when for the first time the Yuan was allowed to decline slightly. Wesbury referred to it as a “minor wiggle” and he’s right. But since it was unexpected, it hit the headlines like a bomb and provided the latest opportunity for the perma-Bears to whip up hysteria.
But let’s put this in perspective, in the last year
- The Japanese Yen declined against the dollar by 17.6%,
- The Euro by 16.4%,
- The Canadian Dollar by 15.8% and
- The Mexican Peso by 19.9%.
The U.S. imports twice the amount of goods from these countries than it does from China. But their devaluation of 15% to 20% happened without notice or comment.
In the meantime, the appreciation of the U.S. dollar means that foreigners pay more for a new Boeing 787 and we pay less for stuff made overseas. That’s good for U.S. consumers and helps keep inflation in check.
The other thing that’s happening in China is that growth is slowing. That had to happen, but for people who simply extrapolate a trend to infinity, it seems to have come as a total surprise. What this means is that Chinese demand for raw materials is slowing. Not stopping, just not growing as fast. That seems to have caught mining companies and other basic materials producers flat footed. As we write this the price of a barrel of oil is threatening to go under $40, a price not seen since 2009. The same is true of commodities like copper and lumber. While this is not good news for workers in those industries, it’s good for consumers who buy products made with copper or wood.
In our view, the “Plow Horse” economy is continuing its slow but relatively steady growth. Markets have always been nervous and traders pay lots of attention to the news ticker. But long term investors who have well-balanced portfolios should not be concerned with the latest Chicken Littles telling us that the end is nigh.
If you have questions or concerns, call us and we’ll be happy to chat.