Market Update Part 2: China Value

American Investment Planners LLC

500 North Broadway, Suite 260, Jericho, NY 11753

(516) 932-5130 / (866) 932-5130

As the American stock market has become a global stock market, a lot of ‘foreign’ terminology has crept into our language in both trying to analyze it as well as incorporating what it means into our personal financial planning process. Since worldwide market forces impact our own Federal Reserve’s reactions to national monetary policy, it behooves us to become familiar to the power our own imports and exports have in the global economy. The devaluation on modern monetary policy is a reduction in the value of a currency as it affects goods and services with which that currency is being exchanged. This is different than depreciation which occurs mainly in basic supply and demand behavior compared to a bank taking policy action.

A ‘currency war’ can occur where countries compete against each other to bring about a relatively low exchange rate for their own currency. Since the price to buy a country’s currency falls – so does the prices of their exports. Imports, on the other side, become more expensive. As far as services go, the domestic side receives a boost in demand both internally as well as from foreign sources. Naturally, other countries may want to get in on this competition which could lead to a general decline in international trade, harming all the competitors. Of course, this kind of devaluation is rare since most countries generally prefer to keep a high valuation for their own currency and allow market forces to work and determine proper pricing. Considering the United States is experiencing its tightest labor market in 40 years – the absence of wage ‘inflation’ is still pronounced, as we hear many of our clients still wondering when their promised raises will begin. With the collapse in oil prices, lowered commodity prices and the recent devaluation of the Chinese yuan – the inflation rate seems it will remain below the Fed’s 2% target threshold for the foreseeable future.

One lesson China is learning from our homegrown monetary and economic policies is that intervening to encourage growth works!  In this case, supporting export industries with a weaker currency should be a good thing, not a reason for markets to expect a doomsday scenario.  If other countries depreciate the value of their currencies, the U.S. dollar will grow stronger and a stronger dollar means cheap imports, less expensive vacations abroad and lower interest rates! Every industrialized nation, as well as many in the developing world, has resorted to currency devaluation as a "Band-Aid fix" at one point, as is told by The Fiscal Times. The market typically does the rest of the work to adjust prices of goods and services after the announcement. Adjustments to personal financial plans are needed as well. Anticipating future long term growth is equally as important as keeping on top of current financial needs. A properly balanced portfolio should still be tweaked as market conditions change.  

For insight into your own investment asset allocation, please feel free to email Barbara Magor Deel, Vice President of Financial Planning at American Investment Planners LLC at barbara@americaninvestmentplanners.

Web source: CNN Money, The Economist, Bloomberg