TIME career

IMF Chief Christine Lagarde: Female Equality Laws Are Good For the Economy

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JOHN THYS—AFP/Getty Images International Monetary Fund Managing Director Christine Lagarde gives a joint press after an Eurogroup Council meeting on February 20, 2015 at EU Headquarters in Brussels. ( JOHN THYS--AFP/Getty Images)

Notes GDPs would increase dramatically if laws changed to make it easier for women to work

International Monetary Fund Chief Christine Lagarde has some good news for economies in the developing world: in one step, they can boost their GDPs up by up to 30 percent. All they have to do is let women into the workforce.

In an article posted Monday on the IMF’s blog, Lagarde discusses a new study that found that over 90% of countries worldwide have some kind of legal restrictions that keep women from working, getting loans, or owning property. Women make up 40% of the global workforce, but in some regions they’re vastly underrepresented– only 21% of women in the Middle East and North Africa work outside the home.

Lagarde says that fixing the laws that keep women from fully participating in the economy could boost GDPs– by a lot. Getting women equally represented int the workforce would amount to a 9% increase in Japan’s GDP, a 12% increase in the United Arab Emirates, and a 34% increase in Egypt. In the US, our GDP would increase by 5% if we made it easier for women to participate in the economy.

Changing the laws is only the first step– Lagarde also notes that childcare and maternity leave benefits also play a major role in whether and how women work outside the home. Currently, the US is one of few developed countries that offers no guaranteed maternity leave, and the IMF study found that in 2009, the U.S. spent only 1.2% of our GDP on family benefits– less than any other developed country. Oh great.

MONEY Autos

Car Ownership Has Peaked—or Maybe It Hasn’t

new cars on the lot
Per-Anders Pettersson—Getty Images

After a strong January for the auto industry, forecasts call for rising car sales in 2015—followed by more increases in the years ahead. So what's this business about already hitting "Peak Car"?

Based on research from the asset management firm Schroders, Quartz recently made the case that “the Western world’s century-old love affair with the automobile is coming to an end.”

By and large, the data indicate that people around the world—young people in particular—are driving less, less interested in owning cars, and even less likely to bother getting driver’s licenses. In light of such statistics, the argument is that America, and perhaps the world as a whole, has reached the marker that’s been dubbed as “Peak Car,” the point at which car sales and ownership and driving in general go no higher.

“Our research illustrates that for the past decade the developed world has shown signs of hitting ‘peak car,’ a plateau or peak in vehicle ownership and usage,” the Schroders study states plainly.

At the same time, however, Automotive News and others point this week to the new IHS report forecasting that global auto sales will hit 88.6 million in 2015, which would mean a 2.4% increase over 2014 and would mark the fifth year in a row of increasing car sales. Not all parts of the world are expected to be buying more vehicles: Despite cheap gas prices, car sales in South America, Russia, and Western Europe are likely to be underwhelming. Yet strong sales are anticipated by IHS in North America and China, bringing about a “slower, not lower” overall rise in the auto market globally.

Car dealership sales in the northeastern U.S. were likely hurt in January due to major snowstorms, and yet just-reported auto sales for the month have been impressive. It’s expected that automakers will post brag-worthy sales increases of 14% or more, compared with the same period a year ago. At such a pace, total sales for the year could reach 17 million.

IHS’s forecast calls for light-vehicle sales of 16.9 million in the U.S. in 2015, and that might be on the low side. “With a strong exit to 2014, and gasoline prices currently plunging, consumers may feel even more positive throughout 2015,” an IHS statement said. And the IHS report calls for higher sales tallies going forward, with predictions of 17.2 million U.S. car sales in 2016 and 17.5 million in 2017. If that last prediction is realized, it would mean a new peak for the nation, which experienced what was then an all-time high of 17.4 million sales in 2000.

In other words, IHS researchers are saying that neither the U.S. nor the world has reached Peak Car, and that from the looks of things we won’t hit that point for years to come. The Economist has also made the case that, despite millennials’ apparent preference for urban living and lack of enthusiasm for driving and car ownership, “it is not clear that declining car ownership among young urbanites will have more than a marginal effect on overall car sales,” and that Peak Car “still seems quite a long way off.”

The researchers at Schroders and IHS can’t both be right. So who is wrong? Well, we should point out that one of Schroders’ graphs illustrates how consumer interest in buying cars has rebounded across all age groups since the Great Recession ended. Also, some of Schroders’ data is dated: The most recent drivers’ license statistics are from 2010, for instance, while the numbers reflecting a rising propensity to buy cars in the U.S. go no further than 2012.

On the other hand, there are compelling, data-driven arguments that millennials will never love automobiles as much as car-crazed Baby Boomers, that the average number of vehicles owned per driver (or household) will never be as high as it once was, and that people all over the world will be out on the roads less year after year thanks partly to smartphones, e-commerce, car sharing, and other technologies. At the same time, it sure looks like auto sales will be on the rise globally and in the U.S. in 2015, and the year after that, and the year after that, and … who knows?

If Google and/or Uber manage to create and perfect a practical driverless taxi in the near future, all bets—and forecasts—could be off.

MONEY Media

Historic Charlie Hebdo Issue Selling for $1,100 on eBay

The weekly newspaper Charlie Hebdo, on January 13, 2015 in Villabe, south of Paris, a week after two jihadist gunmen stormed the Paris offices of the satirical magazine, killing 12 people including some of the country's best-known cartoonists. Its cover features the prophet with a tear in his eye, holding a "Je Suis Charlie" sign under the headline "All is forgiven".
Martin Bureau—AFP/Getty Images The weekly Charlie Hebdo in Paris on Jan. 13, 2015, a week after two jihadist gunmen stormed the Paris offices of the satirical magazine, killing 12

After millions of copies of this week's issue of Charlie Hebdo sold out, the historic edition turned up for auction on eBay and reportedly drew bids reaching £760 (roughly $1,150). Asking prices have soared as high as €100,000—the equivalent of about $118,000.

Within days of a grisly massacre that killed 12 at the offices of Charlie Hebdo, the surviving staffers published a new issue of the French satiric newsweekly. To say copies are in high demand is understating things: Millions of copies have sold out in France at the newsstand price of €3 (about $3.50), and around the globe buyers seeking print editions of the historic issue have turned to online auctions, with many bidding 100 or more times the list price.

Charlie Hebdo, known for publishing cartoon versions of the Prophet Muhammad and mocking various religions (among other institutions), was reportedly targeted by extremist gunmen seeking “vengeance for the Prophet.” The post-massacre edition of the newsweekly again features a cartoon version of the Prophet—an act that some consider deeply insulting to Islam—along with the words “Je Suis Charlie” (I Am Charlie) and “Tout Est Pardonne” (All Is Forgiven).

Normally, Charlie Hebdo distributes around 60,000 copies per week. For the latest edition, the print run was hiked to 3 million and has since been upped to 5 million. One week after the killing, people in France waited in long lines early in the morning to buy multiple copies of the new Charlie Hebdo. Within hours of those millions of copies selling out, issues began turning up on eBay.

On Wednesday the (U.K.) Independent reported that online auction bids have passed £500 ($760) at U.K. and U.S. versions of the auction site. The Hollywood Reporter noted that dozens of bids at one U.K.-based auction pushed the price of one copy up to £760, or $1,153. CNBC rounded up various copies of the new Charlie Hebdo on eBay listed at “Buy It Now” prices of €20,000, €50,000, even €100,000. At today’s exchange rates, those asking prices are the equivalent of around $23,500, $60,000, and $118,000, respectively.

Starting at the end of this week, a few hundred issues will be go on sale in the U.S. at a select few locations—mostly in big cities such as New York and San Francisco. Presumably, the few sellers with copies will have no trouble finding interested buyers. Charlie Hebdo isn’t normally distributed in the U.S., but as USA Today reported, magazine sellers all over the country are trying to find ways to get their own copies that can be put up for sale.

MONEY stocks

China’s Boom Is Over — and Here’s What You Can Do About It

Illustration of Chinese dragon as snail
Edel Rodriguez

The powerhouse that seemed ready to propel the global economy for decades is now stuck in a period of slowing growth. Here’s what that means for your portfolio

Every so often an investment theme comes along that seems so big and compelling that you feel it can’t be ignored. This happened in the 1980s with Japanese stocks. It happened again with the Internet boom of the 1990s. You know how those ended.

Today history appears to be repeating itself in China.

Just a decade ago, China was hailed as the engine that would single-handedly drive the global economy for years to come. That seemed plausible, as a billion Chinese attempted something never before accomplished: tran­sitioning from an agrarian to an industrial to a consumer economy, all in a single generation.

Recently, however, this ride to prosperity has hit the skids. A real estate bubble threatens to crimp consumer wealth; over-investment in a wide range of industries is likely to dampen growth; and the transition to a developed economy is stuck in an awkward phase that has trapped other emerging markets.

No wonder Chinese equities—despite a strong rebound last year—are down around half from their 2007 peak.

iSCH1

Like the Japan and dotcom manias before it, China looks like an old story. “Do you have to be in China?” asks Henrik Strabo, head of international investments for Rainier Investment Management in Seattle. “The truth is, no.”

If you’ve bought the China story—and since 2000 hundreds of thousands of U.S. investors have plowed $176 billion into emerging-markets mutual and exchange-traded funds, which have big stakes in China—that’s a pretty bold statement.

In fact, even if you haven’t invested directly in Chinese stocks and simply hold a broad-based international equity fund, China’s Great Slowdown has an impact on how you should think about your portfolio. Here’s what you need to understand about China’s next chapter.

China Has Hit More Than a Speed Bump

After expanding at an annual clip of more than 10% a decade ago, China’s economy has slowed, growing at just over 7% in 2014. That’s expected to fall to 6.5% in the next couple of years, according to economists at UBS. And then it’s “on to 5% and below over the coming decade,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

Why is this worrisome when gross domestic product in the U.S. is expanding at a much slower 3%?

For starters, it represents a steep drop from prior expectations. As recently as three years ago, economists had been forecasting that China would still be growing at roughly an 8% clip by 2016.

The bigger worry is that the slowdown means that China has reached a phase that frustrates many emerging economies on the path to becoming fully “developed,” a stage some economists refer to as the middle-income trap.

On the one hand, a growing number of Chinese are approaching middle-class status, which means wages are on the rise. That sounds good, but rising labor costs chip away at China’s competitive advantage in older, industrial sectors. “You’re seeing more and more manufacturers look at other, cheaper markets like Indonesia, Vietnam, and the Philippines,” says Eric Moffett, manager of the T. Rowe Price Asia Opportunities Fund.

At the same time, the country’s new consumer-centric economy has yet to fully form. About half of China’s urban population is thought to be middle-class by that nation’s standards, but half of Chinese still live in the countryside, and the vast majority of those households are poor. Couple this with the deteriorating housing market—which accounts for the bulk of the wealth for the middle class—and you can see why China isn’t able to buy its way to prosperity just yet.

This in-between stage is when fast-growing economies typically downshift significantly. After prolonged periods of “supercharged” expansion, these economies tend to suffer through years when they regress to a more typical rate of global growth, according to a recent paper by Harvard professors Lawrence Summers and Lant Pritchett.

In some cases, like Brazil, this slowdown prevents the economy from taking that final step to advanced status. Brazil had been expanding 5.2% a year from 1967 to 1980, but that growth slowed to less than 1% annually from 1981 to 2002.

No one is saying China will be stuck in this trap for a generation, like Brazil, but China could be looking at a long-term growth rate closer to 4% to 5% than 8% to 10%.

iSCH2

Your best strategy: Go where the growth is—at home. A few years ago the global economy was ex­pected to expand at an annual pace of 4.2% in 2015, trouncing the U.S.  Today the forecast is down to 3.1%, pretty much the same pace as the U.S. economy, which is expected to keep accelerating through 2017.

In recent years, some market strategists and financial planners have instructed investors to keep as much as 40% to 50% of their stocks in foreign funds. But ­dropping that allocation to 20% to 30% still gives you most of the diversification benefit of owning non-U.S. stocks.

The Losers Aren’t Just in Asia

China’s rise to power lifted the fortunes of its neighboring trade partners too, so it stands to reason that a broad swath of the emerging markets is now at risk. “China is still the beating heart of Asia and the emerging markets,” says Moffett. “If it slows down, all the other countries exporting to and importing from China will see their growth prospects affected.”

The country’s biggest trading partners in the region are Hong Kong, Japan, South Korea, and Taiwan, and all are slowing down. Economists forecast that the growth rates in those four nations will slip below 3% next year.

Beyond Asia, “you have to be careful with the commodity exporters,” says Rainier’s Strabo. China’s slowdown over the past five years is a big reason commodity prices in general and oil specifically have sunk more than 50% since 2011.

China consumes about 40% of the world’s copper and 11% of its oil. As the country’s appetite for commodities wanes, natural resource producers such as Australia, Russia, and Latin America will feel the blow.

Your best strategy: Keep your emerging-markets stake to around 5% of your total portfolio. If your only foreign exposure is a total international equity fund, then you’re probably already there. If, however, you’ve tacked on an emerging-markets “tilt” to your portfolio to try to boost returns, unwind those positions, starting with funds focusing on Asia, Latin America, or Russia.

Here’s another bet that’s now played out: A popular strategy in the global slowdown was to take fliers on Western companies with the biggest exposure to China—companies such as the British spirits maker Diageo (think Johnnie Walker and Guinness) and Yum Brands (KFC and Pizza Hut)—solely because of their China reach. And for a while, that paid off.

Now, though, the stocks of Yum and Diageo have stalled, and major global companies such as Anheuser-Busch InBev and Unilever have reported disappointing results recently in part owing to subpar sales in China as well as in other emerging markets.

Demographic Problems Will Only Make Things Worse

For years, China’s sheer size was seen as a massive competitive advantage. Indeed, China has three times as many workers as the United States has people.

Yet as the country’s older workers have been retiring, China’s working-age population has been quietly shrinking in recent years. Economists say this will most likely lead to labor shortages over the coming years, putting even more pressure on wages to rise.

iSCH3

China’s demographic problem has been exacerbated by the country’s “one-child” policy, which has prevented an estimated 400 million births since 1979. But China isn’t the only emerging market suffering from bad demographic trends.

Birthrates are low throughout East Asia. The ratio of people 15 to 64 to those 65 and older will plummet from about 7 to 1 to 3 to 1 in the next 15 years in Taiwan, South Korea, and Hong Kong, dragging down growth.

Your best strategy: If you’re a growth-focused investor who wants more than that 5% stake in emerging markets, concentrate on developing economies with more youthful populations and more potential to expand. One fund that gives you that—with big holdings in the Philippines, Saudi Arabia, Egypt, and Colombia—is Harding Loevner Frontier Emerging Markets HARDING LOEVNER FRONT EM MKTS INV HLMOX -0.47% . Over the past five years, the fund has gained around 7% a year, more than triple the return of the typical emerging-markets portfolio.

Another option is EGShares ­Beyond BRICs EGA EMERGING GLOBA EGSHARES BEYOND BRICS ETF BBRC -1.98% . Rather than investing in the emerging markets’ old-guard leaders—Brazil, Russia, India, and China—this ETF counts firms from more consumer-driven economies, such as Mexico and Malaysia, among its top holdings.

The Parallels Between China and 1990s Japan are Alarming

For starters, China is facing a real estate crisis similar to Japan’s, says Nariman Behravesh, chief economist at IHS. With easy access to cheap credit, developers have flooded the major cities with excess housing. Floor space per urban resident has grown to 40 square meters, compared with just 35 square meters in Japan and 33 in the U.K.

Not surprisingly, prices in 100 top Chinese cities have been sliding for seven months. Whether China’s property bubble bursts or not, falling home values chip away at household net worth; that, in turn, drags down consumer sen­timent and spending, Behravesh says.

Other unfortunate similarities between the two nations: Excess capacity plagues numerous sectors of China’s economy, ranging from steel to chemicals to an auto industry made up of 96 car­ brands.

Also, Chinese officials face political pressure to focus on short-term growth rather than long-term fixes. This type of thinking has resulted in the rise of so-called zombie companies, much like what Japan saw in the ’90s. “These are companies that aren’t really viable but are being kept alive,” Behravesh says. Yet for the economy to get back on track, inefficiently run businesses have to be allowed to fail, market strategists say.

Your best strategy: Focus on the few major differences between the two countries. Unlike Japan, for instance, China is still a young, emerging economy. Slowdown or not, “the growth of the middle class will continue in China, and that will absorb some of the overhang in the economy, which is something Japan couldn’t count on,” says Michael Kass, manager of Baron Emerging Markets Fund.

What’s more, when Japan’s bubble burst in late 1989, stocks in that country were trading at a frothy price/earnings ratio of around 50. By contrast, Chinese shares trade at a reasonable P/E of around 10.

To be sure, not all Chinese stocks enjoy such low valuations. As competition heats up to supply China’s population with basic goods, valuations on consumer staples companies have nearly doubled over the past four years to a P/E of around 27.

At the same time, the loss of faith in the Chinese story means there are decent values in industries that cater to the established middle and upper-middle class, says Nick Niziolek, co-manager of the Calamos Evolving World Growth Fund. Health care and gaming stocks in particular suffered setbacks last year. And Chinese consumer discretionary stocks are trading at a P/E of just 12, down from 20 five years ago.

You can invest in such businesses through EGShares Emerging Markets Domestic Demand ETF EGA EMERGING GLOBA EGSHARES EMERGING MKTS DOME EMDD -3.37% , which owns shares of companies that cater to local buyers within their home countries, rather than relying on exports. Chinese shares represent about 17% of the fund, led by names such as China Mobile.

That one of the world’s great growth stories is now best viewed as a place to pick up stocks on the cheap might seem a strange twist—until you remember your Japanese and Internet history.

MONEY stocks

Probability That Stocks Will Rise This Year: 90%

barometer
iStock

After a furious rally on Thursday, stocks are now up after the first five trading days of January—a time-tested signal the market could be in store for another positive year.

Maybe this will be a decent year for stocks after all.

After the Dow Jones industrial average lost around 500 points in the first three trading days of the year, it sure looked as if 2015 was getting off to a lousy start. But for the past two days, the Dow posted back-to-back triple digits gains. Yesterday alone, the Dow soared more than 300 points as investors calmed down about troubles in the global economy.

The result: The Dow is up 0.44%, while the Standard & Poor’s 500 index has gained 0.15% so far this year.

^SPX Chart

^SPX data by YCharts

What’s the big deal?

The first five trading days of the year — known as the January Barometer — offer a surprisingly good clue for how stocks are likely to perform for the full year.

Historically, when stocks rise after the first five sessions of a year, equities wind up posting gains for the full year nearly 90% of the time, according to the Stock Trader’s Almanac, which has been tracking this and other market barometers for years.

More recently, the correlation has grown even stronger. In a Fidelity article about the January Barometer published last year, Fidelity technical analyst Jeffrey Todd pointed out that “the January barometer has held true 37 of the 39 times since 1950 when January experienced market gains.”

Even so, isn’t this wishful thinking in 2015?

After all, the global economy seems to have hit the skids, as evidenced by the recent drop in oil prices. In fact, Japan is in recession, Europe is in deflation, and China is decelerating faster than folks expected.

Yet the U.S. remains the one economic force in the world that’s holding its own.

And if softness in the global economy keeps the Federal Reserve from raising interest rates until late this year — or even until 2016, as Charles Evans, president of the Federal Reserve Bank of Chicago, thinks it should — that could be just enough good news to keep Wall Street happy in 2015.

MONEY

5 Ways to Prosper in 2015

fortune cookie with money inside
Gregory Reid—Prop Styling by Megumi Emoto

The U.S. shines amid global worries. Here are five strategies for profiting from the economy's relative health in your investing, spending, and saving.

The pace of U.S. growth may be more minivan than Ferrari, but the economy is nonetheless motoring along. Gross domestic product is forecast by the International Monetary Fund to grow 3.1% in 2015. That will put the U.S. ahead of most of its peers, which are facing serious headwinds: Europe may slip into its third recession since the financial crisis, and Japan’s stimulus effort hasn’t revved up its economic engines. China, meanwhile, is trying to maneuver slowing growth into a soft landing.

To make sure growth here doesn’t stall out, the Fed will likely wait till late 2015 to raise rates, and any increase is expected to be small and gradual. That’s still good news, though. “The U.S. economy is in a position to withstand the beginning of interest rates rising—something our trade partners can’t do yet,” says Chun Wang, senior analyst at the Leuthold Group.

Our relative health should continue to lure global investors to U.S. stocks and bonds. That in turn should support the almighty buck. After rising about 5% against a basket of currencies of our major trade partners this year, the dollar could gain another 5% in 2015, Wang says.

A stronger dollar means cheaper overseas travel and cheaper imports—and the latter should keep inflation from picking up momentum as well.

Here’a five-step action plan for profiting off U.S. versus them.

Move to the middle on bonds. While bonds that mature in less than three years are usually considered the safest, “short-term high-grade bonds could be the most vulnerable in 2015 if the Fed starts raising rates as expected,” says Lisa Black, interim chief in­vestment officer for the TIAA General Account. Because the recovery here has been so much stronger than in the rest of the world, global investors will continue to favor 10-year Treasuries, putting upward pressure on prices and keeping a lid on yields. Thus short-term rates, over which the Fed has more influence, are likely to see a much bigger rise relative to their current level.

If you’ve kept a big chunk of bond money in short-term mutual or exchange-traded funds recently—­either to hedge inflation risk or to get more yield on cash—get back to an intermediate strategy in 2015. MONEY 50 fund Dodge & Cox Income ­DODGE & COX INCOME FUND DODIX 0.37% yields 2.5%, vs. less than 0.8% for Vanguard’s Short-Term Bond Fund.

Bet on cyclical stocks. LPL chief investment strategist Burt White—who forecasts a mid- to high-single-digit return for the U.S. stock market in 2015—­expects to see above-average performance in sectors that do better when consumers and businesses have more money to spend. In particular, he says, industrial and technology stocks should benefit if the strong economy motivates corporations to invest in systems upgrades. He recommends Industrial Select SPDR ETF INDUSTRIAL SELECT SECTOR SPDR ETF XLI -1.89% , as well as PowerShares QQQ ETF POWERSHARES QQQ NASDAQ 100 QQQ -2.36% , which tracks the tech-heavy Nasdaq 100.

Eke more out of your cash. In 2014 the average money-market account paid a mere 0.08%, and that yield isn’t likely to grow in any meaningful way in 2015. But don’t just give up on your savings.

Move cash you need accessible—like emergency funds—to an online bank such as MySavingsDirect, which yielded 1.05% re­cently, suggests Ken Tumin of DepositAccounts.com. If you have $25,000-plus to deposit, you can earn 1.25% at UFB Direct. Use the rest of your savings to build a CD ladder. Divide the sum into five buckets and deposit equal amounts in one- to five-year CDs. As each comes due, roll it into a five-year to benefit from rising rates. Based on current yields, you’ll earn an average 1.6%.

Head south. The dollar now buys nearly 8% more euros and 13% more yen than a year ago. That will make travel to Europe and Japan less expensive, but it still won’t be cheap. For great value—and some stunning photos besides—consider Costa Rica, says Anne Banas, editor of SmarterTravel.com.

The dollar is up 7% against the colon in the past year, making the country more of a bargain than it already was. Located in the rainforests of Arenal Volcano National Park on the Pacific Coast, the five-star Tabacon Grand Spa Thermal Resort—one of TripAdvisor’s 2014 winners for luxury—starts at $260 a night, for example. And flights from major U.S. cities can be found for $400.

Expect the unexpected. When stocks were spooked in September by Ebola reaching U.S. shores and increased U.S. airstrikes against ISIS, the S&P 500 fell 7% but European shares sunk 13%. U.S. stocks continued to lead when investors returned to focusing on economic growth.

While it’s impossible to predict what will rattle the markets in 2015, what you can do is take stock of your fortitude. If you persevered and profited from this recent snap back, plan for another in 2015 and bet on U.S. outperformance.

On the other hand, if you panicked and sold stocks, dial back your equity ex­posure by, say, five percentage points if it will keep you hanging on to your allocation in rough seas. Redirect that money to U.S. Treasuries. Jack Ablin, chief in­vestment officer for BMO Private Bank, says that these should benefit from a crisis: “It’s remarkable how Treasuries and the U.S. dollar are the newly appointed safe-­haven vehicles for the world.”

MONEY interest rates

China Cuts Interest Rates, Sending Stock, Commodity Markets Higher

A man rides his electric bicycle passing the People's Bank of China (PBoC).
Zhang Peng—LightRocket via Getty Images A man rides his electric bicycle passing the People's Bank of China (PBoC).

Beijing moves to support an economy growing at its slowest rate in five years

China’s central bank cut its official interest rates for the first time in two years Friday, in a surprise move that sent international stock and commodity markets sharply higher.

The action by the People’s Bank of China, which comes in response to a string of disappointing economic data and increasing signs of tension in local money markets, is the authorities’ strongest show of support in months.

The economy is currently growing at its slowest rate since 2009, and while Beijing has tried to appear relaxed about that, surveys are now showing output stagnating and jobs being shed across the key manufacturing sector.

The PBoC’s action also adds to the trend of central banks across the world easing monetary policy to fight off a growing threat of deflation–a trend that goes in the opposite direction to the U.S., where the Federal Reserve is preparing to tighten policy as the economic recovery gains traction after six years of emergency measures.

The PBoC cut its one-year deposit rate by 0.25 percentage points to 2.75% and the one-year lending rate by 0.40 percentage points to 5.6%.

It timed its announcement to come after the close of financial markets in China, but European stock markets surged on the news, as did prices for commodities such as crude oil. The benchmark contract on the New York Mercantile Exchange rose by $1.50 a barrel, or 2.5%, to its highest level in two weeks, while in Europe, the German DAX index soared 2% and the U.K.’s FTSE 100 rose 1.0%.

European markets were also buoyed by a strongly-worded speech by European Central Bank President Mario Draghi promising aggressive action to ensure the Eurozone doesn’t fall into deflation.

Official interest rates don’t have quite the same function in China’s economy as they do in western ones, due to their interplay with other tools, such as caps on deposit rates and statutory reserve requirements. And the market for money is in any case effectively sealed off from the rest of the world by China’s capital controls. As such, they may not have the same kind of stimulating effect that a similar move by, for example, the Federal Reserve (in the days before the 2008 crisis).

Interestingly, the PBoC also relaxed its control of the amount that banks can offer for deposits. They can now offer 1.2 times the benchmark rate, rather than 1.1 times. These range from 0.35% to 4% depending on maturity. The PBoC enforces a strict cap of 75% on loan-to-deposit ratios in the banking system.

Taken together, the measures look designed to support liquidity into a banking system that is facing challenges on a number of fronts. The sector is seeing a sharp rise in bad loans, especially to real estate developers and construction companies, which is hitting revenue. In addition, banks are also looking to raise capital themselves and amass cash to service clients’ demands for other stock offerings that are due next week in China.

Earlier Friday, the PBoC had felt the need to issue a statement via its account on the Chinese Twitter-equivalent Weibo reassuring market participants that liquidity was “ample”. Benchmark one-week interbank rates had risen by an alarming 0.2o percentage point to 3.48% earlier, according to the Wall Street Journal.

This article originally appeared on Fortune.com

TIME Economy

The Strength of the U.S. Dollar Reflects Global Economic Reality

A man stands next to a money changer in Colombo
Dinuka Liyanawatte—Reuters A man stands next to a money changer in Colombo, Sri Lanka, on Feb. 29, 2012

All hail the almighty greenback!

Ever since the Wall Street financial crisis of 2008, predictions of the dollar’s demise have come fast and furious. As the U.S. economy sank into recession, so too did confidence that the greenback could maintain its long-held position as the world’s No.1 currency. In Beijing, Moscow and elsewhere, policymakers railed against the dollar-dominated global financial system as detrimental to world economic stability and vowed to find a replacement. Central bankers in the emerging world complained that the primacy of the dollar allowed American economic policy to send shock waves through the global economy that roil their own markets and currencies.

But here we are, six years after the crisis, and the dollar is showing just how resilient it actually is. The dollar index, which measures the greenback’s value vs. a basket of other currencies, has reached a four-year high. Those policymakers who bitterly criticize the dollar show little actual interest in dumping it. The amount of U.S. Treasury securities held by China stands at a whopping $1.27 trillion.

The newfound strength of the dollar makes perfect sense. Sure, the world economic landscape is changing, with new rising powers like China and India, whose currencies may one day rival the U.S. dollar. But the buoyancy of the greenback is a reflection of today’s reality: the U.S. is the lone, significant bright spot among the world’s major economies. GDP in the third quarter grew an annualized 3.5% — far higher than other industrialized economies. That’s why the Federal Reserve has wrapped up its long-running and highly unorthodox economic-stimulus program known as quantitative easing, or QE, which, by spilling a torrent of dollars into global financial markets, was one factor behind the currency’s weakness in recent years.

Meanwhile, most of America’s key trading partners are heading in the opposite direction. The European Central Bank (ECB) is widely expected to start its own QE program to try to combat potential deflation and jolt sagging growth in the euro zone. That’s why the euro’s value against the dollar has been sinking to levels last seen two years ago. If the ECB does act, downward pressure on Europe’s common currency will likely intensify.

Meanwhile, in Japan, the central bank on Oct. 31 surprised markets by greatly broadening its own monetary-expansion program in an attempt to rescue Prime Minister Shinzo Abe’s stumbling initiatives to revive the long-slumbering Japanese economy, nicknamed Abenomics. The yen tumbled to a seven-year low against the dollar as a result. Research firm Capital Economics predicts that the Bank of Japan’s (BOJ) action will help push the Japanese currency all the way down to 120 yen to the dollar by the end of 2015, from about 112 today.

The dollar has been gaining against some emerging-market currencies as well. Faced with slowing growth and the strain of economic sanctions, Russia’s ruble has been hitting repeated all-time lows against the dollar. Not even an interest-rate hike by Russia’s central bank on Friday has been able to stem the slide. On top of that, though that pressure has eased, the currencies of India, Indonesia and many other emerging economies still have not recovered their strength from when they tanked last year, after the Fed first signaled it was scaling back its stimulus activities.

How long can the good times roll for the U.S. dollar? That depends on many factors, from the future growth of U.S. GDP to the health of the global economy and upcoming Fed decisions on interest rates. Yet with central-bank policy in the most advanced economies sharply diverging — the Fed tightening, the ECB and BOJ loosening — the dollar could see continued gains. Some economists believe the conditions are in place for an extended period of dollar strength, perhaps lasting several years. “The building blocks are still in place for a sustained dollar rally,” analysts at financial giant Barclays concluded in a recent report.

The fact remains, too, that no other currency has emerged to truly rival the dollar as the world’s No.1 choice. The uncertain stability of the euro was exposed by its multiyear sovereign-debt crisis and the chaotic response to it from Europe’s leaders. And even though Beijing has high hopes to transform the Chinese currency, the yuan, into an international powerhouse, policymakers there have been extremely slow to introduce the financial reforms that would make that a real possibility.

Of course, there are still long-term factors at play that could knock away the pillars of dollar dominance. Russia and China, for instance, recently pledged to settle more trade between the two nations in rubles and yuan. But for now, the dollar reigns supreme, as well it should.

MONEY stocks

Could Another Sell-Off Be Lurking This Week?

Traders work on the floor of the New York Stock Exchange October 15, 2014.
Brendan McDermid—Reuters

Last week's tumultuous week in the stock market sets the stage for yet more nervousness and hand-wringing as a fresh set of earnings and economic data are due to be released.

When Wall Street opens for business on Monday morning, will bad news about the global economy be bad news for stocks?

That was the case for most of last week, when the equity market was hit with a frightening sell-off that reminded investors of the bad old days of the financial crisis.

^INDU Chart

^INDU data by YCharts

Or will bad news turn out to be good news for the market, as was the case on Friday, when the Dow Jones industrial average soared more than 260 points?

^INDU Chart

^INDU data by YCharts

Friday’s dramatic rebound in stock prices reflected two forces that are likely to move the market in the coming days.

Keep an Eye on the Fed

At the end of this month, the Federal Reserve is slated to end its stimulative bond-buying program known as quantitative easing.

Investors are naturally nervous about this development, as quantitive easing, or QE, has been credited for the strength and length of what is now a five-and-a-half-year-old bull market. As many market observers have noted, Wall Street is about to lose a major psychological crutch.

Remember that when the Fed ended its prior two rounds of quantitative easing — in 2010 and 2011 — stocks sold off fairly quickly:

After QE round 1, which ended March 31, 2010:
^SPX Chart

^SPX data by YCharts

After QE round 2, which ended on June 30, 2011:
^SPX Chart

^SPX data by YCharts

But late last week, when the market was in the throes of a selloff, St. Louis Fed president James Bullard said in a Bloomberg TV interview that “we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.”

In other words, a member of the Federal Open Market Committee that sets the nation’s interest rate policy is openly mulling whether the Fed should postpone ending QE in light of recent market volatility.

Bullard’s remarks on Thursday were enough to give the markets a lift in the last two days of the week. And if there are more signs of a major global economic slowdown, including a possible recession in Europe and Japan, then the Fed may have to think twice about how — and how soon — it ends its stimulus efforts.

This week, investors will want to see if more members of the FOMC sound similar conciliatory notes of extending QE. So far, no one else has. Boston Fed president Eric Rosengren, a major defender of QE, said on Friday that he does not expect the Fed to extend the program at this juncture.

What else should investors look for?

  • Wednesday’s inflation report from the Department of Labor. If the global economic slowdown is starting to impact the U.S., we will start to see it in the form of lower prices for U.S. consumers.
  • Thursday’s report on the index of leading economic indicators from the Conference Board. The LEI is forward-looking barometer of economic trends, so if the global slowdown is likely to affect the U.S. in the coming months, this index should offer clues.

Keep an Eye on Earnings

Last week’s bloody selloff was peppered by major earnings disappointments on Wall Street. For instance, there was Netflix, which reported that subscriber growth wasn’t as strong as expected and saw its stock lose more than a quarter of its value on Wednesday. Google also disappointed Wall Street on earnings and revenue growth, as well as on paid clicks on ad links.

The idea is that if Wall Street is about to lose its QE crutch, it will have to fall back on the fundamentals — so corporate profit reports will have to look good.

On Friday, a slew of companies led by General Electric and Honeywell announced better-than-expected results, which helped drive stocks higher at the end of the week.

Yet the mood on Wall Street regarding earnings is somewhat pessimistic. The strengthening U.S. dollar, brought about by the global economic slowdown, is expected to crimp global profits for U.S. exporters.

This week, several high-profile earnings announcements are due to be released. Here are the major ones to look for:

  • On Monday, Apple is due to report its results after the closing bell. Everything Apple reports is news these days.
  • On Tuesday, Coca-Cola will reports its results before the market opens. No company is as exposed to the global economy as Coke is.
  • On Wednesday, Boeing is set to reveal its earnings before the market opens. The global slowdown is expected to hurt U.S. exporters, and Boeing could be a sign of how bad things have become.
  • On Thursday, Amazon.com will report after the bell. Amazon isn’t just a bellwether of the tech economy, it is now a key gauge of the health of the U.S. consumer.

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