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".
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 Martin Bureau—AFP/Getty Images

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 -0.2301% . 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 -0.6153% . 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 -0.3419% , 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 0.2158% 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 -0.3647% , as well as PowerShares QQQ ETF POWERSHARES QQQ NASDAQ 100 QQQ -0.545% , 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).
A man rides his electric bicycle passing the People's Bank of China (PBoC). Zhang Peng—LightRocket via Getty Images

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

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.
MONEY stocks

Stocks Plunge Wednesday on Global Economic Fears

141015_INV_Stock_1
Spencer Platt—Getty Images

Volatility is back with vengeance, and it's being felt throughout the financial markets.

Updated: 4:30 pm

Volatility is back with a vengeance on Wall Street.

The Dow Jones industrial average plunged around 450 points on Wednesday afternoon before recovering to close at 175 points down, marking the sixth day in October that the stock market has suffered triple-digit losses. The Dow, which had been trading as high as 17,145 at the end of September, sank to below 15,900 before ending the day at 16,141.

^DJI Chart

^DJI data by YCharts

This capped off the worst three-day sell off for the broad market since 2011.

Small-company stocks — considered the market’s canary in the coal mine, since they’re more easily rattled by changes in the economy due to their size — sank around 1% on Wednesday and are in an official correction, defined as a 10% drop in value over an extended period. Micro-cap stocks, the tiniest sub-set of small stocks, also fell and they’re only a few percentage points off from an official bear market, or a 20% decline.

Why?

Wall Street is having flashbacks to the bad old days in the aftermath of the global financial panic, when there were real concerns that the global economy might slip back into a deflationary and recessionary spiral.

Right now, the big worry is that Europe and Japan will soon suffer their third recessions in the past six years. Policymakers in both countries are scrambling to find ways to jumpstart growth, yet their central banks are running out of ammunition.

Meanwhile China, once viewed as the engine driving global growth, has been slowing noticeably in recent quarters and can‘t find a way to reaccelerate, as it works through its own housing and financial crisis.

“While domestic growth is robust, slowing economies abroad have the potential to upset the recovery,” notes Jack Ablin, chief investment officer for BMO Private Bank.

Those global growth concerns are now being reflected in two troubling trends.

First, there’s the plunge in crude oil prices. While a barrel of crude oil traded above $100 a barrel as recently as this summer, prices fell to around $81 a barrel on Wednesday morning. Falling oil prices are often viewed as a good thing — since lower energy costs free up households and businesses to spend on other things. Yet the fact is, people aren’t necessarily spending that money on other things.

Michael Gapen, chief U.S. economist for Barclays Capital, noted that U.S. retail sales fell 0.3% in September. “The main downside surprise in this report,” he said, came in core retail sales — which strips out volatile food an energy prices — fell 0.2%. He said that was “against our expectation for a four-tenths rise.”

Moreover, the price of oil sometimes doesn’t cause good things so much as it reflects bad things already in the economy.

Right now, investors may be asking: “Is this the moment of truth when lower oil is signaling lower demand?” says Neal Dihora, an analyst with Morningstar.

Similarly, fears over the global economy tends to drive investors into slow-growing but safe assets, like Treasury bonds. And this morning, the yield on the 10-year Treasury fell below the 2% threshold for the first time since June 2013, a worrisome trend as MONEY’s Pat Regnier points out.

Even more troubling is the possibility that the market is telling us that the financial crisis may not be squarely in the rear view mirror.

BMO’s Ablin noted:

“Decades of debt accumulation touched off the 2008 financial crisis and critics argue that the solution, quantitative easing programs, simply shifted borrowing from the private sector to the public sector. The Fed’s primary lever since the Greenspan years, boosting asset prices and enticing borrowing by lowering interest rates, is no longer working now that short-term rates are effectively zero. Scarred by the financial meltdown and an underwater mortgage, households have had a change of heart and are now more interested in reducing debt.”

And as investors are keenly aware, reducing debt doesn’t help stimulate economic activity.

TIME Hong Kong

Hong Kong’s Protesters Are Fighting for Their Economic Future

Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard
Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard on Sept. 27, 2014 Tyrone Siu— Reuters

The city can't remain a global financial center without its own political process

The conventional wisdom about Hong Kong’s pro-democracy protests is that they are bad for business. Hong Kong has become one of the world’s three premier financial centers (along with New York City and London) because the city has been a bastion of stability in an ever changing region, the thinking goes, and therefore the tens of thousands of protesters who paralyzed downtown Hong Kong on Monday are a threat to its economic success. The Global Times, a state-run Chinese newspaper, used just such an argument to try to persuade the protesters to clear the streets. “These activists are jeopardizing the global image of Hong Kong, and presenting the world with the turbulent face of the city,” it said in an editorial on Monday.

That worry isn’t merely Beijing propaganda. Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, said one of the big questions facing Hong Kong over the long term is “whether the political standoff eventually impacts domestic and foreign perceptions of Hong Kong’s stability and attractiveness as an investment destination.” The fallout for Hong Kong’s financial sector from the Occupy Central movement was immediate. The stock market dropped, banks closed branches, and the Hong Kong Monetary Authority, the de facto central bank, had to reassure the investor community that it would “inject liquidity into the banking system as and when necessary” to overcome any possible disruptions.

But the real reason why Hong Kong has been so successful is that it is not China. When Hong Kong was handed back to Beijing by Great Britain in 1997, the terms of the deal ensured that the former colony, ­now called a “special administrative region,” or SAR, of China ­would maintain the civil liberties it had under British rule. That separated Hong Kong from the Chinese mainland in key ways. In China, people cannot speak or assemble freely, and the press and courts are under the thumb of the state. But Hong Kongers continued to enjoy a free press and freedom of speech and well-defined rule of law. The formula is called “one country, two systems.”

That held true in the world of economics and finance as well. On the Chinese side of the border, capital flows are restricted, the banking sector is controlled by the state, and regulatory systems are weak and arbitrary. Meanwhile, in Hong Kong, financial regulation is top-notch, capital flows are among the freest in the world, and rule of law is enshrined in a stubbornly independent judicial system. Those attributes have given Hong Kong an insurmountable advantage as an international business hub. Banks from all over the world flocked to Hong Kong, while its nimble sourcing firms orchestrated a global network of supply and production that became known as “borderless manufacturing.” While there has been much talk of Shanghai overtaking Hong Kong as Asia’s premier financial center, the Chinese metropolis simply cannot compete with Hong Kong’s stellar institutions, regulatory regime and laissez-faire economic outlook.

What happens if Hong Kong loses this edge? In other words, what happens if Beijing changes Hong Kong in ways that make its governance and business environment more like China’s? Hong Kong would be finished. The fact is that Hong Kong’s economic success, the nature of its institutions and the civil liberties enjoyed by Hong Kongers are all inexorably entwined. If Beijing knocks one of those pillars away, ­if it suppresses people’s freedoms or tampers with its judiciary, ­Hong Kong would become just another Chinese city, unable to fend off the challenge from Shanghai. Foreign financial institutions would be forced to decamp for a more trustworthy investment climate.

That’s why the Occupy Central movement is so critical for Hong Kong’s future. So far, Beijing has generally abided by its agreement with London and left Hong Kong’s economic system more or less unchanged. But when China’s leaders made clear last month that Hong Kongers would be able to choose their top official, known as the Chief Executive, from 2017 onward only from candidates who have the approval of Beijing, it became obvious that Hong Kong was going to face tighter control by China’s communists over time. That raises the specter that Beijing will at some point dismantle “one country, two systems” and along with it the foundation of the Hong Kong economy.

By fighting for their democratic rights, the activists in Hong Kong are fighting for an independence of administration and governance that will perpetuate their city’s economic advantages. Beijing should realize that ultimately a vibrant Hong Kong is in its own interests. China has benefited tremendously from Hong Kong over the past 30 years. It was Hong Kong manufacturers that were among the first to bravely open factories in a newly opened China, thus sparking the mainland’s amazing economic miracle. Chinese firms have been able to capitalize on Hong Kong’s stellar international reputation to raise funds and list shares on the city’s well-respected stock exchange. Even now, China continues to upgrade its economy by seeking Hong Kong’s expertise. The stock markets in Hong Kong and Shanghai are in the process of being linked to allow easier cross-border investment.

Of course, Hong Kong’s economy is far from perfect, and here, too, the importance of Hong Kong’s democracy movement can be found. The SAR suffers from a highly distorted property market and one of the widest income gaps in the world. Such ills have bred more resentment in the city toward Beijing. Yet right now many of the people of Hong Kong simply don’t trust their Beijing-chosen leaders to resolve these issues. Hong Kong requires a popular administration that commands the support of the people in order to implement the reforms necessary to tackle these critical problems. Thus the battle unfolding on the streets of central Hong Kong is a contest for the city’s very survival. Perhaps Hong Kong’s pro-democracy activists will disrupt the usually sedate financial district for a few days. But that’s a tiny sacrifice compared to the long-term damage Hong Kong faces if its citizens do nothing.

Schuman reported from Beijing.

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