For those willing to pay attention, there’s more to the world of finance than the ongoing Greek tragedy. While Europe delays Greece’s inevitable default, China’s stock market is in the midst of a serious meltdown. Investors in the US might ask, why does this matter to me and my money?

Chinese budding focus on consumerism is a key supporting factor in US investors’ portfolios. In many ways, the pervasive assumption of the continuation of the Chinese economic miracle parallels our own real estate bubble.

As long as real estate was rising, everything was fine. As long as the Chinese consumer is alive and well – following the thought forward to its logical conclusion – the global economy will be fine too. And, remember when the subprime mortgage meltdown was small and contained? It sounds quite similar to the current commentary on the sudden decline in China’s stock market.

Finally, like our real estate market before reality struck, China’s astounding economic growth also stretches back many decades. And, importantly, it is now slowing. What once was greater than 10% growth in China, is now likely down to 5%, if that.

Adding to the sense of mystery surrounding China’s official economic statistics is their ability to magically meet their own projected growth of “about” 7%. For example, on July 14, they announced exactly 7% growth for the just-ended June 30 quarter. Amazingly, they are able to compile and calculate their data much more quickly than the US.

The official statistics coming out of China are probably fake.

However, what’s not fake is the 30% decline in their stock market in less than a month. What’s not fake is the huge decline in global commodity prices. What’s not fake are the reports of a sudden drop-off in car sales across China. And, finally, what’s certainly not fake are the hard-to-imagine-here government actions taken to stop their stock market rout.

The Chinese government has not only cut interest rates, but also relaxed margin trading rules, suspended all trading – no buying and no selling – in 50% of all stocks in the market, banned all new IPOs, restricted short-selling, threatened short-sellers, pressured insiders and executives to not sell any shares, provided loans to companies to buy back their own shares, allowed insurance companies and pension plans to buy stocks for the first time and they’ve also arranged for all brokerage firms to buy, buy, buy!

So far, their efforts have worked to halt the market decline – for now. What comes following the re-opening of normal market forces? My hunch is, not Chinese consumer and investor confidence. Why does that matter? Remember, there’s no doubt we’re all in the midst of a global confidence game.

July 16, 2015 | Jason P. Tank, CFA

 

Given that I’ve been declared the world’s hardest person to shop for, my family finally threw in the towel this year and gave themselves an ice cream maker for my birthday!

We’ve particularly enjoyed that magic moment when the machine’s relentless churning begins to transform our mix into real ice cream. It’s a moment filled with sweet anticipation that’s been a welcomed break from the type of churning I’ve seen in financial markets in 2015.

Since the start of the year, stocks as measured by the S&P 500 index, have churned sideways, producing a small gain of less than 2%. And, bonds, as measured by the Barclay’s Aggregate Bond index, have declined a little less than 1%. Taken together, it’s not uncommon for a balanced portfolio to show close to zero return for the first half of the year.

The most cited culprit of this unproductive churn is the Federal Reserve’s public hemming and hawing about the future path of interest rates. Much as asset prices over the past six years have been positively impacted by abnormally low interest rates, the anticipation of the eventual rise in rates is now producing a chilling effect.

Think of interest rates as a barometer, of sorts. Interest rates, in part, set up the environment in which all assets are valued by investors. Since the Fed’s experimental zero interest rate policy began in late 2008, the Fed has imposed an artificial pressure on prudent investors to shun safety and embrace risk.

In my professional opinion, the Fed’s experimental policy of low rates was never about providing cheap money to spur demand for businesses to increase their productive capacity. Companies borrowed the cheap money, for sure. Yet, with much of it, they’ve repurchased massive amounts of their own shares and funded larger dividend payments. In essence, the Fed’s policy created a not-so-sweet mix of financial, rather than actual, engineering.

The recent churning we’ve seen in many financial markets – in stocks, bonds and currencies – is a sign the Fed’s mix is at that magic moment of change. The very nature of experiments – such as the Fed’s zero rate policy and their purchase of trillions of bonds – is the uncertainty of their outcome.

To pretend to know the outcome is pure hubris. However, to prepare and adjust is most certainly not. Unlike my homemade version of Ben & Jerry’s Sweet Cream, I get the feeling this Fed-induced churning of markets will probably not turn out nearly as tasty!

Now that the NBA and NHL seasons are over – allowing me to go to bed at a more reasonable hour – it is an appropriate moment to talk a little baseball and money.

Like a steady drumbeat, the remarkable nature of high school students and those who mentor them was highlighted for me over three successive evenings last week.

A week ago, at the Northern Michigan Mathematics, Engineering & Science Symposium, my wife and I visited the Hagerty Center to support our son and his classmates. At this event, a collection of students representing multiple ages and schools displayed their scientific endeavors to both the public and to an impressive set of volunteer judges with vast industry-specific experience.

From the venue to the spread of food, donated materials, equipment and awards made possible by generous adults and their businesses, the kids knew they produced important and valuable work. The symposium presented an opportunity for these students to interact with adults who clearly care about those who are next in line, as they say.

The following night, we attended the TCAPS’ Music Boosters annual benefit concert that brilliantly showcased both the middle school and high school music programs. From fantastic solos to large, multi-school, combined performances, these talented students and – yes, once again – dedicated adults helped produce a wonderful exhibition of student talent and the benefits of training.

What particularly caught my attention that evening were the usual retirement announcements of a few veteran music teachers. Surrounded by hundreds of already-accomplished young musicians and their families, it was clear that these teachers felt the importance of their careers.

When each teacher walked up to accept a bouquet, I envisioned the many thousands of kids they had inspired over the last three decades. From their visible emotion, you could see these teachers fully grasped the meaningful mentorship they provided to a very long list of students.

This very next night, I heard the loudest drumbeat marking the power of adult mentorship. In celebration of their recent state championship and 8th place finish at the world championship, the FIRST Robotics Competition program largely made up of students from TCAPS’ Central High School held a jaw-dropping season wrap-up dinner.

The FIRST robotics program is designed around extensive adult mentorship like few programs are today. The countless hours spent by busy adults with these students and the real-life professional knowledge transfer is something to behold.

Over the two-hour dinner and presentation, the two-way street of the experience became apparent. The mentors received as much as they gave to these students. And, that’s saying a lot, because these mentors gave a lot.

At each of these events, night after night after night, I watched students – very capable young adults, really – show they can accomplish great things with the help of meaningful mentorship. As we mark the end of another school year, I would like to officially salute all of the mentors – both the volunteers and the professionals – who show us and their students what’s possible with the power of mentorship.

May 26, 2015 | Jason P. Tank, CFA