Will China Experience a Prolonged Period of Slower Growth?

China's greatest asset to growth was its cheap manufacturing base that drew investment and interest in low cost alternatives. Globalization is stripping China of this advantage as other nations find their own competitive ground. China will need to adjust its economic strategy to help it find sustainable growth that doesn't rely heavily on foreign capital accumulation. Changing their investment policies and encouraging long-term solutions will be more helpful than short-term strategies in the next phase of China's economic life.

China has been known as a great place to produce products because of a business friendly government, lower labor costs, and less environmental restrictions. This cheaper cost alternatives encouraged foreign companies to outsource simple manufacturing of parts to Chinese companies. This create a net influx of foreign dollars that fuel growth over the past couple of decades.

The country's production capacity was based on its ability to partner with outside companies seeking to shave costs. As Chinese industries learned new skills and abilities they developed many of their own products based upon existing product models. A few industries developed advanced models of products but this is still not the mainstream much of China's manufacturing sector.

Now that countries like the U.S. have achieved cost parity due to high technology and productivity improvements the benefits of outsourcing to China have lessened. Therefore, there is downward investment pressure that limits the amount of capital available to Chinese companies. The percentage of companies that have developed independent income streams has improved.

Without the innovative process that comes from a highly skilled and educated workforce Chinese growth is likely to be muted as nations find alternative places to seek resources. This doesn't mean that there is a wholesale disinterest but that such contracts are not as lucrative as in the past and alternative opportunities such as India, U.S. and Eastern Europe are viable options for production.

Think of how the free market works on a macro scale. China went through major economic reforms in 1978 that liberalized and privatized a number of state businesses. Like a hole in the middle of the ocean the capital rushed in and sparked an era of growth capitalizing on a cheap labor supply. It was a nation hungry and ripe for investment. As that hole filled up and costs increased many of the advantages are muted.

China of tomorrow will not grow as fast as it did in the past as alternative investment locations are found and manufacturing parity occurs with other nations. Chinese labor productivity has gained but is running to its limit without mass educational investment that can improve on innovation and technological production. Poor policies that favored pro-Chinese knowledge accumulation at the expense of foreign companies have raised a skeptics eyes to alternative countries with better patent protections.

With an interest rate of around 5% they can reduce that rate to encourage internal growth and development. They may also consider additional infrastructure improvements that connect regions and lower transactional costs. Revamping education to ensure more scientific minds and skilled labor are created can further help in the long run. Changing government policy to open their economy, ensure free and fair transference of knowledge, and focus their investments in high development areas.

The Chinese Tiger has not been netted yet but will need to consider additional reforms that encourage higher levels of growth. Telecommunications, lower shipping costs, and cross-border partnerships are offering cost-quality alternatives to Chinese investment. By reaching out with partners in countries like the U.S. and finding collaborative methods of mutual development with American companies the Chinese companies can further extend their reach.  

3Q Economy Picks Up Speed-Offering New Economic Investment Opportunities

Gross Domestic Product (GDP) in the third quarter (3Q) of 2014 grew to an abundant  3.9%. It is always nice to see the economy grow, unemployment decline, housing recover, and consumer spending rise. What is the icing on the cake is the increased business investment that can tell us a lot about how big money is viewing the economy and its prospects. The reemergence of the American economy offers some new opportunities that were not possible in the past.

The global economy may be slowing, China and Europe are propping up their systems, but the U.S. has for a short time been clear from such programs. The slowing world economy should have investors worried but it hasn't. The sour international market may just provide investors a silver lining in the U.S.

The U.S. is not isolated from the global economy and certainly will have some challenges. However, as manufacturing parity improves and infrastructure strengthens the U.S. is in a better position to help investors take their capital and turn it into higher value products with international appeal. The right policies can encourage people to invest.

New investments impact two different aspects of society at once. Investment in declining manufacturing centers that have retained their infrastructure not only offers the best medium for economic development but can also  radically change the financial positions of residents, often minorities, that live in such areas and will benefit from new high paying jobs and ecological improvements.

We can't forget the growing income disparity in the nation and allowing investors to improve upon the lives of city residents while still earning significant profit cannot be underestimated as an important factor. Of course this requires pro-business investment environments that places businesses and residents in win-win situations. Policy makers need to look long-term and make the adjustments now to raise economic growth and better manage their budgets down the road.

As the investment environment falters in previous hot spots the U.S. is starting to look like a good place to invest again. It offers political stability, a growing market, strong infrastructure, and an educated workforce. Cities, that once stood as manufacturing centers, are ready for reinvestment in hub development at bargain prices. Investment brings jobs and jobs bring higher wages and better environments thereby raising the standards of those who live in these economically suppressed areas.

Does Data and Our Personalities Impact How We Invest?

Data is used to understand the environment and make investment decisions about new products and services that directly impact the stock market. Recently, the Institute of Supply Management made an accidental miscalculation on the May Purchasing Manufacturers' Index by published 53.2 and then revising that estimate to 56 after the error was discovered (Strumpf, 2014). Due to the importance of that economic indicator stocks bounced downward and then leaped upwards 26 points after the revision.  The change made sense with investors who saw a tough winter and potential spring rebound. 

Stocks can be finicky on new data. The information provided from credible sources, often released from large institutions, are given more weight than smaller publishers. This doesn’t change the fact that they are still a single reference point that when taken in isolation can lead to inaccurate perception. A single switch of a number, miscalculation, or ignored measurement can change the results dramatically. A small mistake can have much wider market implications.

Market over reaction to news is not something new. For example, press releases of companies hiring consulting firms and making other strategic decisions can have an impact on stocks (Bergh & Gibbons, 2011). News naturally impacts how investors perceive the environment according to their strategies and learned problem solving matrix. This phonomenon is experience when government policy releases create a positive or negative reaction on the market. 

Hyper active stock trading lies in the personalities of the investors and their investment strategies. Naturally investors who seek quick returns are likely to be more reactive to new information in an attempt to gain quickly or avoid loss. You can see this in the activities of day traders who take short gains and long-term investors who wait out the market. Each uses strategies derived from their personalities.

The phenomenon of impulsive reaction or reflective contemplation has been experienced in a number of different experiments. A study by Ledzinska, et. al. (2014) found that the time it took for participants to read instructions in a computer task and formulate a search strategy was related to their reflection-impulsivity diagnosis (R-I). The study highlights how some personalities brush the surface information and others contemplate the deeper meaning of that information.

In the investment world data is extremely important for decision making. When data is drawn from multiple sources it is generally stronger and more accurate than when derived from a single source. Savvy investors seek both breadth and depth in their information. The totality of the information allows large investors to make more accurate determinations of stock choices. Width is seen as using multiple markets and depth moves into the logic behind the calculations. Having knowledge of major market trends and how the individual data pieces are calculated helps to avoid rash decision-making when erroneous information is accidentally presented.

Ledzinska, M., et. al. (2014). Cognitive styles could be implicitly assess in the internet environment: reflection-impulsivity is manifested in individual manner of search for information. Journal of Baltic Science Education, 13 (1). 

Bergh, D. & Gibbons, P. (2011). The stock market reaction to the hiring of management consultants: a signaling theory approach. Journal of Management Studies, 48 (3). 

Strumpf, D. (June, 2014). Stocks End Up Despite Jolt From Erroneous Economic Data. The Wall Street Journal. Retrieved August 2^nd, 2014 from http://online.wsj.com/article/BT-CO-20140602-711023.html

U.S. Stocks Rise-Analyst Argues "Buy American Stocks"

The Dow ended at an all time high bumping up 32.37 points (.2%) to 16,583.34 points. The Dow was not the only one to rise. The S&P 500 rose 0.15 percent to 1,878.48 while the Nasdaq Composite rose 0.5 percent to 4,071.869. A royal flush for the day indicating an improving economy. 

Geopolitical risks still exist for Ukraine, Syria, and other areas of the world. Some Americans feel it may be best to invest in the U.S. to limit those exposures. Some of these exposures will continue on for more than a year and others are likely to be resolved soon. Investors often fear the unknown and make decisions based upon these inherent risks. 

Some investment analysts are arguing it is best to invest in U.S. stocks. Emerging markets appear to have stagnated in growth while the U.S. appears to be moving forward into positive growth territory. None of the analysts discussed the emerging market hubs within the U.S. that are becoming ripe for focused investment and development. 

Saving or Spending for Economic Growth?

Neoclassical growth theory states that higher saving rates can increase long-term wealth while Keynesian economics indicates that higher saving rates can lower consumption. Yun-Kwong Kwok in his paper creates a bridge between the two theories by studying the links of the Solow diagram (neoclassical) and IS-LM curves (Keynesian).  These two concepts are often covered separately in college because they do not easily mesh into a single framework.  People are left wondering if we should save or spend?

The first concept to understand is that the neoclassical model is a long-term model while the Keynesian model is more short-term.  One focuses on a longer-term trend while another focuses more on immediate needs. This is one reason why decision-makers who are looking for immediate results often use the Keynesian model. 

In the long-run Solow model, the total output Y of an economy is produced by capital K and labor L: Y=F(K,L).  Capital accumulates through net investment. Output is absorbed through consumption. Stability occurs when accumulation and consumption match. Standard of living improves to match total accumulation until the system is equal in inputs and outputs. 

An assumption of the Keynesian model is that when prices and wages are flexible the economy will be at full employment. Because prices are sticky, the economy deviates for a period from full employment. When demand for certain products produced by a country declines, so will the employment rate. In other words, you cannot keep producing if no one is buying and that means lay-offs and higher unemployment. 

The author found that an increase in the savings rate will first lead to short-run recession but will eventually create long-term growth. He argues that as the central bank increases the money supply it will decrease the interest rate and increase output. A recessed economy with cash infusion will move toward its long-run potential. If that potential is high then it can create benefits. However, an infusion of money that is working against a poor long-run potential will cause prices to increase and output, consumption, and investment to decline. Policy makers must understand the positive or negative long-term potential to determine if infusion, infrastructure improvements, or other policies will result in higher growth.

Comment: It would appear that a major miscalculation is the long-term productivity of the economy. When an economic system loses its fundamental competitive nature through not keeping up with worldwide competition an increase in debt/liquidity during a recession may improve the short-run situation but damage long-term growth through greater debt servicing expenses and lower productivity.  Yet it is a well-known tool that is easy to use and grab when situations become difficult. The question becomes what do we do with this debt once we get back to a normal economy that cannot afford to service it? Creating sustainable systems that continuously reinvest parts of their working capital and saves a percentage of their profits from lower transaction costs (improved profits) through infrastructure improvements allows for greater cash infusion with long-term liquidity and investment prospects. The problem we face is knowing which infrastructure improvements will raise business prospects, tax capital, and business investment. Since businesses work in an infrastructure platform improvement upon that platform raises their opportunities for success but needs to be done in a fiscally responsible manner. Doing so in a smaller hub allows for the proper experimentation for national policy development. 

Kwok, Y. (2007). To save or to consume: linking growth theory with the Keynesian Model. Journal of Economic Education.

The Perpetual Sustainable Economic System

Sustainable economic development is a process of investment, value creation, and reinvestment to expand the economic engine.  Those economic engines that are able to provide a consistent and solid return on investment are able to draw in new resources and investments that keep the circle of influence growing. The system becomes a perpetual changing machine that develops new innovations and efficiencies that translate into market impact. 

To formalize this concept let us consider an example of an investor that contributes $100 into a business venture in hopes of earning higher revenue than what their local bank can offer. The success of a higher return on investment is based within the ability to raise the value of that money through new products and services that are sold on the international market for a profit. 

The ability to raise value is based in labor skill, the cost of obtaining resources, the technology available to increase the productive aspects of the system, and the legal infrastructure that allows such activities to occur. Assuming that the inputs allow for value creation, it is up to the decision makers to put these elements together in an innovative way that develops something of higher value. Therefore, management abilities cannot be ignored in this process.

The eventual return on sales will be used to pay labor, investors, and other expenses. Money that is not used by labor for maintenance or to repay back the initial investment is the profit that turns into labor and investor saving rates (ROI). As this money will continue to lose value sitting in a bank account due to such problems as inflation it is reinvested back into the system.  Part of the tax revenue, like reinvestment, is used to improve upon the hub’s infrastructure (virtual or physical) to create a more efficient value generation system.

Sustainable systems create perpetual value through investment and return of value on that investment. Growing systems can draw in new investments from outside sources that seek to also earn a higher return rate. These investors may contribute money, build businesses within the economic hub, or supply cheaper resources to that hub.  It is possible to see the economic hub as a value creation assembly line that seeks to draw in cheaper and better quality resources. 

Why is data so important? Data reduces investment risks. If companies can formalize the market, find their place within it, and can make forecasts they are much more likely to invest their resources into an economic hub. Considering the multitude of places to invest money, and the lack of information in other areas, the U.S. has an opportunity to capitalize on the Internet age and encourage investments through transparency of government and information.  (Work in Progress)