China favors Euro over USDollar

Be careful who you accuse of currency manipulation. They may stop buying your bonds.

http://www.emirates247.com/markets/gold/tons-of-gold-imports-turn-to-dust-on-arrival-2010-08-15-1.279082

China, whose $2.45 trillion in foreign-exchange reserves are the world’s largest, is turning bullish on Europe and Japan at the expense of the U.S.

Congress, Geithner, Bernanke and Obama have been incessantly accusing the Chinese of manipulating their own currency lower in order to maintain a competitive advantage in exports. What our government officials don't understand is that the Chinese are merely pegging the yuan to the dollar, so any manipulation the Chinese is doing is a direct result of the US Treasury and Fed manipulating the dollar.

Also, our leaders should be mindful that you shouldn't rattle the cage of your biggest creditor. As threatened, the Chinese are net sellers of US Treasury bonds, as they seek diversification away from the USDollar and dollar-denominated assets. They are buying gold and other foreign currencies to reduce their exposure to a debased reserve currency, the USDollar.

Threats of retaliation by raising tariffs in a trade war is exactly the wrong recipe for stimulating the economy. Perhaps our government economists should study the Great Depression to see how well nationalistic trade wars worked out.

China may switch to currency basket

This is the latest hint that foreign central banks are diversifying their reserves away from the USDollar.

http://www.marketwatch.com/story/china-may-link-yuan-trade-to-currency-basket-2010-07-23

Emerging markets stepping up to the gold window

Foreign central banks are snapping up gold bullion for their reserves for several reasons. Foremost is their diversification away from the USDollar, as too much exposure to the sinking dollar has caused their asset values in reserves to decline. Their economies are stronger relative to developed countries, so they need to boost their gold reserves accordingly to reflect their newfound economic health. In other words, their strong currencies need to be backed by gold vs. the USDollar.

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=8970ea5d-3ab9-4ad2-87a8-f76cca63c961

In the past, central banks could sell their gold holdings, in order to suppress the price of gold, as low gold prices enable sovereign governments to borrow at low interest rates. This support allows governments to run perpetual deficits and reduces their debt obligations in the form of low-yielding bond issuance.

But with mounting fears that governments worldwide are reckless in their deficit spending--debasing ALL currencies in the process, gold as re-emerged as a safe haven for monetary store of value.

In another article, the Reserve Bank of India hinted at buying the balance of the IMF's planned 403.3 tons of gold, of which 201.3 tons remain. India purchased 200 tons two weeks ago in a surprise move, as most observers expected China to buy the bulk of the planned sale. However, purchase of the IMF gold by ANY central bank is bullish for the yellow metal, as it further validates central bank net buying--not net selling.

http://www.mydigitalfc.com/plan/india-plans-buy-more-gold-imf-410

401K, IRA--or not?

1) 401K's are good, but not great. If the company matches your contribution, that's a good thing, but I would not contribute more than that.

2) The reason why a 401K is merely good is due to its deferred tax status. You get a small tax break during the contribution phase, but you get clobbered with income taxes during your harvest years.

3) Roth IRA's are better than a standard IRA, but a Roth comes with restrictions and most high-income individuals don't qualify. So it's better than good, but it is not best (the tax-free harvest makes it better than a regular IRA).

4) Indexed funds are better than MOST managed funds, but there are hidden costs when indices get re-balanced. It's still better than most managed funds due to lower fees and better performance. Better yet, there are vehicles linked to the indices, but not investments IN the indices. Hence, they also provide downside protection. This is huge. And oh, btw, they also allow tax-favored accumulation and access.

5) Perhaps small cap funds have outperformed large cap funds, but that depends on the time window, and small caps are historically more volatile. That is not a good fit for older investors. Most of my clients aren't 25, because most 25 year olds have no assets.

6) Risk is a relative value, and there are efficient ways for diversification and risk mitigation.

7) Dollar cost averaging only works if there is a general uptrend or steady state. If you had dollar cost averaged into the Great Depression, you would have had to wait until the mid 1950's to get back to even. If you had dollar cost averaged into the tech bust, you may never get back to even.

8) There are many geniuses who are financially misguided. The first thing I would ask a finance professor is how much is their net worth and how did they achieve it.

9) I advise people to contribute to a 401K only to the level the company matches, as they are basically paying for the taxes you will owe during the distribution phase (retirement). Deferring taxes only means postponing taxable events when your portfolio will be worth more--the government set it up so that they get to take a bigger slice of your accumulated values. In this scenario, a typical American worker gets a $60,000 tax break during their contribution phase, and gets taxed $800,000 during the distribution phase (retirement). And if their estate plan is poorly structured, their non-spousal heirs get taxed another 72% upon death. That is, of course, unless they die exactly in the year 2010. After 2010, the exemptions from estate taxes revert back to pre-2001 levels.

There are a select few who stack the odds in their favor, looking for high reward/risk opportunities.

The younger you are (or the more you earn), the bigger the potential mistake. Think about it--compounding is great if it works in your favor. When it works against you, it is crushing.