Cheat Sheet Q & A:

Question:  How reliant on China is the US economy?:

Bottom Line:  Perhaps you’ve heard about China having debt related problems.  Or maybe you’ve heard that China’s economic growth rate has slowed.  At a minimum you know that China owns a lot of our debt and produces a lot of stuff that we buy.  I’ll break down China in three parts and then explain how much of the US economy is tied to China.


China is going through a deleveraging process that is resulting in slower growth.  As issue is that the Chinese Government has been responsible for buying enormous qualities of several commodities and building whole towns, business districts, etc. that are virtually unused in many parts of the country.  Realizing that over production and building unused sites needed to stop – the Government put the brakes on those projects and the economy almost immediately slowed down by about 2%


China typically has been an importer of food and commodities.  They’ve been the biggest buyer of gold, silver, oil, etc. since 2005.  They also have had a large appetite for automobiles in recent years.  All told 5% of what China imports comes from the US


We know that historically China manufactures a great deal of stuff.  From computers to cheap everyday items – we know the role China has played in the US marketplace.  So how much stuff do we buy from China?  About 17% of what they produce. 

So what does all of this mean? 

I estimate that 7-8% of the US economy is tied to China.  In other words the US economy is more than twice as reliant on China as EuropeEurope and China account for about 11% of all economic activity in the US.

So it is incredibly important to keep an eye on what takes place overseas.  For now China’s economy continues to grow by 7% or so.  That’s important as Europe is still in recession.

If you have a topic or question you’d like me to address email me:


Gold wraps up worst quarter in 45 years – what you should consider:

Bottom Line:  So the last thing anyone investing in gold wants to hear is one more story reminding them of just how bad last quarter was for the gold market.  This one will be a bit different.  I wanted to figure out just how much of the gold market is currently retail (consumer based) vs. investor demand based.  This would help identify what the potential downside for the price of gold would be.  What I found was the following:

  • 43% of the gold market last quarter was investor driven
  • 57% was consumer based

If I extrapolate what the price of gold would be minus any significant investor influence it would equal a price of…  $912 per ounce. 

So with gold prices currently at $1242 per ounce (as I type this) I believe that about $330 is currently the investor demand premium.  I’m not advocating the use of this information to try to time the market but based on my research I do think that $912 represents (at current retail demand for gold) a bit of a floor in the price.  It’s also worth noting that the production cost for mining companies is about $1000 - $1200 per ounce these days.  That means that if gold were to drop significantly from these levels – we’d likely see several of the big gold miners stop producing.  That would eventually put a pressure on the price of gold (given steady consumer demand) as existing supply would be soaked up.


Meanwhile stocks have their best first half since 1998:

Bottom Line:  So the stock market is about 14% higher at halftime in 2013.  Even after a slightly negative June stocks were still able to lock in the best six months to start a year since 1998.  At the end of the first quarter I mentioned that historically we had a 100% chance (again historically) in seeing a higher stock market for the year.  Well the same remains true.

We’ve never had a market that has risen by a double digit percentage with 5 of the first 6 months being “up” months and had a negative market for the year.  So if you’re a stock market investor that bodes well for you.  But I’m more interested in the synergy with 1998. 

Not much in today’s economy is like the go-go 90’s during the dot com boom but we do see the following similarities in the stock market. 

  • Stocks rose in the three years preceding 1998
  • Stocks rose in the three years preceding 2013
  • The increase in 1998 was about 13% at this point with the S&P 500
  • The increase is about 14% thus far in 2013

So if the comparison holds here’s what’s interesting…  The peak in the stock market wasn’t in 98 or even 99.  It was March of 2000.  So…  For those who think that the peak in the stock market for this cycle has already occurred…  Perhaps not.


Housing market is starting to get away from the 1st time home buyer:

Bottom Line:  So I’ve recently become cautious on the housing recovery as we look towards the fall:

  • Investor demand is dropping by about 28% as prices become more expensive 
  • Mortgage rates have risen about 30% in six weeks
  • And now first time home buyers are only 28% of buyers

In a healthy housing market about 40% of all buying activity is from 1st time home buyers.  That number has waned in recent years but still put in respectable numbers in the 30%+ range.  Until now.  In 2011 36% of all home buying was the result of 1st time home buying.  Last year it was 32%.  Today it’s just 28%.

As housing prices continue to increase by double digit percentages year over year while income growth remains at just 2 or so percent – We’re seeing the first timers squeezed.  Additionally buying power is being crunched by the rise in mortgage rates which is now resulting in an abnormally low participation level by those most sensitive price increases in the market. 

When you put all of these factors together I find the following to be likely”

  • Lower rates of recovery in housing after this summer
  • The luxury market perhaps being the best performer this fall

Luxury buyers are less sensitive to changes in pricing and mortgage rates.  They typically don’t see buying power dramatically affected due to low income growth as well.


Google is busy creating an Android based smart watch and game console:

Bottom Line:  Google has received a lot of attention for its Google “Glass” project.  As weird and potentially as expensive as that may be by the time it’s rolled out for consumers to buy, it’s not the next big thing at Google. 

Google Glass will likely be available about a year from now.  Before the holiday shopping season we’ll likely see two other big product releases from Google.

Those products:  A smart watch and a game console.  Both which will be Android based devices.  Both which will work seamlessly with the Google ecosystem.  Imagine setting your DVR to record by talking to your smartwatch for example.  In the Google product future all devices:

Phone, TV, Watch, Tablet, Computer, car (yes car) will work seamlessly together.  I think that all third parties who use the Droid to power their products should be rapidly figuring out a plan to break away from the Android OS because they likely won’t be able to do more with that platform on like devices then what Google can an is beginning to do.


Yahoo just became a safer place for kids (and Google is taking steps as well) changes:

Bottom Line:  Yahoo may be the first modern online company that actually cares about your kids’ safety online.  While most companies offer comments suggesting they care about children and their safety, they actually fight for the ability for you kids to open and use accounts online (they want more users – always).  Yesterday Yahoo changed a few things.

Any kids under 12 now have to have your parental consent to open and use an account.  For existing accounts, you’ll receive a notice from Yahoo that will ask for your approval for them to use their account(s).  Will this be a fix all?  Clearly not but it’s a serious first step.  Marisa Maier (the current CEO) of Yahoo is not only a tech giant but also a recent mother.  I wonder if her own concerns will manifest themselves in company policy going forward.