Weekend Reads for Finance Pros: China, Daniel Kahneman on Luck, and Retirement

Here in Asia, speculation continues to swirl about China, with headlines portending doom: “rout deepens”, “financial distress”, and “bear market”. Amid all of this, a Tibetan mastiff puppy reportedly sold in China for almost $2 million, prompting author and bubble watcher Vikram Mansharamani to tweet: “China bust coming?”

With the announcement of the second default in China’s debt markets, we asked CFA Institute Financial NewsBrief readers if the recent corporate-bond defaults in China reflect a burgeoning systemic risk. In case you missed the poll, the 781 respondents answered with a resounding “no.” Just 14% felt that these events pointed to the beginning stages of a systemic crisis. But as my colleague Ron Rimkus, CFA, pointed out: “The centrally planned nature of China’s economy and the widespread development of ‘ghost cities’ suggest that China may be lulled into a sense of complacency about its usage of debt. The issue, as always, isn’t just the size of the debt burden; it is also the quality of the projects financed by that debt. Only time will tell.”

Here is a small selection of articles about China, as well as a few other interesting reads.

China Chatter

• “The day of reckoning has now arrived,” writes Minxin Pei in the Financial Times. “Beijing has two options, both of them unpalatable. It can either admit the obvious and start deleveraging, reducing the rate of credit issuance and allowing borrowers to default when they cannot meet their obligations. Or it can continue to prop up zombie borrowers with more credit.” See: “China Admits Its Ills But Faces an Unpalatable Cure.”(Financial Times)
• Anyone who has spent any time reading about China knows about its ghost cities. In “China’s Real Estate Riddle,” Patrick Chovanec (@prchovanec) writes that for Chinese property owners, “an empty condo is a store of value, much like gold, another asset that performs no practical function besides retaining its worth.” He notes that “using luxury condos as currency is immensely wasteful. . . . A useless asset like gold or vacant apartments can only serve as a store of value so long as people have collective confidence it will continue to perform that function and thus retain its value.” The article was penned in 2009, but is still relevant today. (Far Eastern Economic Review via An American Perspective from China)
• “China’s ‘Smog Insurance’ Offers to Help Travellers Breathe Easier” (CNN)
• “Short Sellers Target Chinese Developers as Rout Deepens” (Bloomberg)
• “China’s Financial Distress Turns All Too Visible” (Financial Times)
• “China Regulator Warns of Risks in Insurance Asset Management Products” (Reuters via CNBC)
• “China Funds Post Record Outflows as ETF Money Exits Bear Market” (Bloomberg)
• How much will China’s economy grow this year?

China chatter #LipperAward pic.twitter.com/kJSJ2mwujd

— Lauren Young (@LaurenYoung) March 21, 2014

Investing

• “Why Did the Stock Market Sell off Today?” (The Reformed Broker)
• Ben Graham’s Value Investing ≠ Fama/French’s Factor Investing (25iq)
• Interesting piece — and very relevant if you are a financial adviser — about a “small but growing industry that doesn’t manage any money but rather specializes in helping people with lots of money screen and select — and sometimes fire — the professionals who handle their investments.” According to the writer, these firms “are benefiting from investors’ increased distrust of financial advice and of the markets since the 2008 financial crisis. Many clients are more hands-on, particularly younger one.” See: “Consultants Help Clients Find, Fire Advisers.” (Wall Street Journal, tiered subscription)
• “Individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors.” Such is the finding of a recent paper, “Technical Analysis and Individual Investors.” (SSRN)

Financial Literacy

• Timothy Taylor (@TimothyTTaylor), blogger and managing editor of the Journal of Economic Perspectives, has written an incisive post on the perils of poor investment choices, in which he notes that “adding more fine print is not the superhighway to financial literacy” and “a lack of financial literacy has many costs.” (Conversable Economist)
• But, as Jerry Kerns, editor-in-chief at Morningstar, points out in a tweet:

@laurenfosternyc @SquaredAwayBC Except that financial literacy education doesn’t work. http://t.co/SgdPdaIYpY

— Jerry Kerns (@jerrykerns) March 18, 2014

Behavioral Economics/Neuroscience

• “The Thought Father: Nobel Prize–Winning Psychologist Daniel Kahneman on Luck” (Evening Standard)
• “The Neuroscience of Decision Making Explained in 30 Seconds” (Wired)

Retirement

• It should come as no surprise that most Americans are not putting enough away for retirement, but it is still alarming that just 18% say they are very confident about having enough money to retire comfortably. (NPR)
• If you missed our one-day online forum on the state of US public pension funding, you can catch up on the full discussion. (Enterprising Investor)
• “Segmenting Retirement Planning for the Wealthy, the Middle, and the Poor” (Nerd’s Eye View)

people spend more time picking a nice restaurant than planning a retirement investment http://t.co/OqdGohtyB3 h/t @MebFaber #WSJ

— Jason Zweig (@jasonzweigwsj) March 18, 2014

Statistics

• A helpful visual reminder that it is all too easy to confuse correlation with causation:

RT @JustinWolfers: Correlation, causation, and that jazz… pic.twitter.com/LOaJKzdYas

— Lauren Foster (@laurenfosternyc) March 19, 2014

Leadership

• Simple advice, but so true: The way a company conveys its values is through its budget. (LinkedIn)

And Now For Something Completely Different

• Book review: The Soil Will Save Us: How Scientists, Farmers, and Foodies Are Healing the Soil to Save the Planet. (Kirkus)
• “A Toast Story“: How did toast become the latest artisanal food craze? Ask a trivial question, get a profound, heartbreaking answer. (Pacific Standard)

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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