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Daily Archives: August 6, 2009

China may be changing stand on climate talk

I am not a big fan of using emission cap to fight pollution. There are better ways to combat climate change, such as carbon-tax. And the US should do more to conserve energy; China also needs to realize achieving energy efficiency is in its own interest. Report from WSJ:

China signaled a slightly softer position on accepting a cap on the emissions that cause global warming, despite expressing frustration at the lack of a breakthrough on climate-change talks.

Disagreement over whether China and other developing countries should accept such emissions caps is a key impediment to negotiating a successor pact to the 1997 Kyoto Protocol on climate change in time for a planned December meeting in Copenhagen. China and the U.S. in recent months have made reaching a deal in time for Copenhagen a central element of their bilateral relationship.

Yu Qingtai, China’s special envoy for the climate-change negotiations, emphasized the importance of reaching a deal. “The talks on climate change have been going on quite slowly. We only have a few months left before Copenhagen,” said Mr. Yu, who welcomed efforts by the U.S. to pass a domestic climate bill. “The nature of the problem is such that we can’t afford a failure.”

Replacing the old pact, which expires in 2012, will be high on the agenda when U.S. President Barack Obama meets Chinese President Hu Jintao on the sidelines of a United Nations meeting in New York in September, and again when Mr. Obama visits China later in the year.

So far, China has refused any limits on emissions, arguing they would be a form of economic discrimination against poorer countries. China also says that 20% of its carbon emissions comes from products made for export and that it shouldn’t bear the burden.

But China appears to have shifted subtly recently, with some influential Chinese economists arguing that China might soon be rich enough to afford some of the changes necessary to combat global warming.

Mr. Yu also offered a sign that China is taking the first steps toward figuring out how much it could cap while still growing enough to reach its economic goals. He said Chinese scientists were looking at what would be China’s peak emissions, or the level at which economic growth could continue and emissions could be cut back.

China and the U.S. are still miles apart. China, driven by a historically unprecedented wave of urbanization and industrialization, has recently surpassed the U.S. as the top emitter of greenhouse gasses. But Beijing insists that rich industrialized countries have a responsibility to clean up first.
Rich countries like the U.S. should cut their emissions at least 40% from their 1990 levels by 2020, China says — a schedule much more aggressive than ones being considered in the U.S. or Europe. In addition, China wants money and technology for itself and other developing nations to smooth the adjustment to a low-carbon economy. “This isn’t charity, but their responsibility,” Mr. Yu said.

On the other side, countries like the U.S. say big countries like China and India are growing so fast that, unless they accept absolute limits on their greenhouse gasses, the extra pollution from all of their new factories obliterate gains made elsewhere, gutting the value of any deal.

Winning portfolio in the face of inflation-deflation uncertainty

How to build a portfolio that are both inflation and deflation proof (from WSJ):

Inflation or deflation?

Even the experts can't agree whether rising or falling prices lie in our future.

That leaves investors in a quandary: how to construct a portfolio at a time of great uncertainty. A wrong bet could be devastating. If your portfolio is built for deflation, for example, your assets will slump if the country instead experiences a bout of inflation.

The answer is to prepare for the economic scenario you think is most likely, and then build in some insurance in case you are wrong.

[Building a Portfolio]

"If you want to win the war," says Rich Rosso, a financial consultant at Charles Schwab, "you have to own both sides of the fight to some degree."

Such an approach necessarily means some investments will suffer no matter how the economy turns. That is OK: Buying insurance doesn't mean you actually want to use it.

Here are three portfolios, each with built-in insurance. The first will do best in an inflationary period but won't be crushed if deflation instead rules the day. The second is for investors who fear deflation, but want some protection against potential inflation — even if it is down the road. And the third is aimed at investors who believe the economy will muddle through without severe inflation or deflation.


If you believe all the government spending in response to the financial crisis will ultimately beget inflation, you want a portfolio that thrives in a period of surging prices.


Commodities are the primary play, because everything from oil and corn to copper and pork bellies should gain. Plus, commodities — particularly gold — hedge against the dollar, offering a 2-for-1 benefit if a weak dollar accompanies inflation, as some expect.

Since commodities contracts can be a hassle for individual investors, consider a fund such as Pimco's CommodityRealReturn Strategy Fund, which offers exposure to a broad swath of industrial and agricultural commodities.

Though it seems counterintuitive, cash can do pretty well, too. The Federal Reserve would likely fight rising inflation by pushing up short-term interest rates, allowing investors with cash to capture the escalating rates through short-term certificates of deposit and money-market accounts.

Michele Gambera, chief economist at Ibbotson Associates, says his research shows that in the last five bouts of meaningful inflation, returns on cash essentially matched the inflation rate, meaning it isn't losing its purchasing power. Online banks and local credit unions tend to offer the highest rates.

Treasury inflation-protected securities, or TIPS, are an obvious investment since their principal adjusts upward along with inflation. TIPS exposure is available through mutual funds, such as the Vanguard Inflation-Protected Securities Fund, though Steven Fox, director of forecasting at Russell Investments, notes that holding individual bonds to maturity is more effective as an inflation hedge since "the majority of the inflation protection comes when the inflated principal is repaid." Individual TIPS are available through brokerage firms or TreasuryDirect.gov.

Sharp inflation is generally a negative for stocks, because rising interest rates potentially pinch corporate profits and undermine economic growth. But a few stocks will likely do fine. Start with energy and metals stocks because higher prices for their commodities will boost earnings, says Mark Kiesel, a managing director at Pacific Investment Management Co., or Pimco. Include as well U.S. firms with pricing power, such as regulated utilities, domestic pipeline companies and manufacturers of specialty materials. Examples of companies to consider: miners such as Freeport-McMoRan Copper & Gold and energy giant Exxon Mobil, or companies indirectly tied to commodity prices, such as driller Diamond Offshore Drilling, farm-equipment company Deere and seed supplier Monsanto.

Insurance Component: Long-term Treasury bonds and municipal bonds.

Both will likely soar in value amid deflation because their long period of fixed payments would be an attractive source of income as prices for goods and services broadly fall, and as paychecks shrink. And Treasurys, in particular, would likely become a haven for foreign investors, further pushing up their price.


Portfolio preparation is easier for deflationists: Put a chunk of money into long-term Treasury bonds and much of the rest into cash and some municipal bonds.

If broad-based deflation materializes, long-term Treasurys are likely to surge. The bonds' fixed-income stream, meanwhile, would be worth increasingly more relative to falling consumer prices.

Some investment-grade municipal bonds could serve a similar role while also providing tax advantages for high-income earners. But beware: Deflation would likely mean some taxing authorities struggle to service bonds reliant on a specific income stream, like user fees. Instead, stick to "investment-grade bonds tied to necessary services like water and sewage, power or necessary government offices like, say, a courthouse building," says Marilyn Cohen, president of bond-investment firm Envision Capital.

Round out your deflation portfolio with a big slug of cash. Though it won't generate much of a return in a low-rate, deflationary environment, cash in the bank will gain value as prices fall.

Insurance Component: Commodities react most drastically to surprise inflation, so they should be part of your insurance. Add in TIPS, too, and stocks geared "toward consumer-staple companies," says Ibbotson's Mr. Gambera. If inflation arises, companies such Coca-Cola, tobacco giant Altria, and toothpaste maker Colgate-Palmolive will have some pricing power.

Goldilocks Economy

[Goldilocks economy] 

Maybe, just maybe, world bankers will get this right, and the economy will experience neither severe inflation nor severe deflation.

"We think most likely the central banks of the world will get this close enough to right that we will settle in close" to a relatively benign inflation rate of between 1.5% and 2.5%, says Aaron Gurwitz, head of global investment strategy at Barclays Wealth.

In such a "Goldilocks" scenario — where the economy is neither too hot nor too cold — "risky assets would do best, so equities and bonds with some equity characteristics should receive the emphasis," says Scott Wolle, portfolio manager of the AIM Balanced-Risk Allocation Fund.

That means broad exposure to large-cap and small-cap U.S. stocks through funds such as the Vanguard 500 Index Fund or the Bridgeway Small-Cap Value fund; and exposure to developed and emerging markets through funds like the Vanguard Total International Stock Index Fund (mainly developed markets), and the T. Rowe Price Emerging Markets Stock Fund.

For the bond component, pick a fund such as the Fidelity Total Bond fund that largely owns high-grade, intermediate-term corporate bonds and mortgages, along with government and agency debt.

Insurance Component: Just in case the Goldilocks scenario is wrong, you will need insurance against either inflation or deflation. Pick up inflation protection through a commodity ETF, and deflation protection with long-term Treasurys. Cash also is OK in either situation.