🎙️ Yuan Problem

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— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• China’s currency problem

• The new magic number for retirement

This, and more, in just 5 minutes to read.

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In The News

🇨🇳 China Has A Currency Problem

Let’s talk currencies. It’s one of those corners in financial markets that are surprisingly forgettable despite forex’s massive importance — the global currency exchange market is actually considered the biggest and most liquid financial market.

What’s happening: On the other side of the Pacific, China is locked in—once again—to a currency battle, hoping the yuan won’t depreciate any further against the dollar.

• See, for domestic currency trading, China’s Central Bank sets a daily approved range for the yuan to fluctuate within (typically 2% in either direction).
  

• However, selling pressure to exchange the yuan for other currencies has brought its value a hair’s length away from a “policy red line,” according to Bloomberg. Each of the past five times the yuan has depreciated to this level, regulators responded with dramatic interventions to support the currency.

Why intervene? Rapid currency moves can have serious economic consequences. Sudden declines in the yuan’s value make imports much more expensive, reducing the entire country’s purchasing power. While a falling exchange rate makes China’s stocks and bonds cheaper to foreign investors, those investors will be hesitant to step in and “catch a falling knife,” as the Wall Street expression goes.

• In other words, if it’s unclear that the currency can stop depreciating, which would hurt the value of stock and bond investments in dollar terms, they might not want to get involved.
  

• That fear can create a “vicious cycle of capital outflows and exacerbate currency losses,” as an exodus from the country’s financial system weighs on the currency, reduces its value, and spurs more folks to try and allocate funds elsewhere.

TLDR: China has a yuan problem, and it’s not getting any better. In fact, the Federal Reserve’s outlook for fewer interest rate hikes this year actually supports the dollar’s exchange value, adding to China’s currency woes.

• (Quick explainer: The dollar’s role as a neutral third-party currency in facilitating international trade makes currencies’ exchange value against the dollar particularly important.)

Why it matters:

This is all bad news for Chinese officials who hope to make the yuan a more widely used currency internationally. It’s also a reality check for those imminently predicting the U.S. dollar’s role in global finance to be usurped — for now, such calls are premature.

While the Chinese government has succeeded in preventing the yuan from trading outside of its approved range since 2014, the necessity of intervention at all carries a “high reputational cost,” as Bloomberg puts it.

• Recurring top-down efforts to interfere with the yuan’s value, usually to strengthen it, don’t exactly inspire widespread faith in holding the yuan over other currencies or investing in Chinese financial assets.
  

• Allowing the yuan to depreciate too far could also spur backlash in Washington and other major capitals, with recent “trade wars” driven by global fears of cheap Chinese goods, made cheaper by currency manipulation, destroying domestic industries.

Read more

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💸 The New Magic Number for Retirement: $1.46 Million

For many Americans, retirement has become more elusive. The result? They’re working longer, in their 60s or 70s, without the necessary safety net. 

The lowdown: A recent Northwestern Mutual survey revealed that Americans now believe they need $1.46 million to retire comfortably, up from $1.27 million the previous year. 

• One financial planner said the growing retirement savings target reflects heightened retirement anxiety, not accurate planning, as inflation continues.
  

• Of course, $1.46 million is practically nothing for ultra-high-net-worth individuals. But for many middle—and lower-income Americans—the majority of the population—it’s a longshot. 

A big shift: Part of the trend is rooted in a big shift from pensions to 401(k)-type plans, leaving some retirees facing the daunting task of managing their savings for (potentially) several decades — especially as people live longer into their 80s and 90s. 

Math class? BlackRock CEO Larry Fink described it as “an impossible math problem." The uncertainty of Social Security's future further complicates retirement planning, with younger workers expressing concerns about potential benefit reductions due to projected reserves depletion in a decade.

• The survey showed millennials now need $1.65 million for retirement, up from under $1 million in 2020. Baby boomers' estimated retirement needs have also increased to $990,000 from $830,000 in 2020. Interestingly, individuals with at least $1 million to invest now believe they will need around $4 million to retire comfortably, up from $2.1 million in 2020.

Why it matters:

Look, these numbers will keep going up over time due to inflation. But still, Americans’ expectations of what’s needed for retirement are well outpacing the inflation rate. 

The playbook: There’s no one-size-fits-all formula for retirement savings, but Fidelity Investments suggests saving 10 times your annual salary by age 67. 

• For example, a household with a median income of $75,000 should aim to save $750,000 by that age, while Americans earning over $153,001 should target $1.53 million or more. Fidelity recommends saving at least 15% of your income annually starting at age 25, including employer contributions to a 401(k) account.
  

• Yet the average American has saved only $333,940, according to the Federal Reserve, and those aged 65 to 74 have average retirement savings of about $609,000, though not everyone feels unprepared: About 35% of retirees retired sooner than planned because they felt financially secure.

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Quick Poll

Yesterday, we asked: How concerned are you over U.S. government debt risk?

— For team very concerned: “The debt will never matter nominally, but there will be a denominator...your quality of life.”

“The issue with the debt is the amount of gov't spending, not taxation. No party since Clinton is decreasing the spending. Combine that with high rates and we're headed for a disaster.”

And, “We need grownups in congress and the White House.”

“There are multiple areas of concern: government debt and social security obligations with a potentially declining US birth rate. Less people to pay back the debt. It doesn’t seem that our leaders have a plan to be fiscally responsive and are hoping our businesses and economy can grow us out of this problem. But they have no plan.” 

See you next time!

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