As I understand, much of the merchandise sold by dollar stores is imported from China. My worry would be that this source of cheap wares could dry up because of a substantial appreciation in the yuan over the next several years.

The preconditions are in place: China has a huge surplus in its balance of trade and more than a trillion of U.S. dollars in foreign currency reserves. This creates a huge imbalance for the world economy and China itself. Trade frictions and protectionist measures are on the rise, as are calls for China to unpeg its currency.

Then there is the advice in many investment guides to avoid IPOs:

“Most new issues are sold under ‘favorable market conditions,’ – which means favorable for the seller and less favorable for the buyer.”
Benjamin Graham, The Intelligent Investor

“…the major sellers of stocks in IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fad.”
Burton Malkiel, A Random Walk Down Wall Street

“…investing in IPOs is much akin to playing the lottery …. For 29 out of 33 years [1968 to 2000], IPO portfolios underperformed a small stock index.”
Jeremy Siegel, The Future for Investors

“The returns on …IPOs … are ghastly. In 1991, academician Jay Ritter objectively confirmed … that the shares of new companies are a raw deal for everyone but the underwriters. He found that from 1975 to 1984, IPOs returned 10.4% … while the market returned 17.4%…. Ritter’s conclusions have since been confirmed by others ….”
William Bernstein, The Four pillars of Investing

“New issues are typically well promoted…. My experience is that you can buy nine out of ten new issues at a lower price a year or two later. Companies usually go public only when they can get a high price at the outset…. Because of this I generally avoid new issues ….”  Stephen Jarislowsky, The Investment Zoo.

But there may be an exception to the rule. The first wave of IPOs that come out after a recession/bear market (like now) may be able to outperform, according to some academic research.

 Update: Thicken my Wallet did a post on IPOs on Oct. 7. The title is ‘Why catching IPO fever will make you sick’

It could be a warning not to expect a sustained rally in stocks if and when policymakers stabilize the financial crisis. There may be no need to rush back into equities, just yet.

The silver lining might be that a weaker world economy could considerably reduce the odds of the tumble in the U.S. dollar, upward spike in interest rates, and/or galloping inflation that many fear will be the consequence of the U.S. government taking on an estimated $1 trillion (U.S.) in debt to rescue the U.S. financial sector.

As the Chinese economy ratchets down, the authorities will likely want to keep the yuan from rising even more so than before — so they should remain willing buyers of U.S. dollars and treasuries. They won’t want to flee U.S. assets when it will cause the U.S. dollar to fall against the yuan and undermine their export-led, industrial development strategy. A preliminary signal of their willingness to continue supporting the U.S. dollar was the recent decision to cut interest rates.

Commodity-based economies like Canada and Australia will see weakness in their currencies against the U.S. dollar as the commodity boom fades further. And Europe’s regional differences are likely to be exacerbated, raising political conflicts that could undermine the euro – on top of the region’s more restrictive monetary policy that seems destined to produce a greater and/or longer lasting economic slump in the region.

And don’t forget, the U.S. dollar’s status is not just about economics. For many countries, political considerations are paramount. Countries like Japan, South Korea, Taiwan and Saudi Arabia would not want to dump the U.S dollar and assets because of their security relationships with the U.S.

During recessions, lower risk appetite and flight to safety favors government bonds. Although the supply of treasuries will be rising in the U.S., so will portfolio demand – especially considering how underweight many investors are. A Merrill Lynch study noted households currently have less than 0.7% of their financial assets in government bonds, about $1 trillion (U.S.) less than the peak of 4% in 1993. Public pension bond holdings are close to two-decade lows. Bond yields are low right now, even negative after adjusting for inflation, but as the economy winds down, inflation should be subsiding.

Admittedly, the debt obligations arising from the financial crisis — along with ongoing debt requirements for other government programs — are substantial and there should be upward pressures on interest rates. However, like in the 1980s, higher rates should be bullish for the U.S. dollar as foreign capital flows in, attracted by the higher yields. And slack in the U.S. economy may also allow the Federal Reserve to buy some of the debt without inflationary consequences, which offers some assurance the rise in bond rates should not be extensive.

History is an imperfect guide, but when the Resolution Trust Corporation began to buy bad assets during the savings and loan crisis in 1989, U.S. economic growth, house prices and equity markets did not bottom out for another 12 to 18 months. The dollar, however, traded sideways during the period

I wonder if Ms. Cooper and the growing chorus of similar voices are seeing all the warts of the beast they live close to and fewer of the blemishes on the beasts living further afield. While the U.S. certainly has its problems, so do other countries around the world — we perhaps don’t see them as much because of the distance and language barriers.

Take the economic miracle in China. It seems to me to be based in large part upon the suppression of market forces, which is not usually a lasting formula — especially for wrestling hegemony away from the U.S. Like Mother Nature, it’s not nice to fool with market forces. They release a lot of unintended consequences that grow and fester and eventually win out, undermining edifices built without regard for them.

Chinese exports are surging because appreciation in the Yuan has been held far below market levels by printing up scads of Yuan to buy up mountains of U.S. dollars. Supplementing this intervention are currency controls that restrict Yuan convertibility.

Any country can do this sort of thing and put up an impressive run for a time. Japan tried it in the 1980s and early 1990s. But most don’t do it, at least for very long, because it leads to an inflation problem — as highlighted by China’s current annual inflation rate near 8%. And again, this performance would look worse without market interventions: if oil prices in China weren’t subsidized below world levels, the inflation rate could be well into double-digit territory, closer to 15%.

Running the printing presses to suppress currency rates, oil prices, and other things is a recipe for galloping inflation and escalating wages, which, by raising the structure of domestic costs, eventually offsets the competitive edge due to artificially low exchange rates. And currency controls spawn black markets that in time defeat the intent of controls while having other negative side effects.