• 397 days Will The ECB Continue To Hike Rates?
  • 397 days Forbes: Aramco Remains Largest Company In The Middle East
  • 399 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 799 days Could Crypto Overtake Traditional Investment?
  • 804 days Americans Still Quitting Jobs At Record Pace
  • 806 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 809 days Is The Dollar Too Strong?
  • 809 days Big Tech Disappoints Investors on Earnings Calls
  • 810 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 812 days China Is Quietly Trying To Distance Itself From Russia
  • 812 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 816 days Crypto Investors Won Big In 2021
  • 816 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 817 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 819 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 820 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 823 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 824 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 824 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 826 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

Trade Deficit - Be Careful What You Wish For

This Friday on June 10th, the April trade balance will be released. Expectations are for US$58 billion, up from $55 billion in March. In March, the trade deficit had "unexpectedly" narrowed, mostly due to a slowdown of US economic activity.

As the currency markets anticipate Friday's report, let us keep a few things in mind. First, $58 billion is a very large number; annualized, the U.S. is anticipated to import $700 billion more worth of goods and services than it exports. For the U.S. dollar to remain stable, the trading partners will have to accumulate U.S. dollars at a rate of close to $2 billion a day. For the dollar to fall, foreign trading partners don't need to stop buying U.S. dollars, they merely need to buy less, for example by diversifying to other hard currencies.

When a slight narrowing of the trade deficit was released last month, the U.S. dollar received short-term relief (the turmoil with the European constitution also helped the dollar short-term). While many of us are fixated with a trade deficit that few economists believe is sustainable, a lower trade deficit is not automatically good news.

The balance of trade is affected by economic activity domestically and abroad. To correct the global imbalances, increased consumption outside of the U.S. or a higher savings rate inside the U.S. would be helpful. However, Europe remains stagnant, and Asia is expected to slow its rapid growth. Conversely, we do not expect U.S. real incomes to rise sharply, as the global imbalances make this exercise an uphill struggle. Global overproduction (through Asian currency subsidy and U.S. fiscal and monetary policies) leads to high raw material costs; a flood of cheap Asian goods combined with a highly indebted U.S. consumer provide for little pricing power. The result is accelerated outsourcing, not exactly the recipe for real income growth as the U.S. labor force is the one being outsourced.

This leaves an economic slowdown in the U.S. as a path to reduce the trade balance. While this "consumers voting with their feet" scenario may be unavoidable sooner or later, it is certainly not a scenario for anyone to look forward to. It would mean that the economy is slowing down, leaving consumers with a lot of debt, and the housing market in danger territory. Consumers may then opt to cash in any "liquid" assets, most notably their stock holdings to reduce their debt. Asian central banks would have less of a need to purchase U.S. dollars, making the dollar more vulnerable.

Asia is subsidizing their dollar exports to stimulate growth to provide jobs for their population as more and more rural workers migrate to cities. Despite wide anticipation that some day Asia will "give up on" the dollar, Asia won't leave this party without a fight. Asia's growth depends on a healthy U.S. economy. We would not be surprised to have some Asian countries revert to desperate policies, similar, yet more extreme to those of the Bank of Japan exhibited over the past years, to keep their currencies weak. And while Japan has not yet succeeded in wrecking its currency, if Japan and other Asian countries try hard enough, one day they might just succeed.

Unless the structural imbalances are addressed in a serious manner, with a policy shift that encourages savings, the pressure on the dollar is unlikely to disappear. In the current environment, policy makers choose between driving the imbalances to further extremes (the Organization for Economic Cooperation and Development, OECD, is warning of a $900 billion trade deficit next year), or a recession.

This Friday, I am invited again to appear on CNBC, ahead of the release of the trade balance (my appearance is scheduled for 5:20am ET) to comment on the currency markets. The analysis above may help you understand why we brought the Merk Hard Currency Fund to market. As the global imbalances may be unfolding, we provide the Fund as a tool to allow investors to diversify their portfolios. Stock & bond markets, the housing market and U.S dollar cash are all at increased risk. Our focus on "hard currencies" including gold, rather than some speculative Asian currencies aims at the investor seeking hard currency exposure without the speculative environment a turbulent Asia may provide. As Asia diversifies their currency holdings, hard currencies may benefit; at the same time, we seek to avoid the risk associated with Asian countries that have in the past shown that they do not yet have a culture that fosters long-term price stability.

Back to homepage

Leave a comment

Leave a comment