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Friday December 21, 2007 - 13:59:43 GMT
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Global Balance! Be Careful What You Wish For ...

FX Trading – Global balance! Be careful what you wish for…

I bet you’d run out of fingers and toes if you had to add up all the times you’ve heard an economist or analyst expound on the many dangers of global imbalance.  And of course it is all the fault of the US.  It’s that dang current account deficit!   

Take a look at the chart below of the US Current Account Balance below—it is the boogey man of global imbalance for the economic thinkers amongst us.  We have circled the points on the graph where there was a discernable improvement in the current account deficit.  Two things we think you should notice that happened the last two times global imbalances started to “improve”:

1) A recession closely followed
2) A stock market crash did too (1987 and 2000)


Will the third time be the charmer? 

Recession is close at hand many believe.  This from Northern Trust yesterday [our emphasis]:

“The Index of Leading Economic Indicators (LEI) fell 0.4% in November following a 0.5% drop in October. The 1.2% drop in the LEI during the May to November period is the largest six month decline in six years. On a year-to-year basis, the October-November average translates into a 0.8% year-to-year drop, which is the largest drop on record since the third quarter of 2001 when the U.S. was in a recession. On a year-to-year basis, the quarterly average of the LEI has fallen in three out of the last four quarters. The message from the downward trend of the LEI is that the risk of significantly weak economic conditions is growing rapidly.”


Recession chances are rising as the current account improves…But don’t worry!  The US can fall into recession and everything will still be hunky dory!  How can you doubt that when the most ardent supports of that flimsy theory are those who still have a lot of cash sitting in overseas markets. 

The dirty little secret of global growth is that it won’t exist unless the U.S. consumer participates. America's consumption contributes roughly $9.5 trillion to global trade. That's huge! China, for instance, is responsible for only $1 trillion; India, less than that! If the U.S. consumer falls off the table, global growth is in big trouble.

Sorry, we keep forgetting to bow down to our future masters in the east.  Forgive us this discretion.

The fact of the matter is the US current account deficit provides the globe with a lot of dollar liquidity—whether or not those of you out there with PhDs like it or not.  Thus, an improving current account, or, in other words, an improvement in global imbalances, drains liquidity from the global economy.  Let’s now add up the liquidity drains:

1) US Current Account
2) Global credit wheels in reverse
3) China getting serious about tightening

Hmm…And why is any of this important for currency investors/traders/speculators/punters?  Here’s why we think it’s important:

If Stock Market Bull = Risk Appetite = US$ Bear Market; then

Stock Market Bear = Risk Aversion = US$ Bull Market


We think we may find out soon if it all adds up. 

Stay tuned and have a great weekend.  And in case we start our eggnog drinking early, which is known to happen more often than we care to admit, and don’t publish again till next Wednesday, John Ross and I wish everyone a very Merry Christmas!


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