Friday December 21, 2007 - 13:59:43 GMT
Share This Story
Black Swan Capital - www.blackswantrading.com
Global Balance! Be Careful What You Wish For ...
FX Trading â€“ Global balance! Be careful what you wish forâ€¦
I bet youâ€™d run out of fingers and toes if you had to add up all the times youâ€™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. Itâ€™s that dang current account deficit!
Take a look at the chart below of the US Current Account Balance belowâ€”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 â€śimproveâ€ť:
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]:
â€śThe 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.â€ť
Recession chances are rising as the current account improvesâ€¦But donâ€™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 wonâ€™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 $1 trillion; India, less than that! If the U.S. consumer falls off the table, global growth is in big trouble.
Sorry, we keep forgetting to bow down to our future masters in the east. Forgive us this discretion.
The fact of the matter is the US current account deficit provides the globe with a lot of dollar liquidityâ€”whether or not those of you out there with PhDs like it or not. Thus, an improving current account, or, in other words, an improvement in global imbalances, drains liquidity from the global economy. Letâ€™s now add up the liquidity drains:
1) US Current Account
2) Global credit wheels in reverse
3) China getting serious about tightening
Hmmâ€¦And why is any of this important for currency investors/traders/speculators/punters? Hereâ€™s why we think itâ€™s important:
If Stock Market Bull = Risk Appetite = US$ 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 donâ€™t publish again till next Wednesday, John Ross and I wish everyone a very Merry Christmas!
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."