Wednesday March 9, 2005 - 11:26:45 GMT
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Black Swan Capital - www.blackswantrading.com
Dollar testing lows on deficit?
From a Reuters story yesterday evening: “Both Poole [FRB of St. Louis President William Poole] and Bernanke [as in Fed Governor Ben “Keep the presses rolling” Bernanke] sounded relatively unconcerned about the record shortfall in the U.S. current account, the nation's broadest measure of overseas trade.
“Bernanke said the deficit was being fueled by factors outside the United States, including a global savings glut and weak domestic demand in U.S. trading partners. Those factors, he said, may be part of the reason long-term interest rates had stayed down in the face of Fed tightening.
“For his part, Poole said the gap is one natural result of demographics, and may reverse as the populations of Japan and Europe age more quickly than that of America.” In other words, don’t worry, be happy.
Here is a chart of the US balance of payments from January 1992 through December 2004. You can see why people are unhappy about this situation—no advanced economic degree required.
us trade deficit chart
The market commentary appears centered around the upcoming January US trade deficit report due out on Friday. It is a dismal picture indeed. But, I’m not sure if we have reached “panic time” just yet.
Consider a bit of perspective. Below is the same balance of payments chart as above, with Real US Gross Domestic Produce (the up-sloping red line) included for comparison purposes…
chart us trade deficit vs gdp
I am probably way out of my league here, but that hasn’t stopped me before…here goes!
January 2005 rough estimates:
Current Real Gross Domestic Product approximately $11,000,000,000,000
Balance of Trade Balance is approximately ($60,000,000,000)
Trade Deficit as a percentage of GDP: $60/11,000 = 0.00545 = 0.054%
I know turning this number into percentage terms doesn’t excuse the fact the US is bleeding red ink, but I think it does take some of the panic perspective out of the number. Maybe this simplistic view falls under the category of “lies, damn lies, and statistics.” I don’t deny that.
Let’s try one more view. The same balance of payments chart below, with the US dollar index monthly chart below that for comparison purposes:
chart us dollar vs trade deficit
My simple point is this: If anyone can trade the dollar off that correlation, more power to them. Sure, the dollar may test its recent lows at 8048, and be headed for a test of its 1992 bottom at 7843 (as you can see in the chart above). But there may be plenty of other good reasons for that besides the trade deficit.
And though this is a bit of a stretch, what if Friday’s trade number is “better than expected”? Could we see the same dynamic at work in the opposite direction as we saw on the “not as good as expected” jobs number? Answer: Absolutely! Anything can happen in this market.
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