The Yin and Yang of Trade
01/31/12
Sometimes we think back and realize how imperfect our prognostications were, or those of our contemporaries. Let me give you the opening lines of my Newsletter from December 31, 2008:
"A Financial Times poll, conducted among 6,165 adults in France, Spain, Germany, Italy, the UK and the US indicated that some 70% of the Spanish and two-thirds of the French agreed "strongly" or "somewhat" with the statement that the Euro could overtake the dollar in global importance by 2014. For Germans and Italians the figures were 58 per cent and 62 per cent respectively. Even some 48 per cent of those polled in the US agreed. The reason for this believe of course is obvious. The decline of this old empire was not only wished for by Osama bin Laden. Many Europeans are also convinced that the days of US hegemony are (and should be) numbered."
The closing lines of that same newsletter were these:
"Just in case you missed it. What I am trying to say is that the Euro currency is in greater danger to disappear by 2014 than the US Dollar is to be overtaken by the Euro. Don’t kid yourself. Europe is the one with the structural problems. The Euro was good for investment purposes while the going was easy. Now that times are getting tough it will become more and more difficult to keep the weak countries from financing their bailout and stimulus packages on the back of other EU members. The Euro is only as strong as the political will and financial stability of the sum of its member countries. Italy and Greece will be tested severely soon. All countries with overvalued real estate markets will come next. Their banking systems are in grave danger of collapsing. I hope that Europe will be able to manage the coming crisis. I wish to see the 20th anniversary of the Euro, too. The greatest peaceful experiment among nations deserves to last longer than 10 years. Unfortunately, there are not many reasons to be optimistic. However, what I can guarantee you is that the US dollar will not disappear and the aging, decadent empire of ours may well surprise most people to the upside."
Even a broken clock is right twice a day.
Time moves fast and the structural problems of the common currency have become evident. Meanwhile, this decadent empire of ours has at least some things going for it. While the economy is still weak and growing less than it should at this point after a recession, we are growing and unemployment numbers are grudgingly coming down. We may have bought this recovery at a high price (a $ trillion of QE1 and QE2) but so far, Mr. Bernanke’s Keynesian approach seems to work. Of course, success can be measured in many different ways. Just ask one Republican and one Democrat and you will soon find out how the definitions of success vary. Just like Keynes and Hayek differed in how they would have attempted to tackle the great depression of the 1930s. Today, Hayek proponents concentrate more on the debit (borrowing) side, while Keynes proponents concentrate more on the credit (effect) side. Nicholas Wapshott recently framed the debate between the two ideologies from a historical perspective on Charlie Rose. The video is worth watching. Back to this decadent empire of ours. The first chart above shows one possible measure of success. The monthly exports and imports of physical goods have recovered steadily. We see that we import more goods than we export. However, while goods imports have not yet surpassed the 2008 highs, the exports of goods did so last year. Exports are growing faster than imports and that is good news for the manufacturing sector in this country. The second chart shows exports and imports of not only goods but also services in one combined line. Here too we see that imports are hovering below the 2008 highs, while exports have already surpassed them. Maps of the World shows that the US exported roughly $1.8 trillion worth of goods and services in 2010. This makes us still the number one exporting country in the world. China follows close with $1.7 Trillion, which consists mostly of goods, rather than services. Germany comes in 3rd with $1.5 trillion.
The third chart shows us the net balance of exports and imports. The goods portion is shown in light blue and the services portion in green. We see that we have consistently imported more goods and exported more services to the world. The most recent data show that goods imports exceeded goods exports by $63 billion in November 2011. Service exports for the same month exceeded service imports by $15 billion. The net difference is the dark blue line, which shows a trade deficit of roughly $48 billion in November. While reflecting the standing of our country (and the "anglo-capitalist model"), I was reminded of an idea I came across several years ago. GaveKal does first class work and they had brought a strange causality (coincidence?) to my attention. They found a link between the U.S. current account deficit and international blow-ups. I tried to explain the effect of the US current account in my June 2008 newsletter. In the newsletter I had written: "We established above that the U.S. dollar is still the transactional currency of choice worldwide. We also established that U.S. dollar loans were taken out by many entrepreneurs and corporations worldwide. Think of the current account as a gas tank that fills up or empties out into - and thus provides working capital to - the world economy. If the U.S. runs a current account deficit, the world enjoys plenty of liquidity and business is good thanks to the gas tank pumping fuel into the world economy. If the U.S. current account turns positive, however, it sucks cash out of the world economy (remember the fractional reserve banking with a factor of 10:1) and de-levers the world by a factor of 10." I might add that especially European banks were avid dollar borrowers by borrowing short term from US Money Market funds in order to be able to lend long term to corporations and governments. As things got rough in Europe during the 3rd quarter of 2011 the Money Market Funds repatriated their dollars and the current account went positive in the 4th quarter. You can see the US current account in the last chart above. So in essence, the US current account has been the mechanism through which the global economy was inflated or deflated. When the US current account deficit improves, the other countries are deflated and vice versa. This is why (according to GaveKal), whenever we see an improvement in the US current account deficit, somebody somewhere goes bust. This time, it was Europe’s turn. The moral of the tale is that all exporting nations ("the principled creditors") need importing nations ("the decadent debtors") to sell their goods and services. Once the importing nations find religion, the principles of the creditor nations go out the window. Germany will find that out soon enough.
Hermann Vohs
"In the progress of personality, first comes a declaration of independence, then a recognition of interdependence."
Henry van Dyke
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
