Friday, February 11, 2011
By: Michael Pento
The U.S. trade deficit increased by 5.9% to $40.6 billion during the month of December, which was up $38.3 billion from the prior month. For the year 2010, the trade gap surged 43%, which was the biggest jump in a decade, as our government’s efforts to reignite consumer borrowing and spending led to a record number of imported consumer goods. For all of 2010, the trade gap climbed to $497.8 billion, up from $374.9 billion in 2009. The Commerce Department reported that consumer spending rose at an annual rate of 4.4% in the fourth quarter of 2009. That increase—which was the biggest in four years—was led by a surge in imports and helped send the trade gap back onto its unsustainable trajectory.
Despite the fact that the U.S. dollar has fallen 8% since June of last year, the trade deficit has continued to widen. That’s because the inflation caused by a falling dollar has made it more expensive for foreigners to importer U.S. made goods—thus offsetting the increased purchasing power of their currencies. And, of course, the cost of U.S. imports has increased because there is no immediate domestically produced alternative to foreign made goods. Therefore, the U.S. trade imbalance continues to climb higher.
That economic truth ushers in the fear over how much wider the trade gap will grow once the dollar actually crashes, as it inevitable must. Why must it crash you ask? Simply because the U.S. is incapable of paying its debts without a massive dilution to the currency. Once the greenback loses its place as the world’s reserve currency, prices will skyrocket for our imported goods, thus sending many more dollars into foreign control. And send the red ink associated with our trade imbalance beyond the limits of what most economists could ever conceive to be possible. And before anybody tells you that a trade deficit isn't something to be concerned about, ask them if they don't mind selling a great proportion of the assets and the sovereignty of the nation to another country. Add'l Michael Pento Posts
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
Showing posts with label Trade Deficit. Show all posts
Showing posts with label Trade Deficit. Show all posts
Saturday, February 12, 2011
Friday, December 31, 2010
Rising Rates Reveal Debt Reality (Michael Pento)
By: Michael Pento
Thursday, December 30, 2010
The Fed's lucky streak of luring bond investors with low interest rates may be drawing to a close. Nevertheless, the extended period of low borrowing costs has bred a new breed of investor. To the bulls and bears, we can now add the ostriches – those who bury their heads in the sand of declining debt service ratios while refusing to face up to intractable levels of total US government debt. If these ostriches were to actually look at the numbers, they would realize that it is their investments which are made of sand.
As the issuer of the world’s reserve currency, the US government has enjoyed the benefits of low interest rates despite its inflationary practices. When we run a trade deficit with a country like China, they have a strong incentive to 'recycle' the deficit back into our dollars and Treasuries. This practice has hidden what would otherwise be much higher borrowing costs and much lower purchasing power for the dollar. This artificial price signal allows people like Paul Krugman to claim that the Obama Administration’s stimulus programs should be much larger. Because our yawning fiscal deficits have not driven bond yields significantly higher, he sees no reason to curtail spending. Krugman wants to spend like its World War III, and then has the nerve to call those worried about the budget mindless zombies!
Krugman is just one partisan Democrat shouting at mirrors, but the misunderstanding has struck the right-wing as well. Last week, in a debate with me on CNBC’s The Kudlow Report, Brian Wesbury, Chief Economist of First Trust Advisors and writer for The American Spectator, claimed that our $9.3 trillion national debt is of little consequence because our GDP is a far greater. However, he failed to note that our $14.7 trillion of GDP only yields about $2.2 trillion in revenue for the Treasury. To fully access that entire GDP, the government would have to raise all tax brackets to 100% without producing any reduction in output or decrease in revenue. This is, of course, preposterous. As was demonstrated in the 1970s, even small increases in marginal tax rates have a substantial negative impact on output. A healthier appraisal would center on the fact that our publicly traded debt is now 422% of our annual tax revenue.
Wesbury did mention that if the government could not raise revenue to pay off the bonds, it could simply monetize the debt with few significant consequences. Apparently, paying back one's creditors in worthless paper is not technically "default" to an economist.
So neither Krugman nor Wesbury, both intelligent, highly educated economists, see our current course leading to imminent crisis. Unfortunately, both have been led astray by the low debt service ratio which has masked our economy's underlying insolvency. To see through the haze, you have to look at the numbers behind this so-called “deleveraging consumer” and then look at the debt of the nation.
The data point most utilized by those who espouse the idea of a healthy consumer is the household debt service ratio (DSR), a metric that relates debt payments to disposable personal income. This figure peaked at 13.96% in the third quarter of 2007; it has since dropped by 15%, to 11.89%. It is hard to see this as a significant amount of deleveraging, especially when looking at longer term trends. But it gets worse! Most of that modest decline is simply a function of lower interest rates, which have made debt easier to bear. Total household debt has gone down much less. This figure peaked at $13.92 trillion in Q1 2008, and has since declined only 3.5% to $13.42 trillion. How’s that for deleveraging?!
It's also worth noting that back in the first quarter of 2008, most homeowners were sitting on a pile of home equity to offset that debt. Today, most of the equity has vanished, yet the debt still remains.
When looking at the national debt, the situation is even more depressing. At the end of 2006, total debt held by the public was $4.9 trillion. According to the Treasury Department, the average interest rate paid on that debt was 4.9%. Therefore, the annualized interest payment at that time was $240 billion. At the end of 2010, our publicly traded debt has increased to $9.3 trillion, but the average interest rate on that debt has plummeted to just 2.3%. So, despite an 87% increase in debt in just a 4-year time span, the annualized debt service payment actually fell 11% to $213 billion. Krugman and Wesbury look at this and see progress.
Meanwhile, the average maturity on our debt has declined to 5.5 years. Compare that with the UK's gilts, which average about 14 years, or even to Greece's bonds, which average about 8 years. Falling interest rates and reduced durations have merely given the illusion of solvency to the US as compared to these other ailing sovereigns.
By 2015, our publicly traded debt is projected to be at least $15 trillion. Even if interest rates simply revert to their average level – not a stretch, given surging commodity prices and endless Fed money printing – the debt service expense could easily reach over $1 trillion, or about 50% of all federal revenue collected today. Just imagine what would happen if rates were to rise to the level of Greece, nearly 12% on a 10-year note, as opposed to our current 10-year yield of just 3.5%. I bet Athens, Georgia wouldn't look much better than its namesake. Don’t forget: as interest rates rise, GDP growth slows, sending the debt-to-GDP ratio even higher.
Earlier this year, it wasn’t the nominal level of debt that suddenly sent euroland into insolvency, but rather a spike in debt service payments. Right now, the US national debt is the biggest subprime ARM of all time. Much like homeowners who thought they could afford a mortgage that was 10 times their annual incomes, Messrs. Krugman and Wesbury are blinded by deceptively low current rates of interest. These ostriches won't poke their heads up to see the writing on the wall: low rates and quantitative easing cannot coexist for long. As rates continue to rise, the reality of US insolvency will be revealed.
Thursday, December 30, 2010
The Fed's lucky streak of luring bond investors with low interest rates may be drawing to a close. Nevertheless, the extended period of low borrowing costs has bred a new breed of investor. To the bulls and bears, we can now add the ostriches – those who bury their heads in the sand of declining debt service ratios while refusing to face up to intractable levels of total US government debt. If these ostriches were to actually look at the numbers, they would realize that it is their investments which are made of sand.
As the issuer of the world’s reserve currency, the US government has enjoyed the benefits of low interest rates despite its inflationary practices. When we run a trade deficit with a country like China, they have a strong incentive to 'recycle' the deficit back into our dollars and Treasuries. This practice has hidden what would otherwise be much higher borrowing costs and much lower purchasing power for the dollar. This artificial price signal allows people like Paul Krugman to claim that the Obama Administration’s stimulus programs should be much larger. Because our yawning fiscal deficits have not driven bond yields significantly higher, he sees no reason to curtail spending. Krugman wants to spend like its World War III, and then has the nerve to call those worried about the budget mindless zombies!
Krugman is just one partisan Democrat shouting at mirrors, but the misunderstanding has struck the right-wing as well. Last week, in a debate with me on CNBC’s The Kudlow Report, Brian Wesbury, Chief Economist of First Trust Advisors and writer for The American Spectator, claimed that our $9.3 trillion national debt is of little consequence because our GDP is a far greater. However, he failed to note that our $14.7 trillion of GDP only yields about $2.2 trillion in revenue for the Treasury. To fully access that entire GDP, the government would have to raise all tax brackets to 100% without producing any reduction in output or decrease in revenue. This is, of course, preposterous. As was demonstrated in the 1970s, even small increases in marginal tax rates have a substantial negative impact on output. A healthier appraisal would center on the fact that our publicly traded debt is now 422% of our annual tax revenue.
Wesbury did mention that if the government could not raise revenue to pay off the bonds, it could simply monetize the debt with few significant consequences. Apparently, paying back one's creditors in worthless paper is not technically "default" to an economist.
So neither Krugman nor Wesbury, both intelligent, highly educated economists, see our current course leading to imminent crisis. Unfortunately, both have been led astray by the low debt service ratio which has masked our economy's underlying insolvency. To see through the haze, you have to look at the numbers behind this so-called “deleveraging consumer” and then look at the debt of the nation.
The data point most utilized by those who espouse the idea of a healthy consumer is the household debt service ratio (DSR), a metric that relates debt payments to disposable personal income. This figure peaked at 13.96% in the third quarter of 2007; it has since dropped by 15%, to 11.89%. It is hard to see this as a significant amount of deleveraging, especially when looking at longer term trends. But it gets worse! Most of that modest decline is simply a function of lower interest rates, which have made debt easier to bear. Total household debt has gone down much less. This figure peaked at $13.92 trillion in Q1 2008, and has since declined only 3.5% to $13.42 trillion. How’s that for deleveraging?!
It's also worth noting that back in the first quarter of 2008, most homeowners were sitting on a pile of home equity to offset that debt. Today, most of the equity has vanished, yet the debt still remains.
When looking at the national debt, the situation is even more depressing. At the end of 2006, total debt held by the public was $4.9 trillion. According to the Treasury Department, the average interest rate paid on that debt was 4.9%. Therefore, the annualized interest payment at that time was $240 billion. At the end of 2010, our publicly traded debt has increased to $9.3 trillion, but the average interest rate on that debt has plummeted to just 2.3%. So, despite an 87% increase in debt in just a 4-year time span, the annualized debt service payment actually fell 11% to $213 billion. Krugman and Wesbury look at this and see progress.
Meanwhile, the average maturity on our debt has declined to 5.5 years. Compare that with the UK's gilts, which average about 14 years, or even to Greece's bonds, which average about 8 years. Falling interest rates and reduced durations have merely given the illusion of solvency to the US as compared to these other ailing sovereigns.
By 2015, our publicly traded debt is projected to be at least $15 trillion. Even if interest rates simply revert to their average level – not a stretch, given surging commodity prices and endless Fed money printing – the debt service expense could easily reach over $1 trillion, or about 50% of all federal revenue collected today. Just imagine what would happen if rates were to rise to the level of Greece, nearly 12% on a 10-year note, as opposed to our current 10-year yield of just 3.5%. I bet Athens, Georgia wouldn't look much better than its namesake. Don’t forget: as interest rates rise, GDP growth slows, sending the debt-to-GDP ratio even higher.
Earlier this year, it wasn’t the nominal level of debt that suddenly sent euroland into insolvency, but rather a spike in debt service payments. Right now, the US national debt is the biggest subprime ARM of all time. Much like homeowners who thought they could afford a mortgage that was 10 times their annual incomes, Messrs. Krugman and Wesbury are blinded by deceptively low current rates of interest. These ostriches won't poke their heads up to see the writing on the wall: low rates and quantitative easing cannot coexist for long. As rates continue to rise, the reality of US insolvency will be revealed.
Sunday, August 1, 2010
Wall Street robots create best performing month in a year even as billions of dollars left the equity market, no trading volume and poor fundamental economic data
The exploits of Wall Street's mathematician robots churn out a positive month. July yielded the best performing month in a year as the S and P 500 gained 6.88% while the Dow gained 7.1%. These "annual-like" gains occurred even as:
Grandpa's interest piqued while dissecting the curious 6 consecutive up days in the S and P 500. From July 6th through July 13th, the S and P 500 gained 72.76 points (7.1%). This gargantuan move occurred on a paltry 4.290 billion average daily trading volume (223 million fewer shares per day than the July monthly average).
More evidence of manipulative trickery is evident after comparing the two biggest July up days to the two biggest down days in June. The two biggest down days in June (4th and 29th) collectively produced a loss of 71.28 points on average trading volume of 6.159 billion shares per day. The two biggest up days in July were contrived on 1.280 billion less shares per day.
Grandpa's "granddaddy" validation of manipulative and deceptive components became even more evident when May was included in the analysis. The down and dirty:
Another "annual-like" return is assured for the month of August predicated upon economic data continuing to reflect a downward slope, another $10 billion is withdrawn from the U.S. equity funds and volume drops another 10%.
Mr. and Ms. Market are waiting patiently for the average retail investor to come off the sideline and provide the catalyst for another 5 to 10% upward move. When they sense they have sucked in the final flock of lambs, you can be assured the market will sell, once again proving to the retail investor who controls the market.
- billions of dollars were withdrawn from the U.S. equity market
- trading volume was anemic
- fundamental economic data shows clear signs of a slowdown
Significant Dollars Removed from the U.S. Equity Market
Investment Company Institute (ICI) reports $8.797 billion was withdrawn from domestic equity funds through 7/21/10. This represents an average of $2.932 billion per week with yet another week to be reported. For the entire month of June, ICI reported $8.076 billion withdrawn from domestic equity funds and their first report of June included the final 5 days of May.
From the week ending May 5, 2010 through the week ending 7/21/10, $40.515 Billion has been withdrawn from the U.S. equity funds.
Anemic Trading Volume
The S and P 500 clocked in a 70.89 point (6.88%) gain for the month of July on an average daily trading volume of 4.513 billion shares. During the month of June, the S and P 500 was down 58.70 points (5.39%) on average daily trading volume of 5.005 billion shares. The S and P 500 launches 6.88% while month over month average daily trading volume falls 9.8%.
Grandpa's interest piqued while dissecting the curious 6 consecutive up days in the S and P 500. From July 6th through July 13th, the S and P 500 gained 72.76 points (7.1%). This gargantuan move occurred on a paltry 4.290 billion average daily trading volume (223 million fewer shares per day than the July monthly average).
More evidence of manipulative trickery is evident after comparing the two biggest July up days to the two biggest down days in June. The two biggest down days in June (4th and 29th) collectively produced a loss of 71.28 points on average trading volume of 6.159 billion shares per day. The two biggest up days in July were contrived on 1.280 billion less shares per day.
Grandpa's "granddaddy" validation of manipulative and deceptive components became even more evident when May was included in the analysis. The down and dirty:
S and P 500 Monthly Recap
- July 2010 UP 70.89 points (6.88%) on daily average daily trading volume of 4.513 billion shares
- June 2010 DOWN 56.70 points (5.39%) on average daily trading volume of 5.005 billion shares
- May 2010 DOWN 92.28 points (8.2%) on average daily trading volume of 6.383 billion shares
Ben Bernanke's "Unusually Uncertain" Economic Data
- Weekly initial jobless claims averaged 457,000 for the month
- Pending Home Sales DOWN 30% month over month
- Non-farm payrolls for June DOWN 125,000 on a consensus estimate of down 100,000
- Factory Orders DOWN 1.4% versus consensus estimate of down 0.6%
- ISM Services 53.8 versus consensus of 55 (prior was 55.4)
- Trade Deficit -42.3 billion versus consensus estimate of -39.4 billion (prior -40.3 billion)
- Retail Sales -0.5% versus consensus estimate of -0.2%
- Existing Home Sales 5.37 million versus consensus estimate of 5.09 million (prior 5.66 million)
- New Home Sales 330,000 versus consensus estimate of 310,000 (prior revised to 267,000 from 300,000....267,000 lowest level on record)
- Consumer Confidence 50.4 versus consensus estimate of 51 (prior raised to 54.3 from 52.9)
- Durable Orders -1.0% versus consensus estimate of +1.0% (prior reduced to 1.2% from 1.6%)
- Q2 GDP 2.4% versus consensus estimate of 2.5%. Q1 revised to 3.7% from 2.7% while the government revised down GDP figures for 2007, 2008 and 2009
Another "annual-like" return is assured for the month of August predicated upon economic data continuing to reflect a downward slope, another $10 billion is withdrawn from the U.S. equity funds and volume drops another 10%.
Mr. and Ms. Market are waiting patiently for the average retail investor to come off the sideline and provide the catalyst for another 5 to 10% upward move. When they sense they have sucked in the final flock of lambs, you can be assured the market will sell, once again proving to the retail investor who controls the market.
Tuesday, July 13, 2010
US trade deficit at 18-month high (not so good for Q2 GDP..but who really cares...)
BBC News
The US trade deficit widened to its highest level in 18 months in May, driven by demand for imported cars, computers and clothing.
The deficit increased by 4.8% to $42.3bn - the largest since November 2008, Commerce Department data showed.
The 2.9% rise in imports outpaced the 2.4% climb in exports.
US manufacturing has benefited from the global economic recovery, but some fear that problems in Europe will hurt sales in the future.
Debt troubles in the eurozone have also caused the value of the euro to weaken against the dollar this year - making US-made goods less competitive in the 16 nations using the euro.
May's deficit rise came despite oil imports dropping by 9.1% because of a lower oil price and lower volumes.
Sanctions
The deficit with China rose to $22.3bn, up 15.4% from April and the widest since October last year. Analysts say that this will add to pressure on the government to stand firm against China in trade disputes.
Last week, the US Treasury chose not to label Beijing a "currency manipulator" - a decision that undermines efforts by the US Congress to pass punitive trade sanctions.
Some US manufacturers believe the Chinese yuan is undervalued by as much as 40%.
Washington Post
By Timothy R. Homan
(c) 2010 Bloomberg News
Tuesday, July 13, 2010; 12:00 AM Estimates of 72 economists surveyed by Bloomberg ranged from deficits of $37 billion to $41.5 billion. The gap in April was $40.3 billion. The figures indicate trade subtracted from gross domestic product in the second quarter.
The deficit with China increased in May to the highest level since October, while imports from India were the most ever.
Exports from the U.S. to the rest of the world increased 2.4 percent to $152.3 billion, reflecting gains in industrial materials, business equipment and semiconductors. Imports rose 2.9 percent in May to $194.5 billion, led by an increase in demand for cars, pharmaceuticals, toys and clothing from abroad.
Today's report showed the trade gap with China rose to $22.3 billion from $19.3 billion in the prior month. While the U.S. exported 2.5 percent more to China in May, imports from the Asian nation surged 12 percent.
China, the world's biggest exporter, on July 10 reported that its overseas sales jumped 44 percent in June from a year earlier and the trade surplus more than doubled to $20 billion, the highest in eight months.
The surge in Chinese exports in June and the doubling of the trade surplus may prompt U.S. lawmakers to intensify pressure on China to step up the pace of yuan appreciation even as the outlook for overseas demand cools.
The balance adjusted for inflation, which is the figure used to calculate gross domestic product, increased to $46 billion in May. The gap was larger than the average $42.3 billion a month in the first quarter, putting trade on track to subtract from growth from April through June.
Grandpa: Trade deficit will subtract from GDP growth in Q2 however the Dow is currently up 135 points while the Standard and Poor's 500 is up 14. Yippee!! Slower growth makes the market go higher...who would have thunk? Since July 2, 2010, the Standard and Poor's 500 has launched 70 points (5 trading days plus 2 hours).
The US trade deficit widened to its highest level in 18 months in May, driven by demand for imported cars, computers and clothing.
The deficit increased by 4.8% to $42.3bn - the largest since November 2008, Commerce Department data showed.
The 2.9% rise in imports outpaced the 2.4% climb in exports.
US manufacturing has benefited from the global economic recovery, but some fear that problems in Europe will hurt sales in the future.
Debt troubles in the eurozone have also caused the value of the euro to weaken against the dollar this year - making US-made goods less competitive in the 16 nations using the euro.
May's deficit rise came despite oil imports dropping by 9.1% because of a lower oil price and lower volumes.
Sanctions
The deficit with China rose to $22.3bn, up 15.4% from April and the widest since October last year. Analysts say that this will add to pressure on the government to stand firm against China in trade disputes.
Last week, the US Treasury chose not to label Beijing a "currency manipulator" - a decision that undermines efforts by the US Congress to pass punitive trade sanctions.
Some US manufacturers believe the Chinese yuan is undervalued by as much as 40%.
Washington Post
By Timothy R. Homan
(c) 2010 Bloomberg News
Tuesday, July 13, 2010; 12:00 AM Estimates of 72 economists surveyed by Bloomberg ranged from deficits of $37 billion to $41.5 billion. The gap in April was $40.3 billion. The figures indicate trade subtracted from gross domestic product in the second quarter.
The deficit with China increased in May to the highest level since October, while imports from India were the most ever.
Exports from the U.S. to the rest of the world increased 2.4 percent to $152.3 billion, reflecting gains in industrial materials, business equipment and semiconductors. Imports rose 2.9 percent in May to $194.5 billion, led by an increase in demand for cars, pharmaceuticals, toys and clothing from abroad.
Today's report showed the trade gap with China rose to $22.3 billion from $19.3 billion in the prior month. While the U.S. exported 2.5 percent more to China in May, imports from the Asian nation surged 12 percent.
China, the world's biggest exporter, on July 10 reported that its overseas sales jumped 44 percent in June from a year earlier and the trade surplus more than doubled to $20 billion, the highest in eight months.
The surge in Chinese exports in June and the doubling of the trade surplus may prompt U.S. lawmakers to intensify pressure on China to step up the pace of yuan appreciation even as the outlook for overseas demand cools.
The balance adjusted for inflation, which is the figure used to calculate gross domestic product, increased to $46 billion in May. The gap was larger than the average $42.3 billion a month in the first quarter, putting trade on track to subtract from growth from April through June.
Grandpa: Trade deficit will subtract from GDP growth in Q2 however the Dow is currently up 135 points while the Standard and Poor's 500 is up 14. Yippee!! Slower growth makes the market go higher...who would have thunk? Since July 2, 2010, the Standard and Poor's 500 has launched 70 points (5 trading days plus 2 hours).
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