It was an Washington Post article I happen to be reading on my phone who triggered this analysis. I find myself wondering: Exactly what dispositions hide here? What is this press reporter not telling me that might offer an analysis fundamentally various from his?
The story he has composed is the current on America’s worldwide trade in items and services for July, which took place to be launched in September. Basically, our trade deficit.
Novocain to the brain, I understand. But hang with me a minute. There’s a prominent point here that describes why month-to-month headline numbers and the news protection you typically get tell you very little about the financial winds swirling around you, or the more comprehensive ramifications, which are, in this case, rather bothering for your near-term future and mine.
This specific Post scribe wants me to know that America’s trade gap narrowed by 11.6% in July – more than forecast, I’m told, so, I guess, salad days are here once again, or a minimum of on the way. The worth of shipments to abroad consumers likewise livened up – to a 10-month high, no less! That pickup in exports (in theory an intense area and around which today’s dispatch ultimately revolves) rose because of food sales.
We remain in high cotton now, dear reader. High cotton, certainly.
Simply do not attempt offering that cotton to anybody who’s seen the data. Nobody who understands how it was made is buying it.
So I have a few bad habits, when I smelled a decaying fish, my reflexes sent me searching for the source to analyze that fish myself.
And so I did.I pulled the Commerce Department’s raw information. And you understand exactly what? This fish stinks for a factor …
A Strong Dollar Squeezes Revenues
I’ll get to the stink in a moment, however initially – who cares?
Exports account for nearly 50% of incomes inside the S&P 500 and, as such, are a crucial factor the S&P’s operating earnings are down now for 7 consecutive quarters – the longest contraction in a minimum of 20 years.
That’s because exports are a main victim of the strong U.S. dollar. As our Benjamins rise against other currencies, consumers and services outside America can manage less and fewer items made in America since “American-made” is unexpectedly too expensive in regards to the regional yen, euros, pounds, pesos or shekels.
So, fewer John Deere tractors are leaving the showrooms in Brazil. Canadians coping a midlife crisis are buying nearly 10% fewer Harley-Davidsons. Just 2 examples of a larger pattern, and the leading edge of the dollar typhoon.
On the backside, the sales that do happen in euros, Brazilian reals and loonies purchase less and less dollars here in your home when the cash is repatriated.
Managements running business such as Deere and Harley-Davidson then do exactly what Wall Street demands – they cut expenses to protect bottom-line profits for crotchety investors and trigger-happy money supervisors for whom a cent’s miss on per-share incomes is a cardinal sin.
As an act of contrition, Deere and Harley-Davidson lay off higher-wage employees (as all three have), and those lost jobs ripple through Uncle Sam’s economy and his GDP slows.
And yet, the Fed and the White House crow about an economy at near-full work – never mind that the new jobs responsible for near-full work are largely low-wage tasks mixing martinis and establishing appointments in a medical professional’s office.
Now, about that stink the Washington Post was peddling as fresh fish …
You see, the month of July isn’t really the story of a trade gap constricting or export values at a 10-month high. That’s like writing the story of the elephant based upon its small tail.
Exports did increase by $3.62 billion from June to July, which, one might surmise, has Uncle Sam’s economy relocating the right direction a minimum of. Sadly, no.
Nearly $3.56 billion of that boost was because of suddenly big shipments of soybeans, mostly to China as the Middle Kingdom handles exactly what is obviously a pork shortage. China operates the world’s biggest “tactical pork reserve” (no, truly), and hogs grow fat on soybean meal, yet China’s soy production has actually suffered of late.
The remainder of the month’s data … not so great.
However even that’s not the real point.
Be careful the Fed’s Pied Piper
At the other end of the elephant’s tail is the broader effect of the strong dollar over time, because one month does not a trend make. A trend makes a pattern, and the pattern of American exports in a strong-dollar world is depressing.
Exports of American goods and services are down almost $64 billion up until now this year. Every main category is drawing on a barrel of red ink – foods, feeds and beverages; commercial supplies and products; capital products, except vehicle; automotive vehicles, parts and engines; and consumer goods.
For 19 consecutive months on a year-over-year basis.
That we might rightly call a pattern.
Yet the $64 billion in lost exports is but a 5% decline from a year back. Yet even that pittance is enforcing huge expenses on the economy. Picture the impact to Deere and Harley-Davidson if the dollar strengthens more.
That is context for each Federal Reserve meeting from here on out, which is context for the two greatest dangers in the worldwide economy today … the United States dollar and Fed policy.
Into this trend different members of the Fed sing a tune of an economy healthy adequate to manage greater loaning expenses. Various economists hum along to the exact same nonsense. Wall Street dances to the lovely tune.
Possibly you remember, dear reader, that the Pied Piper led rats and kids to their deaths in 13th-century Saxony with enchanting music.
Sure, rate of interest need to increase. Rates ought to never have been this low to begin with. However they are low because of government profligacy and horrible Fed policy back into the 1980s.
Low rates have perverted savings and investment patterns. They have actually taken wealth from righteous savers and showered it upon wastrel borrowers, most especially the bloated Western governments. And they’ve blown extremely big bubbles in stocks, bonds and real estate. Those will burst.
It won’t be pretty.
See, the world is addicted to low-rate dollar financial obligation. It’s the opiate of business, customer and governmental masses who constantly need just another hit to make the discomfort go away. Business from Ukraine to Brazil to Malaysia have been mainlining the stuff by the trillions for a nearly a years now.
Raise interest rates in America and you have actually obtained an issue that possibly spins our current mini-depression into a Greater Depression.
Higher rates mean the debt-addled face higher – potentially debilitating – debt-repayment costs. It indicates foreign companies must now sell more of whatever they sell in your area to create ever more local dinero that they have to buy ever more dollars to make their dollar-debt payments. It means foreign governments should raid their piggy banks.
Cannot offer enough to produce the required dollars? Not enough coins in the piggy bank? Bonds default. Local banks crumble and send regional stock markets diving. Local currencies crash.
Will we get a financial obligation or currency crisis somewhere worldwide that spills over worldwide and raids the American economy once again? Who understands? However if you blend gunpowder with a spark, you get a surge whether you desire it or not.
Just something to think about when you hear Fed authorities and economic experts singing beautiful songs of an economy that can take on higher interest rates … or when you’re reading the day’s fishwrap informing you America’s export numbers are at 10-month highs.
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