No replies to this topic

[TTHQ Staff]

BEING STREET SMART ____________________ Sy Harding The Pressure Continues to Build! March 11, 2005. The Commerce Department reported on Friday that the U.S. trade deficit with the rest of the world grew 4.5% in January, to $58.3 billion. It was about $2 billion more than economists expected. Hopes had been that the three year decline in the value of the U.S. dollar, bringing down the price of U.S. goods for foreigners, and raising the price of foreign goods imported into the U.S., would have finally begun to lower the record trade deficit. But it was not to be. Imports rose to a record $159 billion. U.S. consumers continue to aggressively buy foreign goods. Imports of foreign automobiles, clothing, toys, and artwork set new records. The reasoning of U.S. consumers continues to be, “When U.S. car companies start turning out the same quality and reliability for the dollar that I can get in a foreign car, I’ll start buying American”. But that’s a tough order. It’s next to impossible to manufacture a car slowly enough to provide the same quality for the price when unionized workers earn north of $30 an hour, compared to $10 or less in competing countries. U.S. manufacturers try, by buying more parts overseas, but that also does not help the U.S. employment picture, or the U.S. economy. On the export side, international sales of U.S. cars, car parts, and industrial supplies rose, but exports of U.S. airplanes, consumer goods, food, and beverages, declined. The further increase in the trade deficit sent U.S. bonds and the dollar tumbling further on Friday and for the week, while gold moved still higher, gaining another $3.40 an ounce on Friday, and a big $11 an ounce for the week. On the positive side, economists say the trade deficit is primarily the result of the U.S. economy growing faster than that of either Europe or Japan. Washington periodically pleads for European countries to take more aggressive steps to improve their economies, so their consumers can afford more expensive U.S. products, while continuing the practical step of allowing the U.S. dollar to decline in value, to make U.S. products less expensive for foreign consumers. It continues to be my opinion that a big part of the puzzle of why the plunge in the U.S. dollar has not increased exports, is that foreigners increasingly don’t like America, and shun our products regardless of low prices, where once they lusted after them at any price. What could be more indicative of that than McDonald’s report this week that while its domestic sales are up, its sales in foreign countries continue to decline. The growing trade gap is a potentially serious problem for U.S. markets, not only because of its drag on the economy, but because it requires foreign investors to buy U.S. bonds and other debt instruments at an increasing pace to finance the deficit, at a time when they appear more likely to cut back on such investments. In a speech on Friday, Federal Reserve chairman Alan Greenspan warned that foreigners, including foreign central banks, “face increasing concentration of dollar assets in their portfolios, and will at some time choose greater balance [diversification] in their asset accumulation.” That is, they may soon tire of buying U.S. stocks and bonds, buying which the U.S. depends on to finance the U.S. current account deficit. Already rumors a couple weeks ago that officials in South Korea, China, and Japan are considering moving some assets out of dollar-denominated holdings, sent the markets into a tizzy. The South Korean bank denied the rumor. But where there’s smoke there’s frequently fire. However, the record trade deficit, and resulting current account deficit, even the record debt levels of U.S. consumers, are not as big a worry to the Federal Reserve as the record federal budget deficit. In his speech on Friday (to the Council on Foreign Relations in New York), Greenspan said, “The resolution of our current-account deficit and household debt burdens does not strike me as overly worrisome. But that is certainly not the case for the federal budget deficit”. He warned that the federal budget deficit “is a significant obstacle to long-term economic stability, because the budget deficit [unlike the trade and current account deficits] is not subject to correction by changing market forces”. His warning was probably timed to influence the budget debates in Washington over whether the country can afford further deficit spending to pay for extending the tax cuts devised to stimulate the economy out of the 2001 recession, restructuring Social Security, sending the U.S. back to the moon, etc. In any event, conditions and pressures continue to move in the direction of my expectations that, contrary to current bullish investor sentiment, the bond market is already in trouble, and the stock market will be, once its current favorable season ends, if not before. Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.