How long can America continue to burn up wealth? How long can this nation continue to consume far more wealth than it produces? The trade deficit is one of the biggest reasons for the steady decline of the U.S. economy, but many Americans don't even understand what it is. Our current debt-fueled lifestyle is dependent on this cycle continuing. In order to live like we do, we must consume far more wealth than we produce. If someday we are forced to only live on the wealth that we create, it will require a massive adjustment in our standard of living. We have become great at consuming wealth but not so great at creating it. But as a result of running gigantic trade deficits year after year, we have lost tens of thousands of businesses, millions upon millions of jobs, and America is being deindustrialized at a staggering pace.
So much for those already abysmally low Q1 GDP forecasts. Moments ago, the Census Bureau released trade data for February which crushed expectations of an improvement from $39.1 billion (revised to $39.3 billion) to $38.5 billion, and instead rose 7.7% to $42.3 billion, the highest monthly trade deficit since September. This was driven by a 0.4% increase in imports to to $231.7 billion offset by a drop in exports of 1.1% to $192.5 billion. The goods deficit increased $2.2 billion from January to $61.7 billion in February; the services surplus decreased $0.8 billion from January to $19.4 billion in February. Most notably however, is that as a result of this "unexpected" surge in the deficit, the Q1 GDP forecast cuts, anywhere between 0.2% and 0.4% are set to begin.
Analysis suggests that commentators and policymakers need to better distinguish between the ways in which the US shale gas boom constitutes a ‘revolution’ and the ways in which it does not. The US unconventional energy boom has reversed the decline of domestic production, significantly lowered oil and gas imports, reduced gas costs for consumers, and created a political space for tougher regulations on coal-fired power plants. But it is not a panacea. Even if current estimates of production turn out to be accurate, the benefits to the US economy in the long run are relatively small, and the benefits to manufacturing competitiveness in most sectors are even smaller.
When Abe, Kuroda, and their merry men unveiled their latest idea - Abenomics - the world's macro tourists piled in and spent every waking second convincing the rest of the world's suckers that this time was different for Japan. We, along with Kyle Bass and a short list of other realists, warned "be careful what you wish for." It seems tonight's data is the best example yet of the print-and-grow rock and inflate-and-die hard place that Abe finds himself between. Multi-year highs in inflation (pressing on to the BoJ's target) combined with a total collapse in household spending (lowest in 27 months). Abe is cornered; and JPY and the Nikkei are confounded for now.
In the 16 months since Japanese Prime Minister Shinzo Abe launched his bold plan to reflate Japan’s shrinking economy the yen has depreciated by 22% against the dollar, 28% against the euro and 24% against the renminbi. The hope was to stimulate trade and push the current account decisively into the black. Yet the reverse has occurred. Japan’s external position has worsened due to anemic export growth and a spiraling energy import bill: in January it recorded a record monthly trade deficit of ¥2.8trn ($27.4bn). Having eked out a 0.7% current account surplus in 2013, Japan may this year swing into deficit for the first time since 1980. So why is the medicine not working?
In an overnight session that had little in terms of macro and news flow, the most notable event was that the Dollar-Renminbi finally crossed above 6.20 which as a reminder is the suggested "max vega" point beyond which even more max pain lies for levered accounts long the Yuan. However, in a world in which nothing is discounted and in which no news matters, the "market" broadly ignored this significant development (which as we explained further yesterday means an accelerated unwind of Chinese Commodity Funding Deals, and a potential drop in global commodity prices), and eagerly awaited today's non-event of an FOMC conference, where nothing new will be announced save for the novelty of it being Yellen's first appearance before the press as the head of the Fed. And of course the Fed will almost certainly scrap the 6.5% employment threshold, as the FOMC scrambles to make the economy appear worse than it is reported to be, in a stark reminder that the biggest optically manipulated tool meant to boost confidence in the recovery was nothing but a number meant to serve political purposes.
After trading well above the Dow at last year's peak (and equal with it at 2013 year-end), the Nikkei 225 is now almost 2000 points below the level of the Dow - a 13-month low. Trading not far off the EM-crisis lows of January, Japanese stocks are fading as JPY can't sustain any offer and carry-trades are unwound. Not helped by yet another in a long and illustrious list of mssed trade balance figures since Abe took the helm. Elsewhere in Asia, USDCNY traded up to almost 6.20 (the Maginot line for many derivatives trades) and does not look like the PBOC has it under control and copper has dumped from earlier US exuberance; iron ore is flat; and Chinese stocks are down (along with US futures fading modestly).
A dispassionate discussion of the major forces impacting the investment climate in the week ahead.
In the aftermath in the recent surge in China's renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China's "fight with speculators" (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn't done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan's trading band against the dollar from 1% to 2%.
Unlike most trading sessions in the past month, when the overnight session saw a convenient algo assisted USDJPY/AUDJPY levitation, tonight there has been no such luck for the permabullish E-Trade babies who are conditioned that no matter what the news, the next morning the S&P 500 will open green regardless. Whether this is due to ever louder fears that what is happening in China can not be swept under the rug this time will be revealed soon, but as of this moment both the USDJPY, and its derivative, US equity futures, are looking at a sharp lower open, as gold continues to press higher, while the traditional tension points such as Russia-Ukraine, and ongoing capital flight from some of the more "fringe" emerging markets, continues. Expect more of the same today as people finally peek below the Chinese surface to realize just how profoundly bad the situation on the mainland truly is. And while we realize macro news are meaningless, especially in Europe where the ECB is now the sole supervisor of all asset classes, the fact that Cyprus, Greece, Slovakia and Portugal, are all in deflation, and many more countries lining up to join the club, probably means that absent a massive global credit impulse, we have certainly reached the upward inflection point from the most recent $1+ trillion injection of liquidity by the Fed, not to mention the ongoing QE by the BOJ.
It would appear, judging by the tumble in JPY crosses (i.e. JPY strength) that the carry-traders of the world are disappointed in the BoJ's lack of exuberance.
- *BOJ RETAINS PLAN FOR 60T-70T YEN ANNUAL RISE IN MONETARY BASE (no change)
But it is the commentary that is truly baffling in its contempt for the truth:
- *BOJ: EXPORTS HAVE LEVELED OFF MORE OR LESS (umm, record trade deficit?)
- *BOJ: PICKUP IN CAPEX HAS BECOME INCREASINGLY EVIDENT (Tankan Capex growth fallen for 2 quarters)
- *BOJ SAYS JAPAN'S ECONOMY IS RECOVERING MODERATELY (GDP growth worst since Abenomics began)
Black is white; water is not wet; and Abenomics will work any day now...
"It's the weather" That's all Abe has left to pretend that 'recovery' is right around the corner. Japan just printed its worst current account deficit on record and its worst GDP growth since Abenomics was unveiled - both missing by the proverbial garden mile and both confirming that all is not well in Asia. As for the perpetual hope of a J-curve (or miracle hockey-stick reversal)? There won't be one! As Patrick Barron noted, "monetary debasement does not result in an economic recovery, because no nation can force another to pay for its recovery."And the latest joke from Asian trading floors: "when asked what he thought of the recovery, Shinzo Abe responded "Depends!""
Between China's dismal trade deficit data (desperately defended by several sell-side strategists proclaiming it's just lunar new year 'noise' - aside from the fact that all the same strategists 'knew' the dates and still missed by 6 standard deviations) and the esclalations in Ukraine, it appears 'confidence' is a little shaken in the status quo. JPY has opened notably stronger dragging Yen carry trades lower and implying notable losses on the open for stock futures...
A near-term outlook for the dollar against the major foreign currencies.
Plenty of excuses out there for this evening's collosal miss in Chinese exports (-18.1% YoY vs an expectation of a 7.5% rise) mainly based on timing issues over the Lunar New Year (but didn't the 45 economists who forecast this data know the dates before they forecast?) This is a 6-sigma miss and plunges China's trade balance to its biggest miss on record and 2nd largest deficit on record. Combining Jan and Feb data (i.e. smoothing over the holiday), exports are still down 1.6% YoY - not good for the much-heralded global recovery. Exports to the rest of the BRICs were all down over 20% but no there is no contagion from an emerging market crisis.