Trade Deficit

Contextually, today was interesting bottom-up with only 53% of names agreeing in terms of direction for credit and equity risk (dominated by 50% agreement that conditions deteriorated). 27% saw credit widen as equity rallied while 20% saw credit compress as equities sold off but at the sector level the picture was much more stable with most agreeing systemically worse today. Leisure, healthcare, and Consumer Cyclicals were the only divergent sectors with credit underperformance as equity managed gains (only just in the latter we note). While we saw a clear up-in-quality shift in single-name credit today ( a theme we have been suggesting recently), that was not the story in equities where higher quality names (BBB and above) actually underperformed on average those in the spec grade cohorts. Vol movements were in line with CDS once again with vol rising less for the better quality names and rising dramatically more for the lower quality names (with a particular emphasis on the crossover names in fact).

And the hits, er, cuts, just keep on coming. Q1 GDP, which everyone now has forgotten was supposed to be the inflection point in the new and improved American Golden Age story: remember that whole payroll tax benefit which was expected to contribute 1.5-2% GDP points, is being cut by everyone. From an original consensus of nearly 4%, this number is now down more than 50% according to Wall Street's cadre of so-called economists. The latest lemming to join the Jan Hatzius downgrade wagon (yes, folks: Goldman is and always will be the key factor in any swing in convention wisdom as today's move in crude demonstrates so vividly) is Morgan Stanley's own David Greenlaw who a month ago couldn't contain his enthusiasm about the explosion in US economic activity. So much for that giddyness... And now that Q1 GDP is done, look for Q2 and H2 GDP downward revisions, and screams of protest demanding more fiscal and monetary (QE3) stimulus. Since the fiscal route is a dead end, we let readers conclude what that means for the future of the DXY and all the carry trade derivatives.

Recently Jan Hatzius cut his Q1 GDP as was reported first on Zero Hedge, to 2.5%, even as the Goldman chief economist is still (we give it 2 weeks) keeping his FYE GDP outlook constant (who says bulge brackets don't believe in hockeysticks). Following the just released ugly trade data which as we suspected would lead to even more GDP downgrades, Dudley's successor is out with yet another warning that should come as manna from heaven to those who continue to believe in non-dilutable assets: "Through February, the trade data suggest a large drag on GDP growth in the first quarter and suggest downside risk to our 2.5% forecast." Gee whiz, Jan, if Q1 when the bulk of the tax stimulus is concentrated (which was the reason for Goldman's December bullish 180 on the economy) is unable to post an economic improvement, what is left for the rest of the year, when no more fiscal stimulus is projected, and when, gulp, QE3 is ending? We can't wait to hear your explanation for this.

Another month, and another confirmation that the US export segment is non-existent. In February the US posted a $45.8 billion trade deficit compared to $47 billion in January, but worse than expectations of $44 billion. Importing our way to prosperity and #Winning_the_Future continues. Comparing the Chinese reported trade surplus with the US and the US reported trade deficit with China we get just a 100%+ difference: $7.8 billion versus $18.8 billion. Gotta love two administrations that just make up numbers trying to reconcile their fraud. This number also means that Q1 GDP will see another major revision lower. And so will Q2, Q3 and so forth, leading to QE3. And while we are at it, let's just make it stagflation: the US import price index surged from 1.4% to 2.7% on expectations of 2.1%: the largest rise since June 2009.

Despite relentless calls that the Chinese currency is undervalued, and that it really is China's fault that Brent is nearly at $130, in March the world's fastest growing economy posted an import number of $152 billion: an absolutely monthly record. Still, this was almost precisely offset by total exports which at $152.2 billion represent the third highest monthly total ever (following only November and December of 2010), and leading to a trade surplus of $140 million, in essence implying that the CNY is rather correctly priced (at least per the Politburo's calculations of imports and exports). This is substantially stronger than the consensus which was looking for a trade deficit of $3.35 billion in March, arguing that following February trade deficit which came at a multi year high, in part blamed on the Chinese New Year, the country is once again in aggressive inventory restocking mode. A detailed look at China's two main trade partners, the US and EU, shows that exports to the US surged back to $25.1 billion from $15.8 billion in February, while imports from the US were $12.1 billion. Yet despite a strong euro, it is the EU that exported a record amount of goods to China in March: an all time high of $19 billion. Still, this was more than offset by $28.5 billion in imports from China for a trade surplus of $9.5 billion with the European Union. Ironically, it was the Rest of the World (excluding the US, EU, Japan, ASEAN, Korea, Hong Kong, Australia and Taiwan) which benefited the most, after it exported a record amount of goods to China, or $53.9 billion in March. At least someone (who actually has worthwhile goods to export) is seeing their economy grow, regardless of just how undervalued, or fairly priced, the CNY may be.

But please don't show these statistics to anyone that is feeling depressed or that has just lost a job - it might push such a person over the edge.

The manipulation of data in order to spin the economic situation in this country in the best light possible has become so blatant that only the most ignorant could possibly believe it. The corporate mainstream media dutifully reports the propaganda, without ever critically assessing what is being distributed by the government. The percentage of the American working population in the workforce consistently ranged between 66% and 67% from 1998 through 2008. Then, suddenly in 2008, after the economy went in the tank, a couple million Americans found better things to do with their spare time and left the workforce. Anyone with an ounce of brains knows these people gave up and are really unemployed. The percentage of people in the labor force should be 66.5%. Using this 20 year average would add 5.5 million people to the civilian labor force and the unemployment rolls. This exercise in reality gives a real unemployment rate of 12%. The true picture of the American economy is that in 2007 there were 146 million Americans employed, or 63% of the working age population. Today, there are 139.9 million Americans employed, or 58.5% of the working age population. Over this time frame, an additional 7.1 million Americans entered the working age population. In 2007 there were 26.3 million Americans on food stamps, or 8.6% of the US population. Today there are 44.2 million Americans on food stamps, or 14.3% of the US population. To call the current economic disaster a recovery is to practice the art of the Big Lie.

Markets positive again this morning as investors eagerly await news out of the EU summit. The U.S. tax code may see changes as several Republican Congressman are taking up the matter as announced yesterday. Much attention is focused on the tax deferral of repatriated profits, a $1T sum. Portugal’s failure to reach an agreement on austerity measures yesterday and the subsequent resignation of PM Socrates has taken the country one step closer to accepting an international bailout. However, any such aid is severely limited by the hobbled constraints of the EFSF and the lack of (good)will between payer and payee countries. The BOJ said today that the efforts involved in the earthquake rebuilding may overcome the GDP contraction associated with the original damage.

What will happen to the U.S. economy and the dollar in the near term? Will inflation increase dramatically? What is the outlook for gold, and where should you put your money? BIG GOLD asked a world-class panel of economists, authors, and investment advisors what they expect for the future. Caution: strong opinions ahead...

At this point in the intervention cycle one would have to be a very brave person to dare to do anything in the FX market: the rules are now changing constantly as the central planners shuffle pieces to avoid giving the impression that the world's financial balance is now hanging by a central bank-woven thread. In the enivronment Goldman's Thomas Stolper has just come out with a lone EURUSD recommendation. We refuse to even analyze what this may mean with regard to Goldman's positioning, suffice to say that Goldman will have to do the opposite to what its clients are trading. However whether it is an initiating or closing trade is unknown. So while the big banks are playing hot currency potato with each other, Goldman now sees the EURUSD rising from the 1.41 range to 1.50, with a 1.35 sto: "US balance of payment pressures and the declining Eurozone fiscal risk premium have been our main G10 themes for some time. The latest evidence re-enforces these trends and suggest EUR/$ can appreciate further from current levels. Other factors, like higher oil prices and monetary policy differences between the inflation targeting ECB and dual-target Fed further strengthen the theme." As to whether this is also merely another attempt to by Goldman to push stocks nominally higher due to real value destruction (plunging dollar) is without question.

Japan's 9.0 earthquake is most likely a non-event for the crude oil, but the nuclear power basically has met its Deepwater Horizon.

That China's February inflation just came out at a consensus-beating 4.9% is no surprise. After all, the country miraculous slipped just below the consensus so the Department of Truth had to keep things somewhat symmetric. And yes, while this is the 5th consecutive month that Chinese inflation is higher than the official target of 4%, this is not the news of the evening: a press release just issued by the PBoC however is...

So, let's see which of the things we've been ignoring suddenly matter today...

That didn't take long: From Goldman's Hatzius "News Reinforces Our Sense Of Downside Risk To Q1 Growth." Ah, the propaganda bureau's primary dealers: predictable as a Swiss watch. How long before RenTec's headline parsers read between the lines and realize that QE3 will launch at the latest by September. Of course, there are a few European near-defaults and passed stress tests in the interim, so the dollar may well jump for a month or two, only to plunge to fresh(er) all time lows once more QE is announced (just prior to which Gross will start buying bonds).

And another piece of bad news for both the US economy and US exporters in particular, even despite prevailing dollar weakness over the past several months: the January US trade deficit printed at $46.3 billion, on imports of $214.1 billion ($10.5 billion higher M/M) and exports of $167.7 billion ($4.4 billion higher). This was the worst number since August 2010. The December deficit was revised to $40.3 billion from $40.6 billion. The December to January increase in imports of goods reflected increases in industrial supplies and materials ($4.4 billion); automotive vehicles, parts, and engines ($2.7 billion); capital goods ($2.1 billion); consumer goods ($0.9 billion); and foods, feeds, and beverages ($0.5 billion). A decrease occurred in other goods ($0.6 billion). The December to January increase in exports of goods reflected increases in industrial supplies and materials ($3.7 billion); automotive vehicles, parts, and engines ($1.3 billion); and foods, feeds, and beverages ($0.1 billion). Decreases occurred in consumer goods ($0.6 billion); capital goods ($0.4 billion); and other goods ($0.3 billion). And unfortunately for Wall Street, few are importing US financial innovation any more: "Services exports increased $0.5 billion from December to January." So how much lower does the dollar have to plunge before someone actually starts importing US goods? And an amusing discrepancy: according to the US, the January trade deficit with China was $23.3 billion. According to China, the trade surplus with the US in January was $13.6. Just 100% off between two departments of truth. Due to notable weighting of trade data in GDP calculations, look for another round of downward GDP revisions. The Goldman spin is becoming increasingly difficult at this point. Next up: Next up: Hatzius on the Dudley hotline asking for instructions?