Trade Deficit

It has been a quiet overnight session, following yesterday's epic short-squeeze driven - the biggest since 2011 - breakout in the S&P500 back to green for the year, with European trading particularly subdued as the final session of the week awaits US nonfarm payroll data, expected at 230K, Goldman cutting its estimate from 250K to 210K three days ago, and with January NFPs having a particular tendency to disappoint Wall Street estimates on 9 of the past 10. Furthermore, none of those prior 10 occasions had a massive oil-patch CapEx crunch and  mass termination event: something which even the BLS will have to notice eventually. But more than the NFP number of the meaningless unemployment rate (as some 93 million Americans languish outside of the labor force), everyone will be watching the average hourly earnings, which last month tumbled -0.2% and are expected to rebound 0.3% in January.

What if the biggest challenge to capitalism grows out of its strengths not its weakness?

And so after that epic 5.0% Q3 GDP print, driven largely by Obamacare, the payback begins, and the annualized Q4 GDP print, which came in at nearly half the previous quarter run rate, or 2.6%, is about to tumble by another ~0.5% following the just released trade data for December which saw a 17.1% surge in the US trade deficit from $39 billion (revised to $39.8 billion) to a whopping $46.6 billion in December, the widest deficit since 2012, as US exports declined 0.8% to 4194.9Bn from $196.4 Bn, while imports rose notably from $236.2Bn to $241.4Bn in the month before. All of this brought to you courtesy of the soaring USD. This was also the biggest miss to expectations of $38.0 billion since July of 2008. If this does not force policymakers to reassess the impact of the soaring dollar on US trade, nothing will.

A straight forward discussion of the factors driving the US dollar. 

In 55BC, Cicero stood before the Senate of Rome (warning of its looming demise), spoke of the “arrogance of officialdom” and the more one studies going ons throughout history, the clearer it becomes – the story remains the same, only the actors change - history repeats because the passions of man never change. Those who may grudgingly support the ECB stimulus in the hope that it will buy time for governments to enact structural overhauls, keep praying that politicians will push aside their own personal self-interests for once and focus of the interests of the people. Such wishful thinking is foolish since history demonstrates that only takes place when the system collapses. People who do hold to this view are also worried that looser monetary policy may work against structural measures. The European Central Bank’s stimulus diminishes any incentive for governments to reform. The policy makers and specialists at Davos were divided over the effect of even that program; but where do these people get off assuming they have the ability and right to manipulate the world?

Since its inception in 2008, easy monetary policy has created very few positive effects for the real economy — and has created considerable (and in some cases unforeseen) negative effects as well. The BIS warns of financial bubbles. While economic policymakers should take a closer look at Japan, China, and yes, the United States, when debating the limits of monetary stimulus and the dangerous nature of financial bubbles; sadly, the discussion is happening too late to be anything more than an intellectual exercise.

During his State of the Union speech on Tuesday evening, Barack Obama is going to promise to make life better for middle class families.  Each January, he gets up there and tells us how the economy is “turning around” and to believe that much brighter days are right around the corner.  And yet things just continue to get even worse for the middle class.  The numbers that you are about to see will not be included in Obama’s State of the Union speech.  They don’t fit the “narrative” that Obama is trying to sell to the American people.  But all of these statistics are accurate.  They paint a picture of a middle class that is dying.

Given the potential for financial losses triggered by oil's price collapse to cascade into the financial sector at large, the Fed may well be forced to intervene either directly or indirectly... Unleash the oil weapon...

Assume the news for next week has not already been written,  What should investors, or those monitoring the international political economy be watching?  Here is my list.  

Data and market positioning can explain movement in the currencies.  It does not prove that there is no manipulation or a great conspiracy.  It just means the markets are understandable without resorting to such explanations.    Try it.  

After subdued trading in the overnight session until a little after 8pm Eastern, algos went into overdrive just around the time the Fed's 2015 voting member and uberdove Charlie Evans told reporters that "raising rates would be a catastrophe", hinting that the first rate hike would likely be - as usual - pushed back from market expectations of a mid-2015 liftoff cycle into 2016 or beyond (but don't blame the US, it is the "international situation's" fault), in the process punking the latest generation of Eurodollar traders yet again. Whatever the thinking, S&P futures soared on the comments and were higher by just under 20 points at last check even as Crude has failed to pick up and the 10Y is barely changed at 2.00%.

Cry if you want to, but the dollar is stronger.  Deny it if you want to, but the US economy is more vibrant now than the Europe or Japan.   This is what is shaping the investment climate, if you are interested. 

Those waiting to see if the crude crash would lead to any sizable adverse impact on the US trade deficit in November, as lower production led to higher imports if only on paper, the answer is yes, but in the opposite direction: instead of increasing or dropping just marginally from October's $43.4 billion (to the $42 billion consensus estimate), the November trade deficit tumbled by 7.7% to $39 billion the lowest print since December 2013, as a result of a 2.2% drop in imports coupled with a 1% decline in exports. But it was shale crude once again that was the swing factor, which was massively produced as domestic producers scramble to offset declining prices with extra volume, because as the data showed, in November the US imported the smallest crude amount by notional since 1994, and the lowest cost crude since 2010.

For all those who think the upcoming carnage to the shale industry will be "contained" we refer to the following research report from the Manhattan Institute for Policy Research. For the impatient ones, here is the punchline: "The $300–$400 billion overall annual economic gain from the oil & gas boom has been greater than the average annual GDP growth of $200–$300 billion in recent years—in other words, the economy would have continued in recession if it were not for the unplanned expansion of the oil & gas sector."

Despite the authorities' best efforts to keep everything orderly, we know how this global Game of Geopolitical Tetris ends: "Players lose a typical game of Tetris when they can no longer keep up with the increasing speed, and the Tetriminos stack up to the top of the playing field. This is commonly referred to as topping out."

"I’m tired of being outraged!"