Trade Deficit

Following the stronger than expected net exports by China, we now get a better than expected trade deficit from the US, which comes at $38.7 billion, compared to expectations of $43.8 billion, from a prior upward revised -$44.6 billion. As the number is GDP positive, it has pushed the USD higher, which by courtesy of its newfound status as funding currency of risk assets, ends up offsetting any move in stocks higher, further elaborating the paradox that good economic news in the US is stock market neutral at best and negative at worst. Lastly, the question of where all these extra exports are going (more net exports out of the US, EU, China, Australia, and Japan) refuses to be answered by anyone... Perhaps Mars really is bailing out the earth.

Today's economic data avalance is a trifecta of horror: the August trade balance came at - $46.3 billion (deficit, duh), on expectations of $-44.0 billion, with the previous revised to ($42.6) billion. This is the second highest trade deficit in years. This also means the Q3 GDP will be revised lower again. Oh yes, and Schumer is currently frothing in the mouth as the trade deficit with China was at a record $28 billion, as expected based on the reverse lookup from yesterday's China trade surplus (which dropped). Elsewhere, PPI came in at 0.4%, on expectations of 0.1%: congratulation Ben, you have your inflation, as the bulk of the increase was in food and gas. PPI ex Food and Energy was 0.1%, in line with expectations. Lastly, jobless claims surge from 445K to 462K, with the prior number revised higher for the 24 out of 25 times. And speaking of revisions, the prior week Continuing Claims number was revised from 4,462K to 4,511K: yes stunning, we know. Those on Extended and EUC claims plunge by 340,000 for the week ended September 25, taking away a few more pips from GDP. All in all, this further cements the economic suicide that is QE2.

Futures surge as the US economy continues to hemorrhage jobs: a 451K print in initial jobless claims merely means that ever more people are being shifted over to extended benefits, which increased by 64.7K. One can be sure that at least 20K of this number is those hitting the 6 month ceiling on claim applicability. And yes, anything over 400K means no job creation (private or census), contrary to whatever the DOL may want everyone to believe. Elsewhere, the US trade deficit for July came out at "only" $42.8 billion on expectations of $47 billion, with the previous print slightly revised to $49.8 billion. We are looking forward to the Chinese release over the weekend of their version of the story, which will show more updated August data, and allow to read into how the China-US trade balance is developing.

There was a time when Warren Buffett was actually a credible, respected investor, when his views were prescient, and when his every action was not predicated by some supreme hypocrisy merely seeking to perpetuate the ponzi market, and/or praise the status quo which forces his record bet on "endless" American growth to be aligned exclusively with what the Fed does each and every day, i.e., destroy the value of the dollar. Yet 7 short years ago, the very same Warren Buffett wrote a scathing op-ed in which he lamented the decline of the dollar, the surging US trade deficit, and pointed out that any profits he and Berkshire may make courtesy of his then brand new non-US FX longs, "would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar." Well, the dollar continues to plunge courtesy of QE, and the pain is about to be far more acute once Bernanke really gets involved in the next 3-6 months. And the irony is that on November 10, 2003 Buffett admonished: "A perpetuation of this [dollar decline] will lead to major trouble." So much for once held ideals. And ironically, the same Buffett who now preaches Keynesian ideals at every opportunity, concluded his letter as follows: "In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: “All I want to know is where I’m going to die, so I’ll never go there.” Framers of our trade policy should heed this caution—and steer clear of Squanderville." It is no wonder then that reading between the lines, people tend to forget the brilliant investor that Warren once was, and focus on the two-faced hypocrite that his "assets" have forcefully converted him into.

As the attached chart shows, the recent Obama initiative to push exports to double in 5 years has started off, just like all other administration efforts, as an abysmal failure. The June balance of trade plunged to ($49.9) billion, on expectations of ($42.1) billion - a surge of $8 billion compared to May's ($42) billion. This number was the highest since October 2008, and just $28 billion away from the all time record. At least we now know who the mystery "importer", that extracted Europe from the economic abyss, was in the past 3 months. And courtesy of the Current Account equation, what this surge in deficits means is that Q1 GDP will now likely be revised to well under 1.0%! As JPM reported earlier, revision in BEA assumptions on wholesale and non-durable inventory alone will push Q1 GDP from the official 2.4% to 1.3%. Today's data is the last nail in the Q2 GDP number, and according to analyst will take out another 0.4% from the GDP, meaning that when all is said and done, Q2 GDP will come out to sub-1%. And this was in a quarter when the stimulus was still expected to be boosting GDP. We now fully expect that the final reports of Q3 and Q4 GDP, some time in 2011, to be solidly negative, as the economy is now officially contracting once again. In other words, the Double Dip is (even more) official.

Obama's plan to spur US exports sure is starting with a bang. After reporting a $40 billion trade deficit in January, the US once again was a net importer (no surprise there) to the tune of $39.7 billion. This is worse than the $38.5 billion consensus. Both import and export prices increased by 0.7% (with an import price consensus of +1.0%). The largest deficit increase was in the consumer goods category, which increased by a sizzling 3.1% as everyone is stockpiling Kindles and iPads for that moment when the irresistible force of the US budget deficit finally meets the immovable object of reality (which lately has been quite movable). The next question: with China now also a net importer, and joining such illustrious peers as the US and EU, just who is exporting?

Here are the key observations on the number via Goldman, which now anticipates the need for a GDP estimate reduction as a result. That's ok, we are sure the administration will promote legislation to the GDP equation that will make net imports actually a GDP positive.

In March China recorded its first trade deficit after 70 straight months of trade surpluses, which has occurred even despite global calls that the Renminbi needs to be revalued by about 20%. The primary reason for this was that in March China imported a total of $119.4 billion worth of goods - the single greatest amount recorded in history. This was offset by $112.1 billion of exports, well below the record exports China was pumping out in late 2008 in the mid $130 billion range, and the $130.7 billion exported in December of 2009. Below we present a summary of the key highlights of China trade balance over the past 3 years.

"Many clients have congratulated us for flagging up this outturn back in November last year. We said back in November that ?China will be heading into a trade DEFICIT (!) throughout 2010. This is a mega-call and will have major financial market implications?. Unfortunately I have not pushed this call hard enough. Why not? Well, because as the implications are so very non-consensus, I knew noone would take it seriously. With the pre-announcement of March?s deficit, investors are now more willing to listen." - Albert Edwards, SocGen

Say goodbye to China's "export economy" paradigm. In a stunning development for trade hawks, and pretty much anyone who follows the biggest liquidity bubble in history, China Daily has announced China is about to announce a record trade deficit (yes, not surplus, deficit) for March. This makes the whole CNY undervaluation debate pretty much moot, as even China now moves into the ranks of net importers. From China's official daily newspaper: "The country will probably see a "record
trade deficit" in March thanks to surging imports" and "will "fight
back" if Washington labels China a currency manipulator." Perhaps this finally explains where all the excess liquidity has gone: with China now not exporting to the US consumer, it has instead refocused on its own "middle" class. This means that Chinese administrators are much more focused on maintaining a stable economy, and will be much more concerned about economic overheating, which goes in line with the recent indications of material liquidity tightening out of Beijing. Market News reports that the actual deficit will come in at $8 billion for March, the first deficit since April 2004, when the gap was $2.26 billion. Maybe Albert Edwards will just have the last laugh with his iconoclastic prediction of a CNY devaluation.