The Declining Trade Deficit: Not As Rosy As You Would Think

The trade deficit numbers are out for June 2013 and have been very positive. Due to an oil boom, the trade deficit shrank 22% from around $44 billion in January 2013 to $34 billion in June 2013.

As you can see on Chart 1, the decrease in deficit was due to an increase in exports (red chart) and a decrease in imports (blue chart). This looks very promising, but I want to show that not all is well if you look into the details.

Chart 1: Import Vs. Export

Let’s look deeper into these import and export numbers. Chart 2 gives the breakdown of the export numbers. The largest segments are “machinery and transport equipment”, “chemicals and related products” “mineral fuels and lubricants” and “re-exports”.

Chart 2: Exports January 2013

Chart 3 gives the breakdown of the import numbers. The largest segments are ‘machinery and transport equipment”, “mineral fuels and lubricants”, “miscellaneous manufactured articles”.

Chart 3: Imports January 2013

From these numbers we can deduct that the oil industry is indeed a very important segment that will influence the import and export numbers.

If we then further look at how these numbers evolve in time from January 2013 till June 2013 we have charts 4 and 5.

Chart 4: Exports (billion USD)

Chart 5: Imports (billion USD)

When analyzing the trends on charts 4 and 5, there is one segment that is worth noting. We see that exports of petroleum products (which are incorporated in the segment “mineral fuels and lubricants”) have been going up, while imports of the same have been going down. The reason for this can be found in the divergence of West Texas Intermediate (WTI) crude oil and Brent crude oil.

To continue reading this analysis: go here.

China: Turning US Treasuries Into Hard Assets

A month ago I indicated in this article that China is massively buying copper. It seems that this trend hasn’t stopped yet, and it won’t stop anytime soon. The LME copper warehouse stocks level has been trending down since late last year (Chart 1), which incidentally coincided with China decreasing its margin requirements on banks, which I discussed in this article.

Today, China posted one of the largest deficits in their history, to see why this is, go to: China converting US treasuries into hard assets.

Strength in currency: a good thing?

Today I was thinking about the yen dropping against other currencies. Mostly, such things happen when governments print money. But also when countries post deficits in their current account balance.

The mechanics are as follows:
A country exports stuff to other countries and receives money in foreign currency. Let’s say Japan exports Playstations to America and receives US dollars. Japan will of course want yen, and will exchange those US dollars into yen so that they can buy things with yen in their own country Japan.

If Japan exports more to the US as the US exports to Japan, then more money will flow to Japan than to the US. So more US dollars flow to Japan as yen flow to the US. Which means more US dollars need to be converted into yen, which makes the yen rise.

Conversely, when Japan has a trade deficit, like today, then the yen will drop against other currencies out there. So basically you want your currency to strengthen, which indicates that your balance sheet is improving.

Strength in currency:
Strength in currency has other positive effects. If your currency is higher than other currencies then you can buy more stuff. Let’s say the oil price is $US 100/barrel. If the yen goes up against the US dollar, the oil price is still the same, but Japanese people can buy more oil, which means their import costs go down, which is good for their balance sheet.

People will say though, if your currency goes up, you will export less. I think this is a complete baloney! When your currency goes up, you can always reduce the prices of your goods that you sell to foreigners. You will have less revenue (because you sold for a lower price), but your currency went up (which means you didn’t lose any money). You will still have the same real revenue as a company, currency adjusted. Of course, when you reduce the price of your goods sold, you should also reduce the wages of your employees, otherwise costs will go up. But the employees shouldn’t have a problem with this, because they still have the same buying power as their currency just went up against other foreign currencies. And if they had money in the bank, that money just went up in value against other currencies.

Generally, companies will benefit though, because their import costs went down due to a strenghtening currency.

Conclusion:
When your currency goes up you will always benefit:
1) You can buy more stuff (oil, food, gold…)
2) Exports will NOT go down as you can always reduce prices of your goods sold, and reduce wages of your employees. Import costs will go down as the currency went up against other currencies.
3) Employees aren’t affected as their reduced wages are compensated by a higher currency. Their buying power stays the same.
4) Savings in their own currency will appreciate in value.

I would love to have a discussion with anyone who doesn’t concur with this thesis.