U.S. Trade Deficit: Not as Ominous as it Sounds

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AHEAD OF THE TAPE: Trade Picture Brightens

  • Summary: Today's trade number is predicted to show a July trade-deficit increase from $64.8 to $65.5 billion, ostensibly frightening. But there are numerous reasons why the picture might not be as bleak as it appears: 1) The shortfall in oil accounts for 30% of the total trade-deficit. From June to July, the price of imported petroleum products increased by 4.7%. Since then, oil prices have dropped more than 10%. 2) There is a 10% decrease in inbound cargo volume compared to last summer, suggesting a shift in the import/domestic product ratio. (Less-optimistic reasons: Rising European demand is delaying U.S. orders; supply-chain improvements allow retailers to order later; retailers may be ordering less in anticipation of reduced spending.) 3) Continued Asian growth should keep U.S. exports strong.
  • Comment on related stocks/ETFs: One of the huge beneficiaries of the U.S. trade-deficit is China. Driven by a 33% surge in exports, their July trade-surplus came in at a record $18.8 billion, and $95.65 billion ytd. This has lead some to call for a market-determined yuan, the assumed strength of which would balance trade by making Chinese goods more costly and imports more affordable. David Andrew Taylor asks: Why hasn't the dollar collapsed amid a crippling trade deficit? His answer: With the proceeds from the goods we buy overseas, our beneficiaries invest in our financial markets. Phil Davis argues: When you're the richest guy in the bar, do you worry about the drink-deficit if you buy an extra round or two? No one should be surprised that the richest country in the world by a factor of 4 spends and extra 4% of their GDP on imports. Even Barron's Marc Chandler goes to great lengths to dispel the dollar/deficit myth. Speculators can play the dollar vs. deficit using the Euro Currency Trust ETF (NYSEARCA:FXE), which mirrors the euro's movement (short-sale rules do not apply to ETFs).

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