Monday, April 18, 2005

Well, academic life is once again impinging heavily on my blogging. I am off to Sweden today to give three talks (in Lund and Gothenburg) and won't be back until Thursday evening. Then next Monday the General takes his little platoon to Scotland for the week.

So in sum, posting on General Glut's Globblog will be rather light for the next two weeks. I'll get some comments in, but not every day.

Back to the blogging salt mines in May!

Wednesday, April 13, 2005

Yesterday I reviewed the horror film which is the monthly US trade balance release and noted that all indications are that >$60bn deficits are the all-but-assured near-term future. This is not so much because of run-away oil prices or our insatiable desire for cheap clothes from China. It is instead because of the worryingly stagnant US export performance of late.

Over the past three months, US goods exports (SA) have been completely stagnant: $71.1bn, $71.1bn and $71.2bn respectively. The robust growth of 2004 during which goods exports grew 13% is � for the time being at least � just a memory. A closer look suggests this memory is only going to fade as dark clouds begin gathering around the edges of the US export picture, and thus the US trade balance, and thus the terribly imbalanced global economy.

You get a better view by looking at the top four export markets for US goods: Canada, the EU, Mexico and Japan. Country specific data is not seasonally adjusted, so they have to be taken with a grain of salt. Overall, SA goods exports rose 3.2%, but the drops in NSA exports to Canada, Mexico and Japan are much larger, so we can surmise that we�d still find an SA export decline if that data was available.

Let�s take them in order.


US exports to Canada have been stagnant to slightly declining since spring 2004, and the downward pace has really picked up since the fall. In the September-November 2004 period (which I�ll call �last fall�), US exports to Canada averaged $16.8bn per month, whereas for December 2004-February 2005 (which I�ll call �this winter�) they have averaged just $15.9bn � a 5.7% drop.

European Union

US exports to the EU have been stagnant: $14.7bn/mo. last fall, $14.8bn/mo. this winter. With growing German economic troubles, the return of French stagnation and even some clouds on the UK horizon, stagnancy is the best we can probably hope for into the near future.


Things are even worse here than in Canada, where the export downturn has been particularly steep of late. Last fall monthly averages were $9.9bn; this winter just $9.1bn. That racks up an 8.1% decline in the country�s third largest export market. Latest news out of Mexico is that the country�s central bank has ended its tightening for this economic cycle, a sign that the export market will if anything be shrinking rather than expanding in coming months.


The story for US exports is probably worst in Japan. Last fall monthly averages stood at $4.7bn while this winter they fell to $4.2bn � a 10% decline. Even worse news is that the year-over-year export figures to Japan are completely stagnant � $4.2bn/mo. this winter, $4.2bn/mo. last winter. As Japan shows no evidence of decisively pulling out of its 10+ year economic funk, more declines are to be expected.

Canada, the EU, Mexico and Japan together absorb nearly two-thirds of total US exports. The export outlook for the US is pretty dark, which means of course that the East Asians are going to have to go on an incredible dollar-denominated asset eating spree to keep up with the swelling US trade deficit. With the Chinese economy apparently slowing down for real now, perhaps the time has finally come when Beijing will find the courage to change the peg and thus cut back on its (and Korea�s, Taiwan�s and Japan�s) need to devour US assets.

Tuesday, April 12, 2005

Let's just say that the US is on track to rack up a -$717bn trade balance this year.
The U.S. trade deficit, exacerbated by surging imports of oil and textiles, soared to an all-time high of $61.04 billion in February.

The Commerce Department said Tuesday that the February imbalance was up 4.3 percent from a $58.5 billion trade gap in January as a small $50 million rise in U.S. exports of goods and services was swamped by a $2.58 billion increase in imports.
One feels like a broken record reviewing these monthly trade statistics. Not only was the overall trade balance a record deficit, but the five largest deficits all-time have occurred in the past five months. We haven't seen a deficit under $40bn since November 2003 and two such deficits in a row haven't occurred since October-November 2002.

Just as the static numbers are ugly, the trends are even uglier. So far the 2005 deficit is 30% larger than in 2004. The annualized deficit of the most recent five months is -$697bn while over the same period in 2003-04 it was an annualized -$521bn -- thus 34% larger. While the goods deficit swells uncontrollably, the services surplus is shrinking weakly. For February it was a meek +$3.7bn, while the monthly average for 2004 was +$4.0bn. The US services balance has shrunk every year since 2000 and it on track to be the smallest since 1991.

US exports are growing at a decent clip -- 10.9% faster this year than last. Imports are growing much faster, of course. Americans' insatiable thirst for imported oil is always a big part of the story these days, but the truly worrisome trend is the steady growth of non-petroleum goods imports. In February they hit $117.4bn -- yes, another record -- and for the year they are 17.2% larger than in 2004. Add in a dependence on imported oil at over $50/barrel for weeks now and you find yourself standing on top of a sink hole with the water rapidly being sucked out of the ground.

And don't be too soothed by US export growth, inadequate as it is. US exports have been more or less stagnant for three months now. If this is a sign of things to come, we'll be looking at the gap between import growth and export growth explode. And then a CA balance of -7% of GDP this year looks all but assured.

As I've said before, the only solution to this out of control trade situation is marked reductions in US import consumption -- i.e. a US recession. There is no realistic scenario of dramatically growing US exports combined with slowing or even stagnant imports. The "hard versus soft" landing debate is stale. The real question now is only "how hard?"

Monday, April 11, 2005

Stephen Roach has a phenomenal ability to both get it and not get it at exactly the same time. The latest example of that is his missive from last Friday on "The drumbeat of protectionism". Roach is right that the beating of this drum in the face of gargantuan and ever-growing US trade deficits with China combined with the most sluggish US labor market in two generations was inevitable. However, his arguments for why it is morally wrong (even though politically inevitable) are standard liberal clap-trap and simply don�t hold water.

Roach offers us two reasons why �The macro I practice suggests that the scapegoating of China is a huge mistake.� The first is an all too familiar liberal misidentification (going back to Adam Smith at least) of a �national interest� which unites the interests of all classes and class fractions.

Contrary to widespread impressions, China�s export surge is not an outgrowth of aggressive market-share penetration by rapidly growing indigenous Chinese companies. To the contrary, the bulk of the export surge has been dominated by Chinese subsidiaries of global multinational corporations and cross-border joint-venture operations. . . . Who is the New China? These numbers suggest that China�s so-called export prowess is traceable more to �us� in the West than it is to them.
As far as workers in the US textile and furniture industries goes, since when is outsourcing done by "us"? Global production may be under the direction of � and profits reaped by � US-incorporated TNCs, but that hardly means there is a US right hand "us" failing to see what its left hand is up to in China. Clearly these TNCs are not behind the "protectionist" push in the Senate � but then nobody ever said they were.

Roach�s second reason is your basic "free trade is good" schtick with a twist:
The fact that China accounts for the biggest portion of the US trade deficit is actually a good thing -- it offers America access to high-quality, low-cost goods. If a nation has to run a trade deficit -- and unfortunately that�s the inescapable verdict for a saving-short US economy -- then it makes eminent sense to trade most aggressively with the world�s low-cost producer. That�s precisely what�s happening.
Now fair enough, it takes two to tango, and American consumers are benefiting at the expense of American workers in import-substituting industries as well as those in industries which compete for labor in such industries. That being said, running a massive trade deficit with the world�s low-cost producer of consumer goods actually enables the deficit to run much larger than it otherwise would be. American worker/consumer short-term interests are running roughshod over their long-term interests, and it is hopefully the task of the state to see the larger picture and to do something with it in sight. Consider Argentina�s middle class who were eating and drinking in the late 1990s thanks to the peso peg and yet facing destruction in 2001-02 because of the very same peg.

Roach is right about one thing, however. Tense US-China relations could provoke the hard landing of the dollar which everyone fears. At the same time, tension over the trade deficit might simply become the straw that breaks the proverbial camel�s back. The chances of the US getting out of this quagmire without a recession are, as far as I can see, close to zero. Thus liberal free-traders will blame their favourite whipping boy while the truth is much more complicated.

This is the not-so-thin edge of the wedge aimed at the multiple regional US housing bubbles.
For the first time in 14 years, the American workforce has in effect gotten an across-the-board pay cut.

The growth in wages in 2004 and the first two months of this year trailed inflation, compounding the squeeze from higher housing, energy and other costs.

The result is that people like Victor Romero are finding themselves falling behind.

The 49-year-old film-set laborer had to ditch his $1,100-a-month Hollywood apartment because his rent kept rising while his pay of $24.50 an hour stayed flat.

"There's no such thing as raises anymore," Romero said. . . .

Although pay rose only about 2.4% last year, benefit costs jumped almost 7%.

With benefits factored in, workers' total compensation did outpace inflation in 2004, even if they didn't see it in their paychecks. But employers also are requiring workers to pay a greater share of their premiums.

"Healthcare has eroded the wage base," said Janemarie Mulvey, chief economist with the Employment Policy Foundation, a business-funded think tank in Washington.

"In the long run, we can't continue like this. If healthcare keeps crowding out wages forever, something's got to give."
I wrote a long post on this issue back in January, and with another three months of the same trend unfolding -- and now bolstered by average US gasoline prices of $2.22/gal. -- we're just that much closer to the Day of Reckoning. Just think of all those Californians living in their zero-downpayment ARMed homes and you'll see what I mean.

Friday, April 08, 2005

Andy Xie gives us the straight dope: "The Party Doesn�t End Until Property Prices Fall".
A global property bubble is at the heart of demand creation in this cycle. Real interest rates will have to rise much farther for property prices to turn down. It is too early to expect this growth cycle to end, in my view. . . .

The Party Doesn�t End Until Property Prices Fall

The main engine for demand creation is property. In China, profit optimism originates from the booming property market in terms of price and volume, which is supporting the fixed investment boom. Surging property prices support the spending power of the US consumer despite relatively weak income.

The boom or burst due to a property bubble tends to be long-lasting. The Bank of Japan began to tighten in May 1989. The stock market peaked five months later. The land price peaked in the third quarter of 1991 -- one year after the BoJ ended its rate-hiking campaign. Japan�s economy weakened seriously in 1992 after the land price rolled over. Japan is a good example to show that the lag between demand response and monetary tightening can be quite long in a property-driven boom. . . .

It is difficult to see real interest rates surging quickly in either China or the US. The Fed is unlikely to follow such a course voluntarily. Unless the US suffers an inflation shock from either a sustained surge in oil prices or a dollar crash, it is hard to envisage a collapse in global demand. This is why I do not want to turn bearish on demand until there are sufficient signs of property prices declining.
Indeed, central banks seem to be extremely wary of bringing a pin anywhere near the property bubbles raging in all four corners of the global economy these days. Say globalization keeps consumer inflation well in check, and waning growth in Japan and Europe eventually brings global oil prices back to earth. Why does the Fed raise interest rates any longer? Why not stop around 3.5% and keep pumping fuel into the housing market ad infinitum? Hell, you could even start bringing rates down again in 2006 . . . until the US current account blows the world economy wide open.

Thursday, April 07, 2005

Brad Setser has another post up today on how the Koreans are getting pissed off that they are being force-fed dollar assets. I've addressed this matter myself, most recently on March 31.

Suffice to say that in my view, the Koreans have only two real options. The first is the beg the Chinese to revaluate. I simply cannot see any way for Korea to break from supporting the dollar by itself. The won would soar again, and the Koreans have already shown that this is unacceptable.

The second is to choke off the domestic economy provoking a recession. Japan has enjoyed a fairly stable yen-dollar (and thus yen-renminbi) rate for months now without need to intervene in currency markets thanks to the demise of yet another hopeful end to the country's decade-plus long recession.

I suggest begging is the preferable strategy. Best done in private, however.

The only real interest rate news on the world scene of late is coming from the Federal Reserve. Over the past few days Australia, the UK and the ECB all announced no change to their interest rates. At the same time, the consensus is that the Fed has only just begun. Or has it?

The dollar took a slight dip today precisely because the markets are beginning to wonder whether the Fed is really interested in bringing US interest rates to "neutrality". Now, of course, identifying a neutral interest rate is our modern version of debating how many angels can dance on the head of a pin. That being said, the markets think Stephen Roach's hope that US rates will rise as high as 5.0% in order to truly begin balancing the global economy is unlikely to be fulfilled.

The dollar fell against the euro and the yen as speculation waned that the Federal Reserve will raise interest rates in bigger increments.

Fed Chairman Alan Greenspan spoke twice in the past two days without commenting on inflation, causing the dollar to retreat . . .

``Most of the gains from heightened interest-rate expectations have almost fully been exhausted'' at this point, said Monica Fan, head of currency strategy at RBC Capital Markets Ltd. in London. The dollar may fall by the end of the week to $1.3060, last week's low for the currency, she said.

U.S. 10-year Treasury note yields fell yesterday, after Greenspan addressed a petrochemical group in San Antonio on April 5 without saying energy prices were inflationary.
We have yet to see evidence, as we have in the UK, that housing prices are part of the Fed's calculations. Real estate is wildly inflationary in many US markets, but raising the federal funds rate may be too blunt a hammer for the Fed to wield. However, the Bank of England's last 2004 rate rise initially put a wet blanket on UK housing prices, only to see the housing market throw off the blanket in early 2005.

Now some are worried rates in the UK are too high, putting an unwelcome damper on retail sales.
some economists are speculating that the next rate move will be down instead of up given that inflation is below the government's target while the retail sector is still struggling.

"The events of the last month and today's decision to leave interest rates on hold at 4.75% support my longstanding forecast that interest rates are currently at their peak and could soon begin to fall," said Roger Bootle, economic adviser at Deloitte & Touche.
Should be just in time to save the property bubble from truly deflating. It seems there will always be some bank that will provide a punch bowl to anyone still interested in partying.

Tuesday, April 05, 2005

Yet more evidence for the aphorism "You can't beat something with nothing."
The dollar climbed to a five-month high against the yen and the strongest in seven weeks versus the euro as economic growth in Japan and Germany falters.

``What has surprised the market this year is the fact that Japanese growth has been so weak and we've also seen downward growth revisions from Europe,'' said Shahab Jalinoos, a currency strategist at ABN Amro Holding NV in London. ``The dollar has shown a sustained ability to bounce back.''

Japan's currency dropped as a government report showed household spending fell in February, adding to evidence the Japanese economy is struggling to sustain a recovery from recession. The euro declined as a report showed growth in European service industries stagnated in March. . . .

Japanese and European central banks are expected to keep their benchmark interest rates unchanged at policy meetings this week to help spur growth in their economies, according to the median forecasts in surveys of economists by Bloomberg. The rate gap with the U.S. has widened as the Fed lifted its target rate seven times since June to head off inflation. . . .

Japan's currency may fall to 110 before the end of the week, Christensen said. The U.S. currency may also climb as high as $1.2730 per euro by the weekend, he said, driven by U.S. interest- rates expectations.
Really the only hope for global re-balancing to even begin is for US interest rates to begin choking off US consumption. Without the cut-backs to consumption, higher rates will only stoke a higher dollar which will encourage even more imports and more imbalance.

And with both the eurozone and Japan faltering, the only hope for the US current account is quite frankly a US recession. Dramatically rising US exports are not going to happen. I can't say that we'll see recession this calendar year however. This runaway train has too much of a head of steam still. One has to wonder if a CA deficit of 7% of GDP in 2005 is too conservative an estimate . . .

And one more thing. The markets aren't ignoring the swelling US CA problems, but even the nay-sayers can't see any significant impact on the dollar.
Concern record U.S. current-account and budget deficits will fail to be matched by sufficient capital from abroad will still send the dollar lower this year, said UBS's Mohi-Uddin. UBS, the world's largest currency trader, forecasts the U.S. currency will decline to $1.36 per euro and 103 yen by June 30.
Note that, because of US inflation and Japanese deflation, �103 in June 2005 is the same as about �111 in June 2003. In June 2003 the actual value of the dollar was �118, so according to Mohi-Uddin by June 2005 the dollar will only have declined a mere 6% in real terms in two years. Moreover, we'll still be nowhere near the level at which the Bank of Japan will feel the need to begin intervening massively as they did in early 2004. The world's central banks aren't propping up the dollar so much as private capital is.

Monday, April 04, 2005

Last week Brad Setser pointed out that the weak dollar hasn't benefitted the US very much in terms of cutting imports and boosting exports. In fact, it's done virtually nothing at all as far as tackling a soaring current account deficit goes (Brad runs the numbers today on a $900bn CA deficit for 2005). Somebody who has benefitted, however, is China. In particular, the weaker dollar/renminbi and the end of the Multifibre Agreement has generated a booming textile export trade coupled with shrinking import growth. Bad news both ways for the US and for a European Union seeking to defend its own textile jobs in the face of 10%+ unemployment.
Imports of Chinese textile and apparel products into the United States soared in the first quarter, offering fresh evidence that the world's clothing trade is being drastically reshaped by the abolition of global quotas in January.

The United States Commerce Department said Friday that in the first three months of the year, preliminary data showed that United States imports of textile and apparel products from China rose more than 63 percent from a year ago. . . .

Trade relations between the two countries are already tense, partly because the United States trade deficit with China reached a record $162 billion last year, making it the largest trade imbalance ever recorded by the United States with a single country.

European officials are also weighing some form of trade restriction to stem the equally large flood of Chinese textile and apparel imports into the European Union.
While Chinese exports to the US have skyrocketed, sub-Saharan Africa -- the region surely least able to cope with the Chinese deluge -- is taking it on the chin. US Commerce Department's data on the first three months of 2005 shows that US textile imports from sub-Saharan Africa as a whole dropped 1.5%. The region's #1 category, womens' and girls' slacks, accounting for over 20% exports by area of fabric, fell 10.4% in the first quarter. The top three categories accounting for almost half the region's textile exports to the US, collectively dropped 4.7%. Things in Mexico aren't going much better, with total textile exports to the US dropping 4.3% in area in the first quarter.

Both Africa and Mexico had high hopes once that their privileged access to the US market via NAFTA and AGOA would spur growth, wealth and broad economic development. Looks like it's time to kiss those dreams good-bye, as must happen with all free trade delusions.

Friday, April 01, 2005

Everybody seems to be dissing the March employment numbers released today, but we should instead be celebrating the fact that Bush is now on a pace to supercede the total number of private sector jobs when he first came into office in just four months!
America's employers, hit by high energy bills, turned more cautious in March and boosted hiring by just 110,000 jobs, the fewest in eight months. . . .

"America is not flicking on the hiring switch," said Richard Yamarone, economist at Argus Research Corp. "Right now businesses have to contend with skyrocketing energy and commodity costs, but there is little they can do about that. The one big cost that they can control is labor. That is being done by tightening the hiring reins." . . .

All told, March's payroll gain of 110,000 was roughly half the number economists expected.
Over the last twelve months the US economy has added an average of 164,000 private sector jobs per month. That's barely over the rate needed simply to keep up with population growth, and the Bush administration is still 446,000 private sector jobs short of where it was in January 2001.

And if that's not enough, real private hourly earnings fell again in March. From November 2003 (the recent real high) to March 2005, nominal private hourly earnings are up 3.2%. Over the same period, CPI inflation has risen over 4.0% (we don't have the March CPI numbers in yet) and PCE inflation over 3.1% (same story here). So at best, real wages have been stagnant for over a year; at worst, they're sinking like a wet washcloth.

The Brits are rightly worried today over news that average home prices in the UK fell in March by their largest relative amount in nearly ten years, pushing the rate of home inflation to its lowest point in almost four years. More to the point,
the Bank of England said mortgage equity withdrawal - used for purposes other than buying a home - in the final three months of last year was �6.9bn, half the amount in the previous quarter and the lowest for three years.

Analysts said the falls had made it more likely that interest rates would stay on hold for the foreseeable future and warned it could point to further pain for high street retailers as consumers cut their spending plans. . . .

John Butler, a UK economist at HSBC, said yesterday's figures provided a good explanation for the decline and warned there could be more pain to come. He said there was strong evidence that the strength of retail sales in recent years had been driven by the boom in the housing market.

"The relationship is very strong, which suggests that now we are getting the slowdown in house prices and equity withdrawal drying up, that retail sales growth could decline to zero," he said.
Americans are in an even worse pickle than Brits, since Americans have had no real income growth in well over a year, their housing bubbles in California, Florida and parts of the East Coast are bigger and growing larger every day, and their current account deficit is gargantuan compared to Britain's.

Time to refocus attention on the UK housing market as a harbinger for America's Joe and Jane Homeowner-Consumer (a liberated couple indeed).