Mind The Gap!                                               November 2000 - Issue 2

The US trade deficit hit a record $34BN in September, a rise of 15% on the previous month and far worse than the expected $31BN figure. Does anybody care?

Energy products were a large culprit for the increase, with little sign of there being any easing anytime soon.

As can be seen by the chart, the imbalance on what America imports Vs its' exports is running at $354Billion, a whacking $90BN jump from last year's record $265BN. Put another way, in 1992 the trade deficit was $36BN for the whole year whereas now it's averaging $30 BN a month.

Currently, the US needs over $1BN a day flowing in from overseas investors just to finance it.

The US consumer has been turning away from US domestic manufacturers, with the mighty dollar providing cheaper sourcing overseas. This leaves US manufacturers caught in a period of rising input costs and an inability to raise prices.
 
A classic margin squeeze.
  
All this, at a time when overseas investors into US financial assets, are becoming nervous.
  
Since the November 7th US Presidential election date, more than $1.6 Trillion (TR) of wealth has vanished, more than doubling to $3.96TR, the losses sustained by investors since the main US equity indices peaked earlier this year.

As stated in previous newsletters, Bear Markets do not travel in a straight line. Retracement rallies are short and sharp.

Currently the market may be oversold short term, and institutional Fund Managers have raised their cash levels to 5.3% Vs 4% in March of this year (Wow!), mainly due to confusion. Remember that most Fund Managers have never experienced a serious Bear Market.

The current big hope is that the Fed reduces interest rates at the next FOMC meeting in December.

This may assist but the market was denied this expectation at last weeks FOMC meeting when the Fed remained vigilant on inflation.

With 30 year lows in respect of un-employment levels, hourly wage growth is now outstripping the current annualized GDP.

The hourly earnings growth rate has increased, just as many employee share option plans have crumbled, particularly within the new economy. Should we really be surprised to see wage price demands in $ and cents as opposed to paper promises?

The Fed is well aware of the credit binge of the past half-decade and also aware that the inflation has been transferred to the financial markets and real estate. Greenspan has two choices on how to reverse the trend, either higher interest rates or lower markets which in itself will curtail consumer spending. It is going to be a very tricky balancing act.

If foreigners lighten up on their US holdings, the $US would start to slide, a little at first but no doubt accelerating. A precipitous plunge of the dollar against other currencies would act as a huge uplift on imports - such as Oil, which would be highly inflationary, necessitating an aggressive interest rate increase. The result being a recession, and possibly a big one.