One of my real passions is sailing.
Any time I'm out on the water is pure heaven. I especially enjoy those small, one-man boats. The lasers, sunfish, and dinghies.
I remember the first time I was in a boat that sank. It was at scout camp, many years ago. A drain plug in the back broke, and it was letting in water.
It's a strange sensation when your boat is sinking. At first, you really don't know what's happening. But you can quickly tell that the tiller is much heavier. The boat is becoming hard to steer. And by the time you look down and see your feet are underwater, you're well on your way to going under.
Now fortunately the boat I was in back then was fiberglass, and probably not actually capable of going underwater.
But it was capable of taking on enough water so that I could barely maneuver it back to the dock. And what had begun as a light-hearted jaunt on the briny deep, quickly deteriorated into a real chore.
For months now, our economy has been taking on water. Eventually, it will become as hard to manage, as that little boat I was in long ago.
As those of you who have followed ValueSide know, we started really following our favorite indicator in January of last year. Our favorite indicator of how much water is coming overboard is called the Balance of Trade in Goods.
I like the measure of goods because this is unambiguously how much this country makes. Versus how much we have to buy from other countries.
That trade deficit, the shortfall, tells us how much we are sinking as an economy. There was a time, about 50 years ago when America produced all the goods that we could consume. And then even more, that we sold to other nations.
This created a trade surplus. And was the story in America for its first two centuries as a nation.
Before we begin to explore just why we have a trade deficit, there are a couple of things to recognize.
First, the year after year never-ending endemic trade deficits began 50 years ago. And have been with us ever since.
But this real serious type of deficit really began just a couple of years ago. And we've really been sinking fast only lately.
It is important to get some kind of time frame so that we can see what forces were at work during that time.
The story begins in February of 1972 when then-President Richard Nixon had a full state visit to China. The first time any US President had done so.
It was a sure sign that America was ready to do business with China.
Shortly thereafter trade began between the two nations. In the beginning, the advantage was clearly with the US.
But it did not take China long to realize that they could undercut US Prices. By ignoring all the rules and regulations that the US manufacturers had to operate under, China could make everything a little cheaper. And so they did.
That was Step one for China. They would make things cheaper, and capture market share.
In step 2 of this long half-century process, our own US manufacturers began to see that they could move their US plants and factories across the Pacific.
They would gain the same price advantage as the Chinese. A price advantage that was many times extracted on the backs of oppressed workers, and environmentally dirty factories.
The first US company to make that move was sporting goods company Nike. Followed shortly thereafter by Apple Computer.
Today its become a literal flood of US manufacturers who operate overseas. Not just in China but in all of Asia.
This has led naturally to the loss of factories and plants here in the USA. Don't ask, for instance, to have your television or iPhone of some machinery part be made here in the USA. We simply don't have those plants anymore.
And all that brings us up to the last couple of years.
In the last, two years we've seen our Goods Trade Deficit jump by a remarkable 26%. In other words, we're important a quarter more today, than we did at the beginning of 2002.
Our economic ship is really taking on water.
And I'll speculate here, but let me tell you what I see.
There is one remaining shortage that the US is facing. This shortage is making us go overseas for the goods we need. It's a shortage that we see every day and that economists are talking about constantly.
We don't have enough workers.
Since the end of the pandemic, the JOLTS report on Job openings has been running about 10 million job openings every month.
Plants and businesses need more people to be fully operational. And because there simply aren't enough workers, plants are running at less than full capacity.
This creates a shortfall of excess demand, but not enough supply. So consumers naturally look overseas for those additional goods we need.
Last year we needed a trillion dollars more goods than we made. And at the rate we're going so far this year, I expect that shortfall to grow to a trillion and a half.
And this trillion-dollar trade deficit is a sure sign that:
Our economy is taking on water.
Today's Economic News:
Interesting news coming out of China, where they are reporting on the Chinese overall Corporate Profits for April. And the numbers look pretty dismal. For April total corporate profits slid to a mere 3 1/2%, less than half the level they achieved in March.
But even more stunning was where those profits came from. Profits for those corporations owned by the State were up nearly 14%. While those companies that are privately owned showed a slight loss for the month.
It just goes to show that in communist China it still pays to work for a state-owned enterprise.
Just reported has been the latest Balance of Trade in Goods. And for the fifth month in a row, our Trade Deficit topped $100 billion.
These five months have been the only time in history that we've seen trade deficits this high. And while April's deficit is down from March, it still points to an annual deficit this year of over $1 trillion dollars.
Unfortunately, today lends credence to my thesis that our economy is still sinking.
In good news/bad news on income and inflation. The good news was that personal income increased by 4/10th % for April. But the bad news was that fully half of that income gain was washed away by inflation, which rose 2/10th%.
In earnings so far this morning, it looks like Wall Street is not in a good mood, at least as it addresses earnings.
So far some very negative responses to results reported by: marijuana company Canopy Growth, sporting goods company Hibbett Sports, and retailer Big Lots.
Finally, there is an article in Today's Washington Post that is creating quite a stir on the trading desks this morning. In the article, the Post paints an extremely bleak picture of Ukraine's chances in this war. Most on the Street are taking it that Ukraine has already lost.
Traders are asking where the $40 billion dollar aid package went? If this is true. Signed just a week ago, $40 billion of US Taxpayer dollars presumably have been given to what may now be considered a losing cause.
Zero Hedge is reporting this as a “Stunning Shift” by the Post.
And, at least on Wall Street, this news is raising many questions about both the American's role in this war, as well as the media's reporting on it.
That's the news from Wall Street.
Have a great day!