Looking Back – EU Crisis

I just felt like reminding you that I warned you of exactly what was coming. This post is just me self-aggrandizing – but seriously, lots of people you’ll hear talk a big game. How much of what they say is even grounded in reality?

Everyone’s a champion, until you measure their success. Everyone’s a scientist, until you make them prove their theories.

Here’s what I’m talking about (from January 2012):

Now more directly to our situation here in the U.S.: our GDP is probably about $15 trillion, give or take. Meanwhile, thanks to a cheaper dollar up until mid-2011, our exports were booming and our imports were stabilized, resulting in some steady reductions of our trade deficit…until recently. Our exports according to World Bank numbers, as of 2010, were 13% of GDP; so how much directly would exports have to collapse, by themselves, to utterly abolish any hopes of the U.S. growing?

The answer is about 20%. That reduction would more than suffice to send U.S. growth screaming to zero.

But in actuality, the amount needed is less. Reduction in exports also causes U.S. unemployment which will directly harm U.S. domestic spending. How badly does it skew? Well it’s impossible to lock down for sure, but understanding how consumer participation in networking works, if our trade deficit starts to blow out because of exports collapsing, then the U.S. economy could see a multiple of those base numbers; maybe 2:1, maybe much more. So really a reduction of U.S. exports by 7-10% would definitely be more than sufficient to crush U.S. growth.

And the worst part is, the Fed would be nearly powerless to fix such a problem in the current environment.

Highlight:

So, based on the latest trade reports, I’d guess we’re about one quarter of the business cycle away before hope that the U.S. somehow mystically leaves the rest of the planet behind is extinguished in a plume of disappointment. And the worst part is I don’t think Europe or other markets are going to greatly benefit from our stronger currency because the disappointment from the U.S. letdown will very likely temper purchases of imports. Not to mention that their problems are so extensive, continued austerity and reservation will overpower whatever slight benefit they gain in trade pricing.

In conclusion, dollar strength is persisting because of investors looking for safe havens, a weak economy in foreign trade partners, and a broad drop in most basic materials – energy notwithstanding. This, and the plunging demand abroad plus softening demand at home, is causing the Baltic Dry Index to plummet; which is very likely a good indicator of the direction which economies and markets are headed right now, rather than some sort of false signal. I expect the dollar to continue to gain against other currencies going forward, further decrease in demand globally, a discontinuation for the expectation of growth in the U.S. and most other nations, and eventually a run lower in markets for both equities and commodities as people finally acknowledge these developments and adjust to them.

Wait until I dig out some of my China rants from mid 2011…

Alright. We’re done here.