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Here are highlights from Friday's Analyst Blog:
Trade Deficit Up As Expected
The Trade Deficit rose in December to $40.58 billion from $38.32 billion in November. The rise in the trade deficit is bad news for the economy. On the other hand, the trade deficit was in line with the $40.40 billion consensus expectation.
On a year-over-year basis, the total trade deficit was up 9.3% from $37.13 billion a year ago. The trade balance has two major parts, trade in goods and trade in services. America's problem is always on the goods side; we actually routinely have a small surplus in services.
Relative to November, the goods deficit rose to $53.56 billion from $51.29 billion. That is a month-to-month increase of 4.4%. Relative to a year ago, the goods deficit was up 9.1% from $49.08 billion. The service surplus was virtually unchanged from October at $12.98 billion, and up 8.6% from last years' $11.95 billion. Exports of goods increased by $2.82 billion, or 2.5% for the month to $116.56 billion. Relative to a year ago, goods exports are up 17.0%.
The trade deficit is a far more serious economic problem, particularly in the short to medium term, than is the budget deficit. The trade deficit is directly responsible for the increase in the country's indebtedness to the rest of the world, not the budget deficit. That is not just a matter of opinion, that is an accounting identity.
Think about it this way: during WWII the federal government ran budget deficits that were FAR larger as a percentage of GDP than we are running today, but we emerged from the war the biggest net creditor to the rest of the world that the world had ever seen up to that point. Then the federal government owed a lot of money, but it owed it to U.S. citizens, not to foreign governments. Slowly but surely the trade deficit is bankrupting the country.
While most of the foreign debt is in T-notes, try think of it as if we were selling off companies instead of T-notes. This month's trade deficit is the equivalent of the country selling off Eli Lilly (NYSE: LLY), while last month's deficit was the equivalent of selling off Devon Energy (NYSE: DVN). How long would it take before every major company in the U.S. was in foreign hands if this keeps up indefinitely?
Put another way, the 2010 trade deficit has totaled $497.82 billion, which is 64% what all the firms in the S&P 500 earned, worldwide, in 2010 (assuming those S&P 500 firms that have yet to report their fourth quarter results come in exactly in line with expectations).
Goods Deficit - Two Major Parts
The goods deficit has two major parts, that which is due to our oil addiction and that which is due to all the stuff that line the shelves of Wal-Mart (NYSE: WMT). Of the total goods deficit of $53.56 billion, $25.30 billion, or 47.2% is due to our oil addition. Relative to the overall trade deficit, our oil addiction is 62.5% of the problem.
The monthly deterioration in the goods deficit came entirely from the oil side. It was up by $5.25 billion or 26.2%. Relative to a year ago, the oil deficit was up 7.9% or $1.85 billion. On the non-oil side, the deficit fell to $27.20 billion from $30.40 billion in November, but still well above the $25.43 billion level of a year ago. For all of 2010, the non-oil deficit is up by $69.75 billion to $368.82 billion or 23.3%, while the oil side is up by $60.61 billion or 29.6%.
Getting Off Oil Will Help Greatly
The oil side should be the low hanging fruit to bring down the overall trade deficit and thus help spur economic growth. Oil is primarily used as a transportation fuel. The technology exists and is widely used abroad to use natural gas to power cars and trucks. Thanks to the emerging shale plays, we have ample domestic supplies of natural gas, and on a per BTU basis, natural gas is selling for the equivalent of oil at $23.64 per barrel.
We need to get past the "chicken and the egg" problem of nobody wanting to buy a natural gas-powered vehicle because there are no convenient places to refuel, and gas stations reluctance to install refueling stations for natural gas-powered vehicles since there are not many of them on the road. Not only would such a move save money for drivers in the long run (there is an upfront capital cost as natural gas powered engines are more expensive than regular gasoline powered engines), but it would substantially reduce our trade deficit.
Since it is a domestically produced fuel (and most of what we do import, we import from Canada) there is also a huge national security argument for moving to using more natural gas. The dollars we send abroad to pay for oil imports are simply the tip of the iceberg when it comes to the overall cost of oil. A substantial portion of the Pentagon budget is devoted to keeping the oil flowing in the Middle East and the sea routes open. While I don't think that oil was the only reason for our being in Iraq, it is clearly a significant factor.
Natural gas is also a much cleaner fuel and emits far less CO2 than does gasoline (and almost no other pollutants other than CO2). Thus it would be a very useful step towards stopping global warming. Doing this, especially breaking the "chicken and the egg" problem will take federal government leadership. The benefits for the economy however, would be huge.
It seems inevitable to me that it will eventually happen, and when it does, it will be a great boon to major natural gas producers like Chesapeake (NYSE: CHK) and EnCana (NYSE: ECA). The timing of it happening is very uncertain, but the sooner it happens, the better.
I don't want to minimize the cost of doing this, particularly in terms of water quality. We need to do more research on the chemicals used in fracking operations to get at the shale gas (starting with getting rid of the trade secrets provision that allows the firms to hide exactly what they are putting into the ground and potentially the groundwater).
Strong environmental regulation is needed of the shale gas operations, but it should be possible to both protect the environment and get the gas out of the ground. Yes, there would still be an environmental risk, but we need to take some risks, and the risk of not using the natural gas resource seems greater. It strikes me as a trade-off worth making.
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