Why This Deficit Is No Threat to Your Portfolio

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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The Dow rallied more than 3,000 points in the wake of November’s elections. Since the peak, it has given up a few hundred points.

There are various reasons for this backtracking. But a silly one I’ve heard from pundits lately is that it’s due to the massive U.S. trade deficit.

Yes, that deficit hit its highest level in five years a couple months ago.

But the Commerce Department reported last week that the trade deficit declined sharply in February, as imports from China fell by a record amount, and American exports rose for the third straight month.

You wouldn’t know it by listening to populists on the left - like Bernie Sanders - and on the right - like Donald Trump - but international trade isn’t “killing us.”

Foreign trade benefits us far more than it costs us.

The United States is the world’s third-largest exporter. We are also the world’s single biggest importer. Americans love Japanese electronics, European cars, French wines, Italian shoes, Swiss watches, Dutch chocolates and designer clothing made in Bangladesh.

It sounds alarming when you hear that we buy more from the rest of the world than the rest of the world buys from us. But - unlike a household deficit - a trade deficit isn’t a debt that must be repaid.

Let me give you a real-world example.

I write and do research for The Agora, a privately owned company that is the world’s largest publisher of investment letters - and The Oxford Club’s parent company.

Most of our letters are printed by MPM Communications in Waldorf, Maryland.

We run an enormous trade deficit with MPM. By that I mean we buy millions more in printing services from it than it buys in investment publications from us.

Yet it’s a mutually beneficial relationship. We both profit from it.

Can what is true for companies also be true for nations? Absolutely.  (Although it’s important to remember that nations don’t trade with each other - individuals, businesses and other entities do.)

What all countries want are economic growth, low inflation, a sound currency and rising incomes. That’s what creates prosperity.

The trade number is merely one number among many. It tells you nothing about an economy’s overall health. It’s like looking at one item on a profit and loss statement and ignoring everything else.

Also, remember that a trade deficit equals a capital surplus. When we buy steel, cars, jewelry and electronics from foreigners, those sellers get dollars in return. Many of them are put in dollar-denominated assets like U.S. stocks, bonds and real estate.

Much of this foreign capital goes to finance mortgages and consumer loans, helping to raise our standard of living.

When a country runs a trade deficit, it means the purchasing power of the currency is strong and consumers are wealthy enough - and optimistic enough - to spend.

Countries with trade surpluses, by contrast, generally have weaker currencies or domestic citizens who are unable or unwilling to spend.  (China is a good example.)

There are plenty of things to worry about in the U.S. today. But the trade deficit is not one of them.

Our sovereign debt, on the other hand, is another story. While it is not an imminent threat to the economy or the financial markets, it poses a serious risk to future prosperity... and the health of your portfolio.

That’s why I’ll cover it in an upcoming column.

Good investing,

Alex

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