Would a Yuan Devaluation Really Help the Trade Deficit?

From IBD:

But most economists say a big yuan revaluation wouldn't have a major impact on trade.

As long as Americans spend more than they save and the Chinese continue to save at high rates, the trade deficit will endure.

"To achieve any meaningful change in trade flows, you need a reduction in (spending) by countries that spend more than their income and expenditure increases in countries that spend less than their income," said Nouriel Roubini of Roubini Global Economics. "Changes in relative prices are not by themselves sufficient."

America's trade gap with China hit $235 billion last year.

I've seen various opinions on this matter, but I tend to agree with the above statement. The real issue is the US consumes more than it produces. That is what the trade deficit really represents. I wrote an article dealing with outsourcing that came to the same conclusion: so long as the US buys cheap stuff, we're going to outsource manufacturing to places where it's cheaper to make stuff.

However, I think it's important to realize where this might lead. To quote Paul Volcker from an article he wrote two years ago (and which is still very relevant):

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

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Another Portent of Doom?

Following on from news that Foxtons is up for sale, there are further rather worrying straws in the wind for property owners in the UK.

Demand for mortgages in the UK slowed down in April, as rising house prices and borrowing costs began to take their effects on the market.

The British Bankers' Association said that net mortgage lending rose by an underlying £5.0BN in April, less than the previous month's £5.1BN and below the £5.4BN monthly average over the previous half year.

Whilst this may not signal a crash of epic proportions, it may well signal a market "correction". However, one man's "correction" is another's "crash".

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Gas Hits A New Record

From CNN

Gasoline prices broke a record Tuesday for the 10th day in a row as every state except for New Jersey now has an average price above the $3 a gallon mark in AAA's daily survey.

The latest reading from the motorist group Tuesday showed the nationwide average for a gallon of regular unleaded hit $3.209 a gallon, up from $3.196 on Monday. The group's survey of 85,000 gas stations, by far the broadest sampling of gas prices, has been showing a series of record high prices starting May 13.

Need I say anything more?

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Fed's Lacker Is Concerned About Inflation

From CNBC:

However, Lacker, one of the Fed's toughest inflation hawks, said he'd like to see the inflation rate come down a bit more. Although he is not a voting member of the Fed this year, Lacker dissented four times last year from the majority at the Fed who wanted to keep interest rates unchanged instead of raising them.

“I don’t think the moderation we’ve seen is statistically significant,” he said. “The core inflation has been fluctuating between 2% and 2.5% for two years now and before that from 1996 through 2003, core inflation was between 1% and 2%. We need to get back to containing core inflation between 1% and 2%.”

I have to admit, the following statement made me laugh.

Still, the Fed official believes the economy and consumers can handle higher gasoline prices. He said his major concern is that the public has become “conditioned” to the idea that higher oil and gasoline prices equal higher inflation.

“That does not have to be true," he said. "It is a matter of relative price changes that go on all the time in a healthy economy. Lacker said he was worried that rising gasoline prices will prompt an uptick in inflation expectations.

Obviously, Lacker wasn't aware that Wal-Mart had a big sales decline recently, which they attributed in part to higher gas prices.

In addition, the average consumer probably isn't thinking relative prices when they fill up at the pump. What they are thinking about is "this is getting pretty expensive."


Any questions? I've been adamant in my stance that the Fed won't lower interest rates anytime soon. While the economy is growing below it's full potential, the inflation rate is still higher than the Fed wants it to be. As a result, don't expect a rate cut anytime soon.

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Retail Snapshot

With gas prices hitting a record and the housing market still in a slump, it's important to keep an eye on some of the areas that may be negatively impacted such as retail. Wal-Mart is the largest retailer in the US by a wide margin, so keeping as eye on the daily news is very important. But there are other retailers to watch as well.

Lowe's reports lower earnings.

Lowe's Cos. reported a 12% fall in first-quarter profit Monday as the housing slump and tough comparisons sawed into the home-improvement retailer's bottom line.

Multiple factors, including a difficult housing market in many areas, tough comparisons to hurricane rebuilding efforts and significant lumber and plywood-price deflation continued to create a challenging sales environment in the first quarter," said Robert Niblock, Lowe's chief executive, in the earnings report. "Those anticipated factors were compounded by mixed weather during the quarter."

The central issue here is housing. The other points are pure noise and deflection. Home Depot had the same market and the same set of problems.

Target sales drop

Target's same-store sales fell 6.1% in April. The average estimate of analysts polled by Thomson Financial called for a decrease of 6.2% for the month. Net retail sales fell 1.8% in the period to $3.9 billion from $3.97 billion a year earlier.

The Minneapolis-based general-merchandise retailer cited a sales shortfall in the first two weeks of April for the lackluster results. It forecast May same-store-sales growth in a range of 5% to 7%. In the May period a year earlier, Target's same-store sales increased 5.7%.

Target has been successful at taking customers away from Wal-Mart. However, Target's performance this month is not that impressive and falls in line with Wal-Mart's results.

JC Penney surprises on the upside.

The moderate-priced department-store chain has been on a tear in recent months, introducing new private-label and designer lines found only at Penney stores. It has brought out Ambrielle lingerie, the largest private-brand launch in its history, as well as Liz & Co. and Concepts by Claiborne. It is on track to launch the American Living collection of apparel and home goods by Polo Ralph Lauren and is stepping up its rollout of Sephora cosmetics counters on its sales floors.
All that helped boost Penney's (profit to $238 million, or $1.04 a share, compared with last year's income of $210 million or 89 cents a share.

JC Penney has completely turned themselves around and are doing a great overall job. Now -- can they keep it up in the current environment? We'll have to see.

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Credit Is Still Cheap

From CNBC:

As of mid-May, total M&A activity world-wide totaled about $2.19 trillion, compared with the record $3.87 trillion for all of 2006, according to Dealogic. In the U.S. M&A activity totaled $717.37 billion through May 16, on pace with last year’s $1.49 trillion. Both are shy of 1999 and 2000, when activity topped $1.5 trillion in each year.

Private-equity buyouts have totaled $218.7 billion so far this year, compared with $421.56 billion last year and $53.9 billion in 2000.

So far this year, buyouts represent 30% of the the total value of all U.S. deals, slightly ahead of last year's pace, and about 14% of all mergers.

So this year's pace is on track to tie a record year in buyouts -- which occurred at the end of a stock market bubble.

“It will end,” Steve Rattner, managing principal of Quadrangle Group, told CNBC’s “Power Lunch” recently. “We are in a credit bubble. Credit is an over-valued commodity at the moment. The lenders are not getting compensated relative to the risks they are taking and at some point that will change. Right now, the default rates are at historic lows and that will also change. When it all changes, we’ll get back to some kind of norm."

Right now credit is cheap. Below are charts of AAA and Baa credit from the St. Louis Federal Reserve. Notice that interest rates are still low by historical standards.

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Fed's Moscow Wants Lower Inflation

From Reuters:

Moskow noted that core inflation is still running above the 1 percent to 2 percent range that some policy-makers, including himself, see as an informal comfort zone.

"I'd like to see inflation rates running lower at this point and more toward the center of that zone," he said.

This was brought to you by the guy who has been saying for the last 6-9 months the Fed isn't going to lower rates anytime soon.

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A Portent of Doom?

The news that Jon Hunt, the owner of estate agency Foxtons, will sell Foxtons for around £370m to BC Partners a private equity group has caused a few worries in the housing market.

This signals to many that Hunt has, in effect, "called the market" and decided that now is a good time to get out of UK property.

Foxtons started trading in a converted Italian restaurant in Notting Hill 26 years ago, it now has 19 branches in London. Hunt will continue to work in the US market.

Last year, a BBC undercover documentary made a number of allegations about the firm. It claimed staff used faked documents to support inflated prices, put forward false offers to sellers, and made use of customer information passed on to them by Foxtons-owned mortgage broker Alexander Hall, which is also being bought by BC Partners.

Foxtons joined the industry's ombudsman scheme, an independent dispute resolution service which can award compensation, this year.

The sale of Foxtons UK business is subject to regulatory approval, which is expected within six weeks.

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Gas Hits A New Record

From the Atlanta Journal Constitution

The average price of self-serve regular gasoline hit a record high of $3.18, rising more than 11 cents over the past two weeks, according to a nationwide survey released Sunday.

The latest figure topped the record of $3.07 set two weeks ago, which had been the highest price since the average cost of a gallon of gas hit $3.03 on Aug. 11, 2006, according to the Lundberg Survey of 7,000 gas stations across the country.

How long until this starts to impact consumer spending? I don't have a clear answer, but when gas prices hit records in May the picture isn't that good.

As a rough rule, every penny increase in gas prices lowers consumer spending by $1.3 billion.

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When Will the Buy-Out Splurge End?

There was an article in the print version of Barron's this week. I can't find it online, but wanted to give credit where it is due. The author was discussing when the buy-out mania currently gripping the markets would end. He made the following points.

1.) When the sheer size of the deals becomes astronomical. So far the size of the deals has been pretty contained, especially considering the strength of corporate balance sheets. There are two recent deals that do raise flags. The first was Newscorp's bid for Dow Jones. The thinking here is Newscorp was making a bid so large it would fend off all possible competition. However, the bid was way over the asking price as expressed by the share price of Dow Jones. The second was the recent Microsoft deal when they bid an 80%+ premium for an online ad company. Microsoft is a cash rich company, so they have the money to throw around. But, they could have bid a 50% premium at most and probably gotten the deal. My guess is they were using the same logic as New Corp was in the Dow Jones deal -- putting a bid in play that was so large it would fend of rivals. In addition, several competitors successfully purchased other online ad companies, so Microsoft may have simply wanted to get in while the getting was good. However, the premium does raise a bit of a flag.

2.) When diversification starts to really stretch the imagination. So far the announced deals pretty much make sense. For example, the web companies are clearly moving into the ad area, aluminum companies are buying other aluminum companies etc... When we start to see mergers that strain business sense -- an aluminum company with a newspaper -- then we'll start to think the merger boom has gone too far.

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