The trade balance, the US dollar and the economy: not good news

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The US trade deficit in September was the widest in 14 years.

Chris Rupkey, Chief Financial Economist for MUFG reacted with this comment;

“America’s trade war with the world has limited the red ink of the trade deficit for some time, but now it looks like the terms of trade are changing despite tariffs and sanctions the country will likely remain dependent on foreign products for years to come, regardless of who is president.

In other words, President Trump’s vow to sharply reduce the US trade deficit has not been fulfilled.

This now fits into the hole that the Covid-19 pandemic is digging for the world.

The value of the dollar

As I reported recently, this is not good news for the value of the US dollar.

Couple this continued decline in the US with US net savings falling into negative territory in the second quarter and you end up with the fact that growing public debt is going to have to rely increasingly on foreign lenders to support growth. nascent. Treasury deficits.

That is to say, the value of the dollar will come under strong pressure.

The dollar has lost value this year. It reached a short-term peak of strength on March 19, when the US Dollar Index (DXY) closed at 102.82.

This morning, October 7, 2020, the dollar index stood at 93.60. This is a decrease of 9.0%.

On March 19, it cost $1.0680 to buy one euro. On October 7, it took $1.1780 to buy one euro. This represents a 9.3% decline in the value of the dollar.

I expect the value of the dollar to continue to decline for some time now. One of the reasons is the weakness of the US economy and the fact that growth will remain subdued for an extended period.

A second reason for this is that the Federal Reserve is now following a policy that calls for little or no increase in US interest rates for some time, perhaps two to three years.

Stephen Roach, of Yale University and former Morgan Stanley, even predicted that the dollar could fall by up to 35%.

Mr. Rupkey’s dire picture of the trade situation, mentioned above, only reinforces the belief that the dollar’s decline will not be minimal.

Can this situation continue?

We do not see this situation changing much in the future.

And, this is what the president who takes office on January 20, 2021 will have to face. Whoever this president is, attention will have to be paid to the fact that the economy of the United States is going to have to be restructured.

No matter what is being promised right now in this election campaign, the future will be dominated by the fact that the world has changed and new thinking is going to have to take over.

I’ve used the term “radical uncertainty” a lot recently. I have to admit that I took this phrase from the book by former Bank of England President Mervyn King and former Financial Times columnist John Kay. The title of the book is “Radical Uncertainty: Decision-Making Beyond the Numbers”.

In a world of radical uncertainty, we not only don’t know what the probabilities of possible outcomes in the future might be, we don’t even know all of the possible outcomes that could occur. In other words, there are a lot of unknowns, unknowns.

How to invest?

How to invest in such a situation?

Well, you have to be careful. For a time, the old rules will not apply. Also, a broader separation is going to take place between “legacy” companies, organizations that still retain the “old” structure and vision, and modern “new” companies, organizations that are created to exist and thrive in the world. ‘evolution. world. And that applies to the financial world, just as it does to the manufacturing world.

But, as one can imagine, it will take a long time. After all, there are a lot of unknowns, unknowns. There is so little an investor can predict when the world will be in the state it is in now. And, in my opinion, we are only at the beginning of this period, which means that there is an awful lot to go through.

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