America's Trade Deficit

[canadianoutlaw]

Last Friday WCI's blog post was titled "Don't Give Up on International Stocks". Reminded me of this piece from Warren Buffett I thought you all would enjoy:

http://archive.fortune.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm

[The White Coat Investor]

Thanks for sharing. Interesting way to think about the trade deficit. One more macroeconomic thing to worry about!

[erictait]

Funny, what Buffet argues for is how a gold standard works, just looking for a clearing mechanism to keep worldwide accounts balanced.

There is only one universal law of prosperity -

"Thou must produce more than one consumes"

 

[pulmdoc]

It's an interesting idea. I do note the date of the article was 2003-that's one bet Buffett hasn't won yet. My main concern with this line of thinking is that the accounting is straightforward with physical goods like bananas, TV's, etc. It's a lot harder with intellectual property. If Facebook books Chinese profits to a Dutch company which then pays an Irish subsidiary with that money, will it be picked up in the analysis? I'm sure the money would be repatriated if there was a corporate tax holiday, so in that sense it's "American export money," but it'd be hard to account for.

[erictait]

That is true but theoretically that would be taken care of with a gold standard or some other universal measure to check a country's consumption vs. production.

The "Double Irish with a Dutch Sandwich" http://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp

would not be necessary in a world with a fixed currency peg.  Countries would have an incentive to harmonize their tax regimes so as not encourage this cross border tax arbitrage because they would not want to lose domestic production to foreign competition knowing it could force a loss of real base money wealth.

The irony is, the US is the world's largest tax haven as it does not report capital gains of foreign nationals back to their home countries, hypocrisy much?

What's funny is I wrote a newsletter article back in like 2012 for our investors explaining this phenomenon.

I tried to attach it but I am not sure it went through, you can e-mail me if you want a copy.

[pulmdoc]

I don't think returning to the gold standard just so we can account for trade deficits is the answer. My point is simply that perhaps the reason why the US economy has thrived for decades despite a persistently negative trade deficit that economists all seem to agree should lead is ruination is that the trade deficit reported isn't accurately representing the true flow of money across countries.

[Zaphod]

Remember that trade deficit is invested in US debt by the partners. Some of the worry economists have is that means a large amount of debt is owned by foreign countries and could theoretically drive down the dollar/rates by selling them off at some time. However, our dollar is super strong right now and hence none of that has come to pass as of yet and a devaluing would be pretty great for the overall economy and companies with large % of foreign earned income.

Obviously its a complicated thing, and doesnt seem to be at all the type of concern some make it out to be. I cant stand that super folksy article and over simplification to push a complex situational view. Things should be simplified, but only to the point it makes sense, some things are complex and thats the way it is.

Overall there is more and more talk about how maybe we arent capturing the truth in many of our old metrics like GDP, etc...interesting and would make sense.

[erictait]

Pulmdoc

It is a relatively true accounting, and in actuality, they count things like "film" exports as a positive number on the U.S. side of the ledger, which means the production of real goods from the U.S. economy is probably overstated in "official" government statistics.

It hasn't led to ruination because central banks, especially the US Federal Reserve print currency with impunity (for now) and U.S. trading partners continue to take the worthless paper (though China stopped buying US treasuries a few years ago, Japan and Abe have taken up the slack).  Trade deficits are a result of "beggar thy neighbor" policies bc no currency has any natural restraint system.

We live in a worldwide system where the payments on global debt has outstripped global income.

The question is how sustainable is it in the long run?  None of us knows, but the U.S. now has a president very familiar with bankruptcy proceedings, maybe that is why he is there?

The real question for you is, what types of assets do you want to hold with this macro-economic picture?

I myself am a hard asset guy, I want to own units of production, not dollar denominated paper.

[erictait]

Hey Zaphod - long time no speak

The dollar is strong right now because (1) the FED is raising rates while all other major economy's Central Banks are still lowering their interest rates making the U.S. dollar the perfect free money arbitrage carry trade and (2) the futures markets assume that Trump is going to deficit spend on all of those infrastructure projects he is talking about.  It's all about expectations as opposed to a repudiation of the dollar by our trade partners.

I have no clue what is going to ultimately happen, but what I do know is economic history.  We are at a 5000 year low for global interest rates and some places they are negative.  Unless there is going to be a worldwide debt jubilee, there is going to have to be a currency revaluation at some point as global debt payments have gone beyond what global incomes can sustain.  Someone is eventually going to get hurt (probably bond/debt holders initially), but who knows really.

I just prepare as best as possible based upon what has happened in other economic calamities while not sacrificing cash flow and long term returns.

[janettebournes]

Sorry to dig up an old thread

I know it's the antithesis of staying the course but has anyone modified their investment plan over these concerns over our national deficit?

I have a significant amount of my net worth wrapped up in muni bond funds, not sure if this is the push I need to go 100% equities

[Zaphod]

The problem with the debt, or trade deficit, even GDP calculations is they are broad and gross, its hard to get detail or nuance from them. Many wonder if they are even accurately tracking production and actual value (latter two). As for debt no one ever talks about the asset side of things. Americans apparently have 93T in liquid assets, against 20ishT in liability. Thats really not that bad. That is also not accounting for everything else, even illiquid and government owned.

Here is an interesting article arguing the trade deficit may be overestimated by a factor of 9-10. http://www.economist.com/node/21543174

I would exercise caution in changing your long term plans based on such blunt and possibly totally off measures.

[erictait]

I agree with Zaphod,

 

Your risk in holding bonds is that their price moves inversely with interest rates (rates go up, bond prices go down). If there were to be a debt crisis with the U.S. dollar then interest rates MIGHT go up.  This would diminish the price of your bonds.

If you are holding your bonds to maturity for the interest, then this situation is immaterial to your original investment objective.

Now of course if you are worried about the bond issuer having the ability to pay you your coupon, that is a different story, but muni bonds have the power of taxation so they COULD potentially raise taxes to maintain payments.

Your issue is that you own a "bond fund" where you are not holding individual bonds in your portfolio to maturity.

You definitely have something to worry about in a scenario of increasing interest rates as the fund manager may not be holding the bonds in the fund to maturity, but is instead constantly trading them in and out of the fund.

This scenario is one that can occur irrespective of the debt levels. If interest rates rise, the value of your fund and thus your portfolio is going to decline.

Any reason that you don't own individual muni bonds janettebournes?

 

[janettebournes]

erictait wrote:

I agree with Zaphod,

 

Your risk in holding bonds is that their price moves inversely with interest rates (rates go up, bond prices go down). If there were to be a debt crisis with the U.S. dollar then interest rates MIGHT go up.  This would diminish the price of your bonds.

If you are holding your bonds to maturity for the interest, then this situation is immaterial to your original investment objective.

Now of course if you are worried about the bond issuer having the ability to pay you your coupon, that is a different story, but muni bonds have the power of taxation so they COULD potentially raise taxes to maintain payments.

Your issue is that you own a “bond fund” where you are not holding individual bonds in your portfolio to maturity.

You definitely have something to worry about in a scenario of increasing interest rates as the fund manager may not be holding the bonds in the fund to maturity, but is instead constantly trading them in and out of the fund.

This scenario is one that can occur irrespective of the debt levels. If interest rates rise, the value of your fund and thus your portfolio is going to decline.

Any reason that you don’t own individual muni bonds janettebournes?

 

Click to expand...

Thanks, great explanation and easy to understand

I think I was deterred from laddered individual munis from two articles I found on this website:

1) http://www.mdmag.com/physicians-money-digest/investing/4-Reasons-to-Avoid-Individual-Municipal-Bonds

2) https://www.whitecoatinvestor.com/5-questions-to-answer-before-buying-individual-munis/

Also, I remember reading an article featuring your journey in real estate investing. Very impressed you've been able to manage all that, a medical practice, and an asset management group!