Friday, March 11, 2005


The trade deficit appears to be turning. Even in the face of wide open textile import rules. Last month most remaining textile restrictions were reduced or eliminated; imports from China surged again. However, exports grew almost as fast as imports. What is happening?

The low dollar and the strong world wide economy is having the expected results. Instead of re-investing dollars in treasury bonds, developing nations are buying US capital goods. Treasury bonds are trading down in price and capital goods profit are going up. Developing nations have a lock on businesses such as textiles where labor is a higher percentage of the final products costs; industrial nations have a lock on capital intensive industries.

Yes, I have written about the expansion phase before, but it is here. New factories and new machinery will be purchased in broad categories of businesses in the near future. One clear sign of this is that the capacity utilization rate in US manufacturing has moved quickly from 72% to 79%. Again, this means businesses will borrow and spend large sums and will have nice increases in total profits.

I have written that it is common sense for oil prices to go up when airline traffic goes up and it is common sense for the price of copper to go up when the volume of electronic equipment sales go up. The costs of oil is not the biggest cost in flying a plane and the amount of copper in a cell phone is not big but it is vital. Apple computer will not purposely sell an i-pod at a loss. The price of copper is a very small factor in the total price of an i-pod and Apple will buy as much as is needed at whatever price is required if they have customers ready to buy i-pods.

In this post, I add the cost of money as the next piece of common sense. The current up-trend in long-term interest rate is a positive sign for industrial firms; not at all a negative indicator. In the same way that an airline only needs to buy lots of fuel when the price is high, large capital intensive businesses only need to borrow lots of money when interest rates are on the way up.

The turn in the trade deficit shows that the march toward higher interest rates has begun. Interest rates and a strong dollar just like oil and airlines trade together. It is counter intuitive to most folks but still true.

If you have not locked in your home mortgage and all other long-term financing; you need to get moving. You need to reduce exposure to bond investments and increase your exposure to economically sensitive investments. Buy good old American businesses. Review your IRAs and 401-K's. It is easy for fund managers and salesmen to sneak in bonds to stabilize returns. The bad news is that bonds go down in value when industrial firms are growing and profiting.

For the past few months, as much as 80% of new purchases of mutual funds have been international funds. A number of these funds will not do well if the dollar strengthens. One should use caution when buying international funds in this market. The safer bet is to buy US stock. If you prefer to reduce volatility and are willing to pay the additional fees, then buy a US stock mutual fund versus the international stock fund. Please note that many stock funds with fancy names are part bond and part stock funds. If this is what you want, I have no problem. I avoid managed funds to avoid the fees but I certainly would avoid the "combo" fund. I like to know how much I have invested in stocks and in bonds.