Dividend stocks for income investors
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal
Recent articles:
• 5 ways to profit from Buffett's forecast, 3/15/2006
• Japan's gain could be your loss, 3/14/2006
• Google and AT&T: Is bigger better?, 3/10/2006
More...
| | Jubak's Journal
The trade deficit's deep bite
(Page 2) of 2
 Previous
A shift from an income surplus of $30 billion to the income deficit of the $10 billion or so some economists project for 2006 isn't much help if you're trying to balance an annual current account deficit north of $800 billion. But it becomes positively devastating if you add this trend to other trends now working to push the current account deficit higher in the years ahead.
Look at oil, for example. In 2005, the United States imported $176 billion in crude oil at an average cost per imported barrel of $46.78, according to the Census Bureau. Our trade deficit with OPEC (the Organization of the Petroleum Exporting Countries) came to $92 billion. That's less than half our huge deficit with China in 2005 of $202 billion, but it's still a significant part of the $805 billion record deficit in 2005.
And there's certainly a good chance that the price of that oil -- and hence the size of the U.S. trade and current account deficits -- will climb in the years ahead. On the same day that the fourth-quarter current account numbers hit the news, the president of OPEC said the organization's new price target was between the upper $50s and the lower $60s per barrel. That's a huge jump from the last announced price target of $22 to $28 a barrel.
There's an unfortunately long list of similar trends that are working to continue to push the U.S. current account deficit higher. The size of the U.S. surplus in agricultural products has been falling as U.S. consumers eat more specialty and out-of-season products from around the world. Higher U.S. interest rates will increase the income flowing to the overseas owners of U.S. financial assets. And so on
But you get the idea.
No magic fix
It would be comforting to believe that this huge problem can be fixed by a single, simple act. That's why our politicians are so fond of "solutions" such as forcing China to revalue its currency, the yuan, so that Chinese goods become more expensive. Or of rhetorical solutions such as "The U.S. can grow its way out of this problem by making U.S. exports more competitive."
Well, when you're running an $800 billion current account deficit, "it don't work like that." In many categories, Chinese goods are so much cheaper than the alternatives and so embedded in the global supply chain that making the yuan more expensive would, for some painfully long period, just increase the profits of Chinese manufacturers and the size of the U.S. trade deficit with China.
And our chances of growing our way out of this mess? Since U.S. exports make up such a small percentage of the U.S. economy, exports would have to grow by 70%, Paul Ashworth of Capital Economics has estimated, to eliminate the deficit.
A slew of solutions
In truth, it's going to take the combination of a lot of different "solutions" to get us out of this fix.- Yes, we should work to increase U.S. productivity, because that will drive U.S. exports higher -- and because high U.S. productivity growth, relative to the rest of the developed world, will continue to attract the overseas investments that we'll need to finance our deficit while we dig ourselves out of this hole
- Yes, we should put pressure on China to take down barriers in its markets that prevent U.S. companies in fields such as financial services from doing more business in China. And we should demand that the Chinese adopt adequate rules protecting intellectual property. Add that to some appreciation in the yuan, and the trade deficit with China will shrink. Gradually.
- Yes, we should do everything we can to encourage economic growth in the rest of the world. The U.S. can't continue to pull the global economy -- even with strong assists from China and India.
- Yes, U.S. consumers have to spend less and save more. The odds are that it will take a painful slowdown in the U.S. economy to produce the "spend less" result. Higher U.S. interest rates would go a long way toward creating that spend-less environment and encourage U.S. consumers to save more as well. Part of the U.S. savings "problem" is a result of the negative real interest rates that Alan Greenspan engineered to keep the economy from deflating after the popping of the tech stock bubble in 2000. But certainly, no rational economist expects people to save when banks pay 1% and inflation is 2%.
- Yes, those of us who live in the U.S. are looking at a reduction in our standard of living. We've used borrowed money to live beyond our means, and the bill is coming due. The most likely method of payment? A weaker dollar, which would make everything imported (including oil, even though it is priced in U.S. dollars) more expensive for anyone paid in U.S. dollars, and higher interest rates.
- And most of all, we need to follow the first law of holes: When you find yourself in one, stop digging. We need to adopt policies on energy, government budget deficits, health care and education that won't put us even further in hock while we're trying to work our way out of this deficit.
We don't have an endless amount of time to take these steps. Japan, a major funding source for the U.S. current account deficit, is one of the most rapidly aging societies in the world. Japanese savers will need to keep more and more of their money at home to pay the costs of that aging. The Chinese, another society of savers, have only a relatively small window of opportunity for putting aside the money they'll need to pay for their own retirements and health care in a society virtually without pensions or health insurance. Id estimate that the problems caused by a large and rising current account deficit will become obvious to all but the most ideologically blinded by 2010, and that we have until 2030 to fix them before an aging global population in the developed world (and China) hugely raises the price of any solution.
All this may sound very abstract to you. Global problems do seem far away from the everyday tasks of getting the kids to school or paying the doctor.
So in my next column, I'll talk about how the U.S. trade deficit and the budget deficit in Washington have already put the squeeze on your future.
New developments on past columns
High returns in a low-interest-rate world; 5 keys
The combination of Katrina, Rita and Wilma cost Berkshire Hathaway (BRK.B, news, msgs)'s reinsurance businesses $3.4 billion in losses in 2005. But this is one strong insurance franchise: Thanks to Geico, Berkshire Hathaway's low-cost auto insurance unit, Berkshire Hathaway managed a $53 million insurance underwriting profit in 2005. And with insurance companies, any time you collect more in premiums than you pay out in claims, you wind up with a river of no-cost cash to invest. In 2005, Berkshire Hathaway's insurance business wound up with a no-cost $49 billion. That is, the company had temporary use of $49 billion in float (money paid in premiums today that will be paid out in claims in the future). And, thanks to the slight underwriting profit for 2005, Berkshire Hathaway didn't have to pay a cent for the use of that money. In 2005, the company used part of this float to make five acquisitions: Medical Protective (a medical-malpractice insurer), Forest River (a recreational-vehicle manufacturer), Business Wire (a distributor of corporate information), Applied Underwriters (a provider of payroll services and workman's compensation insurance), and PacifiCorp (an electric utility serving six Western states.) As of March 17, 2006, I'm raising my target price on Berkshire Hathaway's B shares to $3,440 by September 2006. (Full disclosure: I own shares of Berkshire Hathaway in my personal account.)
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Berkshire Hathaway. He does not own short positions in any stock mentioned in this column.
|
