Wednesday, July 3, 2013

Less In, Less Out - Today's International Trade

Would you say business is booming when both inventory purchases and sales are down? Of course not. The same dire reality applies to nations like ours.
US International Trade
Today, Haver Analytics reported their monthly data on US international trade. On a year to year basis, both exports and imports are at best near zero.
Most worrisome is the fact that the three and a half years trend is stubbornly down. If the US was a business, its business would be shrinking. If the President was the CEO, he would be fired.
Industrial companies, like Caterpillar, and the agricultural complex were completely oblivious to our economic problems of the last five years because international demand for their products continued to be robust as middle classes expanded everywhere. These new groups demanded better roads and more beef, which is much less efficient as a nutrient than say corn.
The fact that the US dollar fell below historic lows meant that everybody could better afford our products. But the trend is no longer robust. In fact, the risk is that the Dixie, the name given to the dollar by Futures traders, may increase now.
An increase in the value of the dollar is one of the key indicators of deflation. This and lower US international trade could signal  the beginning of a period when assets lose value. Just like last year's cell phone is now worthless, your inventories could face a net loss in value if deflation takes hold.
Dollar Futures (2001 to 2013)
Deflation is generally recognized as an important problem during the Great Depression. It is not clear, though, whether deflation was the cause of the Depression or just a symptom. The argument persists.
What is clear is that deflationary periods pose different challenges to businesses. Computer manufacturers like Dell for example, know well that they must create manufacturing models that reduce the need to inventory any more parts than absolutely necessary. In their segment, extra parts lose all value in just a few months after purchase. Most businesses, on the other hand, sit on inventory for longer. There are plenty of small local retailers who struggle to turn their stock more than once per year. This even happens to apparel retailers. In apparel, manufacturers rotate product lines at least four times per year, something that their retailers can't even dream of doing. As a result, these retailers are forced to discount their older models or else risk losing them all together.
The need to discount something to try to find the price where new buyers are trading is deflation; which is at the core of what I want you to get from this post. If the macro indicators are truly giving us a view into what the near future will bring, then you need to be concern with the effects of deflation.
Deflation Risk
Keep an eye on your inventory levels. Extra inventory should be converted to cash ahead of deflation. Remember that during deflation all assets go down in value while dollars goes up. Having extra dollars will actually be the smart thing to do since their purchasing power will go up during the deflation.
Recall that after oil and commodities skyrocketed in 2008, we experienced a short deflation. The dollar went up while oil, copper and even gold dropped.
This time, gold may not fall as it did before. Gold is both an asset and a currency. It is highly possible that as the Europe drops, gold's currency value may compensate for asset value loss.
But this article is not about gold but about your business and your business holds assets in the form of inventory. keep an eye on the price of the dollar and the size of our national and international economic activity. More expensive dollars or less economic trade will continue to point towards deflation risk.
Don't count on the Fed's money printing as a solution. The so called Liquidity Trap has rendered all the added liquidity from Japan, Europe and US useless. Inflation from too much liquidity is taking place not within the real economy but with bonds and dividend paying stocks. Bonds are tanking as we speak.
If you see deflation in the horizon, plan to eliminate low velocity inventory, those that do not sell all of the time. Use that cash to take advantage of the opportunities that will come soon after.

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