Friday, March 17, 2017
Stock market value and the trade deficit
There are always lots of interesting correlations in the economics data. I just saw someone on twitter post the first pic of the stock market valuation and it triggered in my mind the trade deficit graph. So I looked it up and sure enough there is almost a perfect correlation between the two.
I wonder if it has to do with the fact that foreigners are by definition "saving" their USD earnings (if they werent saving there wouldnt be a trade deficit in the first place) to the tune of hundreds of billions of dollars each year, so the stock of foreign USD savings grows enormously each year. What to do with all that money? As should be know by now (as QE demonstrated) there are only a few places to park USD savings:
State and municipal bonds
Notice how Im ignoring exchanges into other currencies as an option as that doesnt change the USD environment.
Im uncertain of the Real Business category since Im not clear on how real investment is accounted for in the national accounts. Is that part of the capital account and as such wouldnt be reflected in the trade balance data? Please help explain if someone has the knowledge.
Either way, with hundreds of billions in additional USD savings each year and only these options for how to save that money, Should it be any surprise that the stock market value correlates with the flows of additional investable savings each year?
Just something to think about. However, one needs to explain the correlation split at the end of the graph (present day) as the stock market has gone up while the trade deficit has remained flat as a % of GDP. Nothing comes to mind right now,
P.S. we shouldnt expect to see as much, if any, correlation between the trade deficit and Bond valuations as they are all dependent on the benchmark TSY CD rates which as we know are explicitly set by the monopolist Fed\Tsy nexus.