Friday, June 29, 2018

No Dollars Lost

So what happens to all of those dollars we spend on foreign stuff in excess of what foreigners spend on U.S. stuff?

Well, each week we track "foreign portfolio investment" in the aggregate, as well as to what extent stocks and bonds contribute to the total, across a number of countries  -- and therein lies a big part of the answer. Just completed the exercise and felt inspired to offer up the following lesson.

Here's the latest for China (in millions of US dollars):

And here's the latest for the U.S:

So, we know, all too well, that China sports a large goods trade surplus, while the U.S. has a large goods trade deficit, with the rest of the world. But, as you can see above, China has quite the large deficit when it comes to inbound foreign investment (-$386 billion over the past 12 months), while the U.S. has a monster surplus (+$472 billion).

Now here's the thing, if all of the aggressive talk, and action, of late actually does (as the Administrations suggests it will) ultimately result in more foreign purchases of U.S. stuff (as opposed to U.S. investments), it's highly likely that there'll be less capital available to invest in U.S. markets.

I.e., when all's said and done, assuming our buying of foreign goods doesn't diminish greatly going forward (a source of capital for foreigners to invest back into the U.S.), all this wrangling simply redistributes capital away from U.S. investments and toward U.S.-produced consumption goods.

Not saying that that's necessarily a bad thing, but we need to recognize that with less demand generally comes lower prices. You know what that means when we're talking stocks in your portfolio. When it comes to Treasury bonds, for example, it means higher interest rates.

Bottom line, be careful what you wish for...

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