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The Cloud Behind the Silver Lining in the Trade Deficit Data

Your editor never misses a chance to point out when the trade deficit data is bad. After all, it’s evidence of an economy that over-consumes and under produces. But it’s only fair we pass on the good news too, if and when there is any.

The Australian trade deficit narrowed to just $427 million in December, according to figures released yesterday by the Australian Bureau of Statistics. Yes, it’s still a deficit. But it’s a much smaller deficit than the $2.8 billion deficit in November. And what do you have to thank for that big improvement?

Iron ore, of course. In what could be one last hurrah for its power to improve economic perceptions, iron ore prices were up 12% for the month, according to the ABS. With a 20% increase in export volumes, that was enough to drive an overall 3% increase in exports. With imports down 6% in the same time, the deficit was narrowed (although not eliminated).

But this would not be The Daily Reckoning if we did not tell you about the cloud behind the silver lining. The cloud in the data is that capital goods imports were down 19%, including a 35% decline in industrial transportation equipment. These goods are the diggers and drillers that make the mining boom go. What does the decline mean?

Well that’s the big question, isn’t it? The Reserve Bank of Australia has told us there are three stages to the current prosperity: the increase in commodity prices, the increase in commodity investment, and the increase in commodity export volumes. If you’re keeping score at home, you’ll note we are in phase three. Export volumes are up. But the decline in capital goods imports suggests all the benefits of the investment boom phase (to Australian investors) have been enjoyed.

Really, this whole discussion is another way of coming at the same problem we laid out for you at the beginning of the week: what sector is going to carry the S&P ASX/200 to 6,000? Can it possibly be the resource stocks? Can it be the banks? Or can it simply happen as investors flee cash and fixed income for shares?

Pondering this subject last night, we realised we might be making a bit of an American error. ‘Americans speculate on stocks. Australians speculate on house prices,’ our colleague Steve Keen always says. Maybe we’re looking in the wrong place for the speculative frenzy. Maybe we should be watching house prices instead.

Regards,

Regards,
Dan Denning
for The Daily Reckoning Australia

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