by Nico Isaac
Updated: February 07, 2017
On February 7, the Commerce Department released its annual report on the U.S. trade deficit.
And, it wasn't pretty.
Per the report, in 2016 the U.S. was in hock by $502.25 billion, its largest trade gap since 2012.
Right away, the mainstream stock market experts filed the report under "B" -- for "bearish." From one February 7 news source:
"U.S. stocks pared earlier gains as the U.S. trade deficit hit its highest level in four years. Investors are getting caught up in a lot of uncertainty that is making them cautious." (MarketWatch)
It's such a concern that the new leader of the free world has made it a top priority to protect the U.S. from racking up its debt with other countries:
"President Trump is setting out to narrow the gap in an effort to bolster the economy." (Wall Street Journal, Feb. 7)
But what if this notion -- that a widening trade gap is bad for the economy and by proxy, for stocks -- is wrong?
In June 2015, the Socionomics Institute (SI) published a ground-breaking Socionomist that answered this exact question. In a three-page report titled "Misconceptions of Trade Deficits Continue," editor Chuck Thompson set the scene:
"The prevailing logic is that trade deficits are bad for the nation's balance of payments and therefore bad for the economy and stocks.
"Robert Prechter noted in the June 1988 issue of The Elliott Wave Theorist that the conventional wisdom 'doesn't fit the facts.' Prechter observed that the trade deficit had actually expanded throughout the 1982-1987 bull market. He also illustrated the disutility of popular trade deficit logic:
"Had the devil himself approached you in 1982 and offered to give you five years of trade balance figures in advance, you would have sold short right then and gone bankrupt six times over as a result.
"Since the early 1970s, the stock market and the trade deficit have tended to trend together. During this period there have been six recessions, which are highlighted in blue. Each of these recessions followed a decline in stocks and the trade deficit."
The next part of The Socionomist's findings ring particularly true to the current political climate:
"Understanding the trade deficit is more than merely an academic matter. In 1994, economists almost persuaded the federal government to risk a trade war to reduce the deficit under the inaccurate presumption that an expanding trade deficit would hurt the economy.
"Prechter commented, 'If the administration had somehow managed to force a further reduction in the trade gap, it would have derailed the economic recovery that came with its renewed expansion, reaping the opposite results that economists promised.
"The federal government's latest trade deficit machinations include legislation that would enhance the president's authority to negotiate major international trade agreements."
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