Bob LeClair's Finance and Markets NewsletterChange Change

1/1/15 2/7/15 2/14/15 (Week) (Yr-to-Date)Dow Jones Ind. Avg. 17,823 17,824 18,019 195 196

(% Change) 1.09% 1.10%S & P 500 Index 2,059 2,055 2,097 42 38

(% Change) 2.02% 1.85%NASDAQ Composite 4,736 4,744 4,894 149 158

(% Change) 3.15% 3.33%

S & P 500 P/E Ratio 19.7 20.0 20.4 0.4 0.8S & P 500 Div. Yield 1.92% 1.98% 1.96% -0.02% 0.04%T-bill - S&P 500 Yield -1.88% -1.96% -1.95% 0.01% -0.07%

30-Year T-Bond Yield 2.75% 2.53% 2.65% 0.12% -0.10%10-Year T-Bond Yield 2.17% 1.96% 2.05% 0.09% -0.12%91-Day T-Bill Yield 0.04% 0.02% 0.01% -0.01% -0.03%Yield Spread 2.71% 2.51% 2.64% 0.13% -0.07%

30-Year Mortgage 3.87% 3.59% 3.69% 0.10% -0.18%15-Year Mortgage 3.15% 2.92% 2.99% 0.07% -0.16%1-Year Adjustable Rate 2.40% 2.39% 2.42% 0.03% 0.02%30-Yr. - 1-Yr. ARM Rate 1.47% 1.20% 1.27% 0.07% -0.20%

$ Value of Euro (€) $1.2104 $1.1316 $1.1394 $0.0078 -$0.0710Japanese Yen (¥/$) 119.78 119.12 118.75 -0.37 -1.03Crude Oil, Spot Price $54.12 $51.69 $52.78 $1.09 -$1.34Gasoline, Reg. ($/Gal.) $2.26 $2.17 $2.25 $0.08 -$0.01

For the Week Ending:

Top 5 Countries with which the U. S. Trades, 2014

CountryTotal Trade($ Billions)

Top 5 Countries with which the U. S. Trades, 2014

CountryTotal Trade($ Billions)

Canada 658.1

China 590.7

Mexico 534.5

Japan 200.9

Germany 172.6

Top 5 Countries with which the U. S. has a trade deficit, 2014

CountryTrade Deficit

($ Billions)

Top 5 Countries with which the U. S. has a trade deficit, 2014

CountryTrade Deficit

($ Billions)

China -342.6

Germany -73.7

Japan -67.0

Mexico -53.8

Canada -34.0

Top 5 Countries with which the U. S. has a trade surplus, 2014

CountryTrade Surplus

($ Billions)

Top 5 Countries with which the U. S. has a trade surplus, 2014

CountryTrade Surplus

($ Billions)

Hong Kong +35.1

Netherlands +22.9

U.A.E. +19.3

Australia +16.0

Singapore +14.1

Chapter 5:Chapter 5:

The Balance of Paymentsand International

Economic Linkages

Balance of PaymentsBalance of Payments

??????

Balance of Payments

Net value of all economic transactions - including trade in goods and services, transfer payments, loans, and investments - between residents of the same country and those of all other countries.

BoP and GDP

accountcurrent on balance M)- (X

services and goods of imports M

services and goods of exports X

spending government G

spending investment capital I

spending nconsumptio C

:where

)(

MXGICGDP

BoP and GDP – 4Q/2014Source: Bureau of Economic Analysis

[www.bea.gov]

549187,3960,2112,12711,17

)890,2341,2(187,3960,2112,12711,17

)(

MXGICGDP

BoP and GDP – 4Q/2014[GDP = C + I + G + (X – M)]

68%

17% 18%

-3%

100%

U. S. Balance of Trade [Goods](1954 – 2014; $Billions)

Balance of Payments AccountsBalance of Payments Accounts

Current Account Financial Account Capital Account Errors and Omissions Reserves and Related Items

Balance of Payments AccountsBalance of Payments Accounts

Current Account: (millions) Goods - 2014: - $782,100 Services - 2014: + $233,600 Net Amount - $548,500

Balance of Payments AccountsBalance of Payments Accounts

Financial Account– Direct foreign investment

– Portfolio investment

– Other capital investment – short-term financial transactions

Balance of Payments AccountsBalance of Payments Accounts

Capital Account:– Debt forgiveness

– Assets transferred by people who move from one country to another

– Sale of patents and trademarks

Balance of Payments AccountsBalance of Payments Accounts

Double Entry System: debits offset credits sum of transactions equals zero unaccounted for differences are

recorded as statistical discrepancy

Balance of Payments Accounts

Debit Entries: purchase of foreign goods,

services, or assets decline in foreign liabilities

Balance of Payments Accounts

Credit Entries: sale of domestic goods, services, or

assets increase in foreign liabilities

Balance of Payments AccountsBalance of Payments Accounts

Current Account Financial Account Capital Account Errors and Omissions Reserves and Related Items ∑ = 0

Current Account (+/-) Financial Account (-/+) Capital Account Errors and Omissions Reserves and Related Items ∑ = 0

Balance of Payments AccountsBalance of Payments Accounts

International Account Relationships

Deficit

Govt. -

Investment

Private-

Savings

Private

Balance

Account

Current

Saving as a % of DisposableHousehold Income, OECD, 2012

U. S. Balance on Goods, Services,U. S. Balance on Goods, Services,and Income 1981-2007 ($, Billions)and Income 1981-2007 ($, Billions)

U. S. Balance of Trade, 1954-2014[Goods & Services; $billions]

Bob LeClair's Finance and Markets NewsletterChange Change

1/1/15 2/14/15 2/21/15 (Week) (Yr-to-Date)Dow Jones Ind. Avg. 17,823 18,019 18,140 121 317

(% Change) 0.67% 1.78%S & P 500 Index 2,059 2,097 2,109 12 50

(% Change) 0.58% 2.44%NASDAQ Composite 4,736 4,894 4,953 59 217

(% Change) 1.20% 4.57%

S & P 500 P/E Ratio 19.7 20.4 20.5 0.1 0.9S & P 500 Div. Yield 1.92% 1.96% 1.96% 0.00% 0.04%T-bill - S&P 500 Yield -1.88% -1.95% -1.94% 0.01% -0.06%

30-Year T-Bond Yield 2.75% 2.65% 2.72% 0.07% -0.03%10-Year T-Bond Yield 2.17% 2.05% 2.12% 0.07% -0.05%91-Day T-Bill Yield 0.04% 0.01% 0.02% 0.01% -0.02%Yield Spread 2.71% 2.64% 2.70% 0.06% -0.01%

30-Year Mortgage 3.87% 3.69% 3.76% 0.07% -0.11%15-Year Mortgage 3.15% 2.99% 3.05% 0.06% -0.10%1-Year Adjustable Rate 2.40% 2.42% 2.45% 0.03% 0.05%30-Yr. - 1-Yr. ARM Rate 1.47% 1.27% 1.31% 0.04% -0.16%

$ Value of Euro (€) $1.2104 $1.1394 $1.1378 -$0.0016 -$0.0726Japanese Yen (¥/$) 119.78 118.75 119.08 0.33 -0.70Crude Oil, Spot Price $54.12 $52.78 $51.16 -$1.62 -$2.96Gasoline, Reg. ($/Gal.) $2.26 $2.25 $2.28 $0.03 $0.02

For the Week Ending:

How to cope with the trade deficit?How to cope with the trade deficit?

Currency depreciation Protectionism End foreign ownership of U. S.

assets Increase the savings rate

Should We Devalue the $?Should We Devalue the $?

Overvalued currency– tax on exports; subsidy to imports

Weaker currency should reduce deficits

Contrary to U. S. experience “J-curve” theory

The Theoretical J-Curve

Time

0

2

4

6

8

-2

-4

-6

Ne

t ch

ang

e in

tra

de

ba

lance

Trade balanceinitially deteriorates

Currency depreciation

Trade balanceeventuallyimproves

Protectionism:Protectionism:Tariffs, Quotas, etc.Tariffs, Quotas, etc.

Each raises domestic prices and erodes purchasing power

Lower standard of living Tend to reduce both imports

and exports - deficit remains unchanged

“Clinton Imposes Tariffs on Steel Imports That Exceed Quota”

[New York Times, 2-12-00] “President Clinton imposed tariffs

on steel imports valued at $410 million today, answering pleas from steel makers and labor unions but raising tensions with South Korea, Brazil, Germany, Japan and other major trading partners.”

“Clinton Imposes Tariffs on Steel Imports That Exceed Quota”

[New York Times, 2-12-00] “The duties, which take effect

immediately, will sharply raise the price of steel imports that exceed a quota pegged at 1998 import levels. The United States says it was flooded with steel imports in 1998 and 1999.”

“Clinton Imposes Tariffs on Steel Imports That Exceed Quota”

[New York Times, 2-12-00] “The action places a 10 percent

duty on wire rod and a 19 percent surcharge on line pipe, with the duties phased out over three years. The duties will hit only those imports that exceed the 1998 baseline.”

“WTO panel rules that U. S. steel duties are illegal”

[MSNBC, 7-11-03]

“In a stinging rebuke to the United States, the World Trade Organi-zation ruled Friday that heavy duties on steel imports imposed by the Bush administration violate global trade rules.”

“WTO panel rules that U. S. steel duties are illegal”

[MSNBC, 7-11-03]

“A three-member panel of trade experts said in a 968-page ruling that the “safeguard” duties of up to 30 percent … were out of line with WTO rules.”

“WTO panel rules that U. S. steel duties are illegal”

[MSNBC, 7-11-03]

“Washington immediately said it would appeal, and would keep in place the tariffs that President Bush had justified as necessary to protect domestic steel producers against a flood of cheap imports during a restructuring period.”

“WTO panel rules that U. S. steel duties are illegal”

[MSNBC, 7-11-03]

“In response, the European Union stepped up plans to impose $2.2 billion in retaliatory duties on U. S. imports, ranging from footwear to fruit and vegetables – possibly pricing them out of the market.”

“Bush Administration to Impose Tariff on Softwood Lumber from Canada”

[Wall Street Journal, 8/10/01]

“The Bush administration announced Friday that it would impose a 19.3% penalty tariff on softwood lumber imported from Canada in retaliation for what the U. S. said were unfair government subsidies given to the Canadian lumber industry.”

“Bush Administration to Impose Tariff on Softwood Lumber from Canada”

[Wall Street Journal, 8/10/01]

“An economist for the National Association of Home Builders said the higher tariffs could add up to $1,000 to the cost of a new home.”

Cross-Border M&A MovesFan Protectionism in EU

- The Wall Street Journal, 2/27/06

“French Prime Minister Dominique de Villepin’s government has arranged for the merger of Suez and Gaz de France in a $37.98 billion deal, in an effort to fend off a hostile bid for Suez by Italy’s Enel.”

Cross-Border M&A MovesFan Protectionism in EU

- The Wall Street Journal, 2/27/06

“The efforts to fight off foreign buyers of publicly traded companies come amid a wave of cross-border takeovers in Europe and underscore how nationalism continues to thwart the integration of the Continent’s economy.”

Cross-Border M&A MovesFan Protectionism in EU

- The Wall Street Journal, 2/27/06

“The moves will test Europe’s commitment to enforcing a free flow of capital and whether Brussels has the means to face down protectionism in two of the European Union’s most powerful capitals, the Journal writes.”

Cross-Border M&A MovesFan Protectionism in EU

- The Wall Street Journal, 2/27/06

“This is the first opportunity the prime minister has to demonstrate he can do something concrete about his doctrine of economic patriotism ...”

“France backs G. E.’s bid for Alstom, with a new twistl”

[International New York Times, 6-21-14]

“President Francois Hollande’s govern-ment said it backed the G. E. bid and, in a surprise move, would itself take a 20 percent stake in the main remaining portion of Alstom. The agreement, if concluded, would end nearly two months of negotiations by G. E. and the government.”

“France backs G. E.’s bid for Alstom, with a new twistl”

[International New York Times, 6-21-14]

“A previous deal that Alstom and the American conglomerate had tentatively reached … was stopped in its tracks in May by opposition from the Hollande govern-ment, which described Alstom as too much of a national treasure to let fall into foreign hands and demanded a seat at the negotiating table.”

End/Restrict Foreign Ownership of U. S. Assets

Increase domestic interest rates Result: more domestic savings Result: domestic investment will

fall Result: slower economic growth

Stimulate Domestic SavingStimulate Domestic Saving

Provide tax incentives for saving:– Traditional IRA Accounts– Roth IRA Accounts– 401(k) & 403(b)(7) plans– Section 529 plans

“U.S. Trade Deficit Widens, ...”[New York Times, 9/21/95]

““In the long run, according to In the long run, according to textbook economics, the huge textbook economics, the huge American trade gap is an inevitable American trade gap is an inevitable result of the nation’s saving too result of the nation’s saving too little [in order] to finance a high little [in order] to finance a high level of consumption.” level of consumption.”

“U.S. Trade Deficit Widens, ...”[New York Times, 9/21/95]

“Foreigners essentially lend to the United States the difference, obtaining the wherewithal by selling more goods and services here than they buy.”