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The following is an excerpt from Zacks Chief Strategist John Blank’s full Oct Market Strategy report To access the full PDF, click here.

I. U.S. Markets

I am going to start this U.S. overview with Eurozone budget data. Eurozone data, you ask? Shouldn’t that be in the global overview? Not this month. This month, I will have the USA and Mainland China trade date in the global section.

What am I thinking harder about? The big policy issues most investors to this publication would like to know more about: U.S. trade and tax decisions.

What this PhD economist needs to do first? Cover tax changes. To start, I don’t know much of what is going to actually happen on the Federal budget. The House and Senate both must approve a finalized tax plan.

Tax plans come with joint decisions on personal and business taxes, debt financed spending, and revenue sent to Federal programs to fund needed operations -- like national defense, Medicare, and interest on the huge accrued debt. That’s where the rubber meets the runway.

A core matter, then, concerns annual Macroeconomic Balances. I want to share more on that in this letter. There’s a logical structure. Most of you are not aware of it. That is the relationship trade balances and their financial sister -- current account balances -- have with Federal budget balances. You cannot violate this.

All economies -- regardless of size -- function under Macroeconomic Identities.

(1) Aggregate Demand (Spending) = Aggregate Supply (Output), which implies

(2) Consumption(C) + Investment (I) + Government (G) + Net Exports  (NX) = Y

(3) C + I + G + Exports = Domestic Production of Goods and Services + Imports

Below: The latest Consensus Economics macro balances for the Eurozone.

 

Study this table of twin balances closely. See the relationships? Macro Identities predict.

Tight countries with bigger Budget Surpluses (the Netherlands, Germany & Ireland) run bigger Current Account Surpluses (identical to Trade Surpluses). Loose countries at the bottom (France, Spain, Belgium, Portugal & Italy) run the largest Budget Deficits. The identical countries also accrue the biggest Trade Deficits.

This is a key point I want to make -- on the USA -- and any other country.

The bigger your Federal budget deficit, the bigger is your national trade deficit.

I will re-state that final identity/equality. Closely inspect this key relationship:

Consumption + Investment + Government + Exports = Domestic Output + Imports

When the USA -- or any other country -- is at full employment (4.2% in an unemployment rate is clean evidence of that), running a Federal deficit means over-spending on the ability of the domestic economy to supply the excess demand  -- created by the visible excess seen in government budgets

In times of deep stress -- like a recession or depression in private domestic spending -- John Maynard Keynes in the 1930s argued very effectively. This was a good idea. Get the Federal government to spend, when the private consumer and businesses cannot. That is persuasive. Running and asking for enlarged Federal budget deficits in times of deep private macro stress is forever called “Keynesian.”

However, what about an economy that is at full employment? That will mean internal domestic spending, however created, has fully engaged the capacity of the domestic economy to supply it.

At full employment of domestic resources, any Federal overspending is balanced by production shipped in from abroad (aka Imports). That means this: Larger Federal Budget problems must lead directly to larger Federal Trade Deficits.

So what, you say?

Realize: the current USA Federal government is attempting to deal with lowering trade deficits. It is re-negotiating trade deals with Canada, Mexico and Mainland China, among others. Then, the same USA Federal government proposes to increase the Federal budget deficit with tax cuts?

Ensuing larger Federal budget deficits will surely DRIVE UP the U.S. trade deficit!

I restated it. Because that’s a BIG point.

It is an undisputable one, from both the point of view of Macro Identities and the recent macro data I showed you from the Eurozone (or any other sovereign for the matter).

If you want to cut your overall trade deficit, you MUST CUT your budget deficit!

Why USA politicians try and violate Macro Identities? I do not know.

II. Global Markets

For a Global Outlook, I will present the freshest trade data for the USA and China.

In 2016, the U.S. exported $1.45T and imported $2.19T, leaving a trade deficit of $735B. The U.S. had an $18.6T economy. The trade deficit in % of annual GDP is then -3.95%.

In 2016, in comparison, Mainland China was nearly a mirror image. China exported $2.1T and imported $1.59T, leaving a surplus of $510B. China had an $11.2T economy. The trade surplus in % terms of annual GDP is +4.5%.

 

The US-China mirror image is no artifact of statistics. It is real. Also pay attention to the statistics on the US’s major trading partners. The US runs chronic trade deficits with ALL of its major trading partners, sans our mother in history, the United Kingdom.

What’s my big point? Our Federal budget deficit creates our overall trade deficit! U.S. general government borrowing/lending is -4.4% of GDP in 2016. Now, consult the trading partners of China. Lo and behold, Hong Kong and the US see these huge trade surpluses.

Hong Kong is an entrepôt.

An entrepôt or trans-shipment port is a port, city, or trading post where merchandise may be imported, stored or traded, usually to be exported again. These commercial cities are spawned due to the growth of long-distance trade.

Japan, Germany, South Korea and Taiwan? All of these high-income countries currently import much more than they export to China. Really!!! They don’t display the US story, at all. It’s the reverse.

Current Republican Senator from Tennessee Bob Corker, and a member of the Senate Budget Committee, summed up this situation succinctly:

I think the greatest threat to our nation is us. The way we handle our finances, we as a nation are the greatest threat to our nation. It’s not ISIS. It’s not North Korea. It’s not ascendant China. It’s not Russia. We are the greatest threat.”

 --Sept. 29th, 2017

III. Zacks October Sector/Industry/Company Telescope

Fall is the season. Sector leaders are clear.

It is no surprise to see Info Tech lead. The global economy is heating up. A pro-cyclical domestic bid is on, too, shown by Very Attractive Consumer Discretionary and Industrial sectors. Health Care stays Attractive.

U.S. jobs are plentiful and stock markets are moving up.

(1) Info Tech is, once again, a Very Attractive Sector. The Semiconductors lead, and Electronics is tops. Computer-Software-Services, and Misc. Tech are good.

Top Zacks #1 Rank (STRONG BUY): Seiko Epson Corp. (SEKEY - Free Report)

(2) Consumer Discretionary stays a Very Attractive Sector. The leaders are Consumer Electronics, Autos/Tires/Trucks and Other Consumer Discretionary.

Top Zacks #1 Rank (STRONG BUY): Honda Motor (HMC - Free Report)

(3) Industrials rise to Very Attractive from Attractive. The leaders are Machinery-Electrical, Business Services and Machinery.  Airlines look the worst.

Top Zacks #1 Rank (STRONG BUY): Park-Ohio Holdings Corp. (PKOH - Free Report)




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