Trade gaps haunt the global economy

Last week, the International Monetary Fund released its semiannual Global Financial Stability Review, ahead of meetings this weekend in Singapore. The report was full of warnings that the risk of a global financial crash is increasing. This comes hot on the heels of a message from HSBC, one of the world's largest investment banks, that it has put the United States on recession alert.

So what is behind all of the doom and gloom? Chalk it up to the rising global imbalances in trade and foreign reserves that are boosting the possibility that a cyclical global slowdown could melt down into something worse. Not surprisingly, the U.S. economy is the key variable here.

Just look at the U.S. trade deficit, which surged to a record level of $68 billion in July according the Department of Commerce. As the U.S. deficit increases, it depresses the dollar, since more foreign currency is needed to buy all those imports while demand for dollars weakens. The flip side of this is China's record trade surplus, which is flooding that country in foreign currency -- boosting reserves and creating upward pressure on Chinese currency. A rapid depreciation of the dollar could add to inflationary pressures here at home, while inflicting substantial losses on foreign investors' dollar-based investments.

The IMF says that with the world fixated on the U.S. slowdown, not enough attention is being paid to these imbalances. The IMF scheduled multilateral consultation between the U.S., China and Saudi Arabia, to help find an orderly solution to the problem.

The managing director of the IMF, Spaniard Rodrigo de Rato, remains optimistic, however. He sees continued smooth sailing for the world economy, albeit with more ominous clouds on the horizon today than a few years ago. So you can see there continues to be a lot of debate among the smart money about the direction of the world economy. We need to monitor the data and commentary to guide our investment approach through the rest of the year.

Flight from utilities

Although TXU is up over 24% so far this year with dividends, there is a tendency for utilities to sell off ahead of an economic slowdown. Why? Well with factories and offices scaling back, and the subsequent drop in power demand, utilities find it harder to make the case to regulators for expansions or rate hikes.

More from MSN Money

• The economy's next time down has begun
• Why Apple should tempt investors
• The 5 best stocks for 2007
• The financial trap facing the U.S., China
• No shortage of bubbles and troubles

Apple headed to $100

My son Joe, who you may recall is a total iPod junkie, was disappointed. Like many other fans, he thought that there would be a new video iPod player, sometimes referred to as the vPod, that would sport a large touchscreen and longer battery life. Although the new video iPods do have about 50% more battery power, the screens are not enhanced. Also, the new movie download service currently includes only Disney films like "Pirates of the Caribbean," which can only be downloaded in a format that is inferior to the high-definition DVDs the kids are used to.

Joe, who is 14, is one of the new generation of consumers who is totally comfortable with the concept of downloading TV shows to a portable device. He watches them on the school bus. His reaction suggests that Apple still has a lot of work to do to push its devices to a new level. The latest release was truly just a "refresh," and not game-changing as many expected.

There was a completely different reaction from my 11-year-old daughter. As soon as she heard about the new larger, less-expensive, case-hardened, colored nanos, she flipped out. She was so excited. I drove her to the Apple store on our way home from soccer practice, and she was bummed to see the latest gear had not arrived. But no worries. She zoomed to our PC at home and ordered a new, pink 4-gigabyte nano, engraved it online with her name and phone number, and paid for it with her babysitting money. Apple offered free shipping, which was a nice touch. Then she counted the days to its delivery.

I'm telling you all of this as a reminder of what great marketing and salesmanship is all about. It's about finding ways to create a buzz of newness about old products -- getting current customers to upgrade and new customers to want to buy for the first time. Apple does this better than any other company right now, and thus begs our attention. Since the iPods are almost a consumer staple now, I’d like to reiterate my suggestion that you add Apple to your portfolios over the fall on dips, as it is likely to tune into $100 over the course of 2007 and 2008.

Jon Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman did not own or control shares of companies mentioned in this column.

Rate this Article

Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). Low

Thank you for rating.

High

• View all top-rated articles
• E-mail us your comments on this article
• Discuss in a message board