Thread by @Trinhnomics

Good morning 🌞 After the neutral Fed minutes, JPO heard fixed income investors & whispered sweet nothings into equities’ 👂. Said Tuesday the Fed was closely monitoring the implications of the trade tensions on the econ & would:

“Act as appropriate to sustain the expansion🕺🏻”

https://twitter.com/trinhnomics/status/1130996024787386369

Korea posted its 1st current account deficit since April 2012 (headline); before you freak out, let's look at it quickly.

A current account is a way to measure net income flows:
CA (net income) = Net trade (services +goods)+ Primary & secondary incomes

Chart below 👇🏻

You know from all my posting of NEGATIVE GROWTH OF EXPORTS that income inflows from exports are 📉but imports are 📉too so net merchandise trade still positive in April at 5.7bn.

It's the services that dragged (they always do). So where't the negative from? Primary income (green

In April, primary income recorded a MASSIVE -4.3BN OUTFLOW & secondary too (but usual amount) & services although shrink in deficit meant that the income outflows (services + income accounts = -6.3bn);The net surplus of merchandise trade of 5.7bn wasn't enough so CA goes negative

Okay, u're like that's the income generated by Korean people and firms, what about me? You know, the foreign investors getting involved in KOSPI, KRW, fixed income etc (and also Korean investors in domestic & foreign assets)???

Well, that's what we call the BOP = CA + KA +others

Sorry, gotta run. Continue this thread laterzzz :-) The #balanceofpaymentisfun 🤗

Oh, want to remind you that YEAR TO DATE, Korea still has a current account surplus of USD10.6bn so do not worry about its BOP. Will talk about the capital account after my meetings & TV interview etc.

Here's how national account identities work:

GDP (output) = Consumption +Gov + Investment + Net trade (services + goods) or Y = C + G + I + (X-M)

Current account (CA)=(X-M) + Net income from abroad + Net current transfers

CA = Savings - Investment

So CA surplus is net savings

Korea in April:

CA = (X-M) + Primary + Secondary
-665 = (net goods 5,668 + net services -1,432) + -4330 + -571

Korea had a net negative savings but that was just April. Ytd, it's positive. Notice that the net trade is the same one for GDP. A CA surplus country is a net saver 🐜

Said in my TV interview that May will turn surplus b/c the deficit is just b/c of primary income outflow & even if trade weakness persists, Korea is still a net saver but surplus narrowing in nominal terms & even more so as a share of GDP.

👇🏻Large surplus still 🐜& ❌grasshopper

Now u know what a current account is & so when u hear a country is a CA surplus, u know they are net savers.

Q: Where do they recycle excess savings?
A: In CA deficit countries of course (mostly the USA, in things like UST & equities, etc); CA minus countries IMPORT CAPITAL💪🏻

Since we're getting deep here, something else to think about, as China turns into less & less of a CA surplus country (was 0.4% of GDP in 2018 & likely to be roughly the same in 2019), it will want to ultimately: IMPORT CAPITAL too.

Asia CA % of GDP👇🏻👇🏻