February 11, 2011

Pundits worry that we are living beyond our means and that our best days are behind us or that we are eating our way into the poorhouse. If that was the case, we would expect to see the market anticipate this and decline relative to the rest of the world whenever the trade balance worsens. The implication here is clear: it predicts a negative relationship between trade deficits and the U.S. stock market relative to the rest of the world.

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