Posted on 10/16/2007 10:09:52 PM PDT by bruinbirdman
Foreign investors slashed their holdings of US securities by a record amount as the credit squeeze intensified, according to the latest Treasury figures.
The Treasury International Capital report – known as the Tic – for August will be closely watched because it appears amid growing concerns about the weakness of the US dollar, which hit a record low recently against a basket of major currencies.
“The bad news is that [the data] plainly show how vulnerable the dollar is to a continuation of the credit crunch-risk averse environment,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital. “There is no way to get away from the lack of corporate bond inflows, the foreign selling of US equities and the countervailing strong US purchases of foreign equities and bonds.”
The Treasury said net sales of US market assets – including bonds, notes and equities – were $69.3bn in August after a revised inflow of $19.5bn during July. The August outflow exceeded the previous record decline of $21.2bn in March 1990.
Until now, US policymakers have appeared relatively relaxed about the dollar’s decline, since there has been little sign to date that this has been been triggered by a broader global aversion to US assets. However, that attitude could change if signs emerge in the coming months that non-US investors are becoming more nervous about holding dollar assets, as a result of the recent credit squeeze.
Some analysts said on Tuesday that the August data might turn out to be an aberration, since it occurred during the most intense period of this summer’s credit squeeze – when investors were arguably most uneasy about the market outlook. Consequently, some said they hoped that the outflows will have been reversed in September.
“There was clear panic-selling of equities in August, but given the market’s subsequent rebound, those flows should have reversed,” said Dominic Konstam, head of interest rate strategy at Credit Suisse. “If foreign investors return to buying equities, it is not obvious that there will be a capital flight from the US that will lead to a dollar crisis.”
However, others suggested that the scale of swing in August indicated that more fundamental pressures were now bubbling – not least because the dollar continued to decline in September.
The dollar was generally firmer on Tuesday after traders digested the Treasury data. The dollar index was 0.2 per cent higher at 78.25, but that is only 0.8 per cent above its record low set late last month. The dollar was up 0.3 per cent against the euro, but was 0.6 per cent lower against the yen.
Since August 1998, Tic flows have been positive and the last period of pronounced outflows was in the early 1990s when the current account deficit was briefly eliminated.
A breakdown of the data showed that one key reason for the outflows was that there were net foreign sales of US equities of $40.6bn in August, more than reversing the purchase of $21.2bn in July. Reflecting the pressure on US markets and the dollar, US residents purchased a net $34.5bn of long-term foreign securities.
In the debt world, there were net sales by foreign investors of US corporate bonds – but overall holdings of US government debt remained relatively balanced.
Thank you very much Europe, Latin America, Asia, we appreciate our assets back, at discounted values.
When they are sky high again, y’all come back now, and buy them again.
Boy this game is so much fun.
Of course, American investors overseas do just as stupid knee jeerk reaction things as well...
If you remember anything tonight, let it be the following.
Right now, the world has the lowest allocation of their money in the US market in modern history. Also, Americans have their highest allocation in International, in history of modern econ.
When this folly is exposed, the US market is going to go up in value, dramatically.
Put these together and you’d have to be sniffing glue to post what you did.
Foreign investments have been financing our house of cards. Without those investments, who will?
Your assuming that not purchasing the dollar is permanent. Ok, so at what point would you purchase a dollar denomination? Remember, a dollar not going abroad, as it would otherwise acts the same way.
I wouldn’t be dumb enough to claim I’m smarter than anyone about finance and econ, but since I do it professionally, have so for 15 years, and run a large practice, would say that I’m not a drug taking underwear wearing day trader that has just learned everything I know from Money Magazine. If you catch my drift?
Wouldn’t you agree that there would be a tipping point beyond which our nation would be in serious trouble? Explain to me where my thoughts on this are wrong. Do you simply see foreign investors thinking our treasury notes were a bargain at some point? I don’t understand how. We would have to raise rates significantly for that to happen, and that would severely damage the economy. The dollar would take more hits based on that.
Thanks in advance.
A weak dollar is a problem when inflation goes high, and the cost of govt borrowing goes high. Neither is the case now, or yet.
Some would argue that we are seeing inflation, especially with energy costs. Unfortunatley that is a weakness of weak dollar, but not actually an inflaitonary problem as the cost is more about the dollar and lack of refining. Gold too is appearing to be “much higher” but only when viewed in usd denominations...
It is hard to understand, and has been since the 1700’s, that trade is always fair at inception, even when gold was the standard, or so according to Adam Smith, Wealth of Nations. His premise was that trade at inception was fair, or it would not have been originated. This same argument was very heated in “Import England” of late 1700s.
A great example of how this works despite face value logic is with Japan. They shipped us goods, and left with empty boats. Actually, the boat was not technically empty, it was carrying a cargo: One envelope with cash in it.
The cash had to be turned around right? Either dump it in the currency market and discount it, buy american goods, buy american companies, or american property. They chose r/e and some biz ventures, and when it worked, they piled on, creating a bubble in cali and hi r/e.
Meanwhile, their currency kept increasing in value. This created a scenario that made bank loans more and more expensive, eventually making their banks insolvent.
So, in the end, it is obvious now that the US got the better deal? Their stock market is less than half peak value of nearly 20 yrs ago!
With all due respect, you and others are so incredibly wrong about the state of US financial affairs. We are literally on the verge of a perfect scenario for American growth, not demise by any means! Granted, not all will be winners, but the aggregate will bring our market higher, much higher.
I would not want to be highly invested in foreign equities right now, especially Asia where a bubble that will be viewed later as rivaled by none, is currently in the latter stages. The devastation there will be mind boggling, make Japan look like nothing.
US treasuries, most likely, are doing reasonabley well now for a number of reasons, but one that I’m interested in, is the fact that many foreign investors and govts are buying them as a hedge against a rising dollar and weakening of their own currency. If for example, an invetor buys 1m of 30 yr us tres, and the dollar recovers 30% over the next X years, they wind up not only gettting the coupon, but a higher valued coupon over time, and principal of 1m+30%.
I simply find it fascinating that everyone thinks this time is different, the USD will never recover, and that current economic trends will continue forever. That is the best way to lose money ever.
At some point DoughtyOne, the dollar becomes so cheap, as to become ridiculous to Canadians, Japanese, Brits, etc... They will then travel here, buy stuff here, get R/E, buy out US companies on the market etc. At some point, it gets too extreme right? And at that time, very large financial institutions overseas will realize that they are woefully short allocation in the US bond and equities market, need to make up the gap by buying US securities. The same will hapeen to US investors that are heavily overseas. When they realize they are losing overseas, gaining here, they will repatriate their money, at the expense of the foreign markets.
Ok, hope that wasn’t boring, cuz my wrists are killing me.
Great thoughts. Thanks
I’m pretty stupid in just about everything life has to offer. Food and finance though, I’m good at.
I appreciate the response, so don’t take this the wrong way. Is there no scenario that causes the U.S. to be unable to sustain it’s continued deficit spending? I see foreign investment drying up, and there seems to be no down side that you can see at all.
That sounds excessively optimistic to me. We can’t just print money without there being a down side.
Inflation is already here by way of oil.
Obviously, if the country borrows too much money, then it has to devote a significant portion of their “take” annually from tax payers to not finance govt, but to pay its debt. Sound like a relative you know? Personal finance and govt finance are similar that way.
But, what if you had a debt, it appeared large, but over the years you got one big pay raise after the next. Heck, even if your debt grew, if you’re income is growing even faster, your debt to income ratio is actually getting better, not worse. This was what Reagan beleived, that we would grow our way out of the national debt. And to a degree it worked, unfortunately as the coffers grew, so did the spending. Much liek the rich dudes wife deciding the next car is going to be more expensive, the mink a bit furrier, and the wine a bit more exclusive...
The US govt, and the Amercian financial machine are smarter than they appear. Also, they’d tell you all this, but maybe they’d rather keep it to themselves, so they don’t tip their hand to the rest of the world.
A dramatically weaker currecny, a great benefit is our national debt has now shrunk by about 30%... Now, we just need a govt that quits spending more, every time it takes in more.
Also, if you think the US is bad, then you should see other nations. We are the most solvent nation on earth really, and if anyone is living in a house of cards, look first at China, Japan, and most of W Europe.
Without trying to create any attack or criticism of you personally or your profession, the word "professional" in the world of money management or anything else simply and only means that the one so termed does it for money. That money may come from generating legitimate returns for clients, as is, I'm completely certain, true for the great majority. It may also come from 2% fees on billion-dollar hedge funds where the pricipals cannot now withdraw funds and whose fund values cannot be priced.
Nothing is permanent in finance, but the erosion of the dollar as a currency will probably continue as long the Fed takes it upon itself to serve as the main benefactor to the money center banks whose professional staffs saw fit to purchase gargantuan amounts of very questionable debt. If the Fed sees fit to continue to lower rates at the short end, I'd suspect the dollar has a modest amount further to fall. The IMF thinks the dollar will fall for 3-5 years.
[The excerpt below is from a WSJ article concerning the IMF’s view of the US dollar.]
Over the "medium term," which is three to five years in IMF parlance, "we still see room for further depreciation," Mr. de Rato said.
The euro, he said, is "very near" its equilibrium value. At a breakfast with reporters yesterday, Mr. de Rato repeated his remarks that the dollar's drop had been "quite substantial." However, he then added his projection that the dollar still had room to fall. IMF officials say his remarks were meant to more accurately convey the fund's view of the dollar and didn't reflect any pressure from the U.S. Treasury or European finance ministries. "There's still some depreciation to come in the medium term," said the fund's chief economist, Simon Johnson.
Another thing professionals do is to package some of these debt instruments.
"In the spring of 2006, Goldman assembled 8,274 second-mortgage loans originated by Fremont Investment & Loan, Long Beach Mortgage Co., and assorted other players. More than a third of the loans were in California, then a hot market. It was a run-of-the-mill deal, one of the 916 residential mortgage-backed issues totaling $592 billion that were sold last year.
The average equity that the second-mortgage borrowers had in their homes was 0.71%. (No, that's not a misprint - the average loan-to-value of the issue's borrowers was 99.29%.)
It gets even hinkier. Some 58% of the loans were no-documentation or low-documentation. This means that although 98% of the borrowers said they were occupying the homes they were borrowing on - "owner-occupied" loans are considered less risky than loans to speculators - no one knows if that was true. And no one knows whether borrowers' incomes or assets bore any serious relationship to what they told the mortgage lenders."
Professionals both packaged and bought the above type of instruments. So I'll rhetorically ask: What's the definition of professional?
The final piece of total insanity in the equation is that the US Treasury says it is interested in a strong dollar, but little or nothing is done to maintain its value. In fact, it appears the exact opposite mandate is in effect.
Personally, I have no real problems buying productive dollar-denominated assets......with dollars I already have or dollar-denomiated debt....which is what foreigners are doing. But buying dollars or dollar debt with foreign currencies to me is ridiculous when the US Treasury and the Fed seem to be devaluing them as fast as possible.
Oil is not inflated. American goods that involve oil might be inflated because of it, but oil actually is not.
Gold too, if you revalue it using Canadian or Euros, appears to have barely gone up in value.
Our country has so far avoided the two major problems of a weak currency, inflation and high cost of borrowing. If the benefits of a weak dollar materialize, we will not see those in a damaging fashion.
I appreciate your comments. Thanks.
Yes, if you think that the dollar goes weaker from here, it would be foolish to take foreign dollars and buy USD assets. I’m saying, that we are at the point in the cycle where the weak dollar cannot any longer be expected to continue its fall, and that when the shift is made, the deal is then extremely profitable.
The Canadian dollar is at par, the pound at 2, both on the extreme end of a range. That is not just a “range”, it is where common sense kicks in. Truly now, does it not ever get to the point in your mind, where spending 80 bucks on a french bottle of wine, is just plain stupid to buying a great California wine for 20 bucks? Or maybe you just are that much richer than i and can somehow taste the 60 dollar difference??
Or how about the airline company deciding what airplane to buy? Is it not the same with airbus and boeing? Does the 30% discount by buying the boeing not have any value in the making of that decision???
I kind of don’t appreciate the repeated reference using “professional”, really comes across as personal. Let me ask you a question. If I said I’d played professional foootball for 15 years, would my experience there, be no more important or valuable than that of some guy that watches games during the w/e? Or what if I served in the US Armed Forces, would that 15 yrs of experience be as easy to piss on? And it’s not like I’m asking you to take my “credentials at face value” since I’m willing to back anything I bring up, with examples and illustrations? Also, I’m the first to admit when I don’t know, don’t care, or don’t understand.
The long story about the mortgage situation, not sure what the relevance there is by the way. IMHO, you had a r/e boom fueled by excessive liquidity, that had no responsible originators since they intended on dumping the loans off on some other sucker anyway... An end to that boom is welcome, and the spectacular demise of some of these companies was probably expected the day they put the name on the building.
Oil is not inflated. American goods that involve oil might be inflated because of it, but oil actually is not.
Almost all American goods involve oil. It’s how the veggies and milk get to the supermarket as well as a key ingredient in everything plastic.
No, you’re right, oil certainly is a small cost in literally everything we have. But hey, there is always something that is a bit more expensive than usaul in any process, and it is quite remarkable to see so far, that oil has not really stifled the US economy. I certainly, if someone told me years ago about 80+ oil, would have predicted chaos. But that is econ for you, very hard to predict, and takes on its own life form.
It’ll take awhile for the higher prices to hit at the pump, but when they do it’ll suck money from other sectors. A double wammy will be arriving in time for the cold weather in the form of higher priced heat.
I like the Profs scenario better.
Chicken little was hollering during the S&L scam. LongTermCapital was the original hedge fund fiasco that was supposed to ruin the world economy. DotCom bubble was the end of the world. Enron and energy futures frauds ruined the country. 80 dollar oil is unbearable. Real estate bubble burst. Unsecured debt is hurting the little guy.
It appears the US economy is huge for a reason and relatively stable over the long haul. Ooh, ooh, ooh. Long term, diversified, balanced, dollar cost averaged investments sounds like a winning plan in the U.S.A.
The discussions of the intricacies of the economy, I find, are facinating.
yitbos
It is fascinating. But a bit like Rugby or Cricket, unless you know what the heck the rules are, it looks completely insane.
I think in America, even more so overseas, the end of the world stuff is so fascinating, and everyone can get in on the fear, regardless of knowledge.
PS,I don’t know a darn thing about Rugby and Cricket...
Bail !
Quite naive to believe that these assets “come and go” - once investors got their money back they wouldn’t dig it in the back yard.
The money will be going to work elsewhere.
Now that’s plain wrong. You could sell oil for 20 bucks a barrel and well cover all costs and a sensible margin.
Mark for later
You’re proving my point. Oil like you said, has a break even around 20 something. The cost of it is not cost of production related. There are all sorts of factors at work, and a big one is speculative hoarding.
People in the US constantly get burned buying international investments. They always buy at the top, sell at the bottom. Foreign investors make the same mistake when buying here. This has always happened, and will always continue to happen, until people become really smart, whcih will not happen. And if they did, volatility would dry up, and we’d be bored to death.
Great comments. China, you’d agree, is on the verge not of greatness, but spectacular collapse? One hopes, that their collapse does not come at the cost of too many lives.
Remember in the late 80’s when the mantra was all about Japan? Yeah, how does that look 20 yrs later? For a very brief while, the Nikkei was valued higher in mkt cap than the entire NYSE. That sure had people in the US worried..
Professional, your posts are very informative, thanks.
A little bit of knowledge can make a buck on the fear factor. I don't trade, but a couple of times a year when I reallocate some assets, I seem to pick more long term winners than losers. Thanks for the long term outlook, now I won't be investing in cases of tuna fish.
yitbos
I’ve worked with thousands and thousands of clients, invested probably about 1b. I also have lots of colleagues.
Trust me, when I say that nobody trades themselves to wealth.
Yes, a well timed well thought out long term trade idea can work.
Wish I would have bought Canadian govt bonds about 5 years ago, at 62 cents on the canuck. That investment would be up 60%, not including the coupon that just also went up 60%. Dang, have to remember that for next time...
Thank you, appreciate that.
That’s been my opinion for several years.
Just a matter of time and the greed of the PLA generals running the thing.
And it is just a variation or flip side on how the Soviet Union ran its economy into the ground.
They don’t appreciate that wealth is generated in domestic consumption and personal capital accumulation.
Instead they squeeze the workers to feed the military industrial complex and line their pockets.
That puts the cart before the horse.
Sometimes I like to get personal.
I like Forbes. Read an article many years ago; during the Thatcher years, I think. The advice was to buy companies being privatized by governments at the first chance. They are usually being sold by socialists who have no concept of the value of the assets. The IPO will be cheap and the capitalist owners will manage it better than the government.
Most of these have been utilities of one kind or another of which I am particularly fond.
yitbos
Also, when you consider the speculative nature of the Chinese, you can imagine that caution in every way shape or form been thrown to the wind.
I’ve heard that the greed is so bad, that no real effort is actually being made to get the companies there profitable. Volume, market share, but no profit. It is making them work like mad men, but not making any profit.
This bubble also is longer, larger in size, and without the normal reaction of a restrictive fed, or othe type constraining move, means that when it goes, it will be a total wipe out. Meanwhile, they are all so happy and proud...
I heard too, that over 1m brokerage accounts are being opened in China, EACH DAY. So, they are again, the originator, the holder, worker of the bubble, which makes it even worse.
Remember Henry Ford’s philosophy?
Pay line workers enough they can afford to buy the cars they build.
In China that still only applies to management.
That was of course a driving force in the last big international boom for us investors, back in 1993. Telmex, the stock of the new world. When they went private, found that 2000 employees didn’t even exist! But, the idea grew, bubble formed, then blew up.
Personally, the area of investment today, I see as the best risk/reward scenario is small cap growth. The returns have been totally pathetic for the last 10 years. The valuations are extremely low, wall street barely follows, and you can hardly find a credible place to buy it in a packaged diversifeid product.
I estimate, that in order for the 20 yr trailing period, ten years from now to reach long term returns of historical means, the sector must perform at an average of about 20% per year for the next 10 years. I discovered this late last year, so far so good, growth is doing very well compared to value. I’m buying I SHares IWO, because i don’t trust any other packaged form, and would rather avoid buying lots of little companies I know little about. That IWO holds 1000 securities, and the mgmt fee is like 25 bps.
Hard to figure out what to believe there. It certain is proven that they went from bikes, to mopeds, to cars. Pollution there is certainly a sign of econ expansion, but when it is financed irrsponsibly, disaster awaits. Did the Chinese get enough a taste of freedom and capitalism to revolt, when they realize they got duped by their own govt? And will the govt shoot them for revolting?
Eh, eh. I was thinking Teledanmark (TLD bought low, sold high), and British Gas (BRGYY still own.)
yitbos
I'm a little more conservative with IWM.
For individual equities, I am way overweight energy.
yitbos
One of the primary reasons the Euro is so strong is their interest rates are much, much higher than ours.
yitbos
Oh ok - that said I guess inflation is a problem in a high priced commodities environment. Ecpecially for a country that doesn’t have much intrinsic efficiency for the use of oil and gas.
hu ? I though we got still 1% less then you guys.
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I just wanted to correct one of your comments. You are absolutely right that Euroland is not running a trade deficit and in most years runs a surplus. However, the combined Euroland economies run budget deficits larger than the US budget deficit (and ours is coming down to around 2% of GDP. Euroland has a restriction of budget deficits of 3% of GDP but many countries are seriously in excess of that. Furthermore, our public debt/GDP figure is around 64% which puts us below most Euroland countries (about equal with France and Germany).
I too watch the TIC reports carefully. My gauge is three consecutive negative reports, then long term rates explode to the upside and this credit cycle is history.
BUMP
DB:
Euro rates are lower than USD rates: 1 MO Euribor: 4.18% and 1 Mo LIBOR is 5.08%.
It’s the trade deficit although we actually run a surplus with a lot of the European countries. We are the No. 2 exporter in the world. It is the deficit with Asian countries and OPEC that are the problems.
RT
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