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.
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
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