What’s next for global capital flows?
The sometimes excitable Ambrose Evans-Pritchard sees more doom and gloom ahead in the oddly titled piece in the Telegraph “Foreign investors veto Fed rescue”:
Asian, Mid East and European investors stood aside at last week’s auction of 10-year US Treasury notes. “It was a disaster,” said Ray Attrill from 4castweb. “We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed.” The share of foreign buyers (”indirect bidders”) plummeted to 5.8pc, from an average 25pc…The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.
As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?
The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.
The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo’s Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system. Japanese investors and foreign funds are having to close their yen “carry trade” positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks.
Of course things might get considerably worse from here. It’s hard to say. However, there should come a time, perhaps soon, when shorting the dollar and making bullish bets on commodities and oil ceases the be the riskless strategy that the Fed’s dawdling has thus far made it. In such a scenario, we would not be surprised to see the large foreign investors capitalize on the low dollar and reduced stock prices to recycle some of their exaggerated surpluses into US equities. One way or another, those surpluses have to be recycled or the global financial system cannot function.
March 18th, 2008 at 6:56 pm
If you’ve read Ambrose Evan-Pritchard for any length of time, you will know his story line never changes. He should change his name to Ambrose Henny-Penny. London is about to lose it’s status as the world’s leading financial marketplace. The reason for this is all the CDOs and derivatives they trade in. Who wants to invest in a London Hedge Fund nowadays. They are on the outside looking in.
How does a decreasing dollar affect China, Russia or Iran? Would a de-stabalized USA mean the “smart money” would invest in China, Russia or Iran? Can you de-stabalize the USA? All the military sabre rattling by China, Russia and Iran will cause their economic undoing. A slowdown in exports in China may well mean revolution. Russia is about to find it’s place in the world and likley will not like it. Back in 1998 nobody wanted a Zhironovsky to run Russia. Is Putin that much different? And how about that New Guy? I expect the New Guy commands a great deal of respect in the world. You know the World “loves’ the New Guy. The best thing about calling yourself the New Guy is you can be replaced and not have to change the name.
Iran will find it has no friends.
The strength of today’s stock market says the world wants a strong USA. Remember your pension. It does not matter where you live in the world, a strong USA is good for your pension. No other country has as “clean” a financial marketplace as the USA.
As the saying goes…What’s in your wallet?”