Falling home bias in the US, rising home bias in Russia?
American's home bias — or at least American institutional investors' home bias — seems to be falling. Americans are more willing to hold a share of their financial assets abroad. Stephen Jen thinks the recent uptick in US demand for foreign assets — the following chart shows the rolling 12 month sum of US purchases of long-term foreign bonds and foreign equities in the TIC data — is one cause of dollar weakness.
No doubt he is right: the more Americans want to move their funds abroad, the more US assets foreigners need to buy. Foreigners in effect have to finance both the US current account deficit and American purchases of foreign assets.
But the current fall in "US home bias" also may be in part a consequence of the falling dollar. A falling dollar, after all, increases the returns of holding foreign assets. Indeed, the US net international investment position would look pretty ugly right now if foreign returns on their investments in the US had come close to matching US returns on their investment abroad over the past few years.
By contract, Russians - private Russians — seem a lot more enamored with their own currency than the used to be. They no longer hold quite as many dollars under the mattress (hat tip, Barry Ritholtz). A lot of the dollars previously held under the mattress — estimated dollar holdings are now falling — seem to have been traded for rubles and moved into local banks — though no doubt some are going into euros as well.
Dollars(cash) under the mattress don't pay interest. But for many years, they actually were a pretty good financial asset. So long as the rubles was falling, mattress money produced steady capital gains. Sort of like housing in the US until the last year or so.
And it has turned out that a lot of Eastern Europe was far more interested in holding appreciating dollars than depreciating dollars. I (briefly) worked on Bulgaria in late 2002, and at the time, Bulgarians decision to take dollars out from under the mattress and convert them into bank deposits denominated in the Bulgarian lev (which is tied to the euro through a currency board) was a big influence on the balance of payments. The dollar had just started to depreciate against the euro back then. Bulgarians didn't like to see the lev value of the dollars fall, and suddenly started selling dollars for euros and ultimately lev.
I suspect something similar is happening in Russia. I don't think the decline in Russia's dollar holdings is simply a product of a lack of large dollar-denominated notes.
One of the most important global trends of the past few years has been the growing willingness of private investors — foreigners and local residents alike — to hold financial assets denominated in emerging market currencies. Home currency bias certainly seems to be increasing in a lot of emerging economies; a lot fewer financial assets are denominated in dollars (and euros for that matter) than used to be the case …
That, at least to me, is an unambiguously good thing. It though does raise the question of how the US can finance its ongoing external deficits if private demand globally is rising not for assets denominated in dollars, but for assets denominated in emerging currencies.
The answer of course is that central bank demand for dollars continues to grow …
Reverse currency subsitution has also been prevalent in places like Turkey, where the opportunity cost of holding dollars has been exorbitant over the past couple of years.
Of course, there is also the cynical explanation that kleptocrats prefer €500 notes to $100 bills- fewer briefcases for the bodyguards to lug around when conducting under the table transactions…
More Theater of the Absurd. Treasury Secretary Paulson in Beijing to advocate revaluation of the yuan; what he really advocates is the destruction of US Dollar purchasing power. Why would the Russians or Chinese want to own the US Dollar when the US Treasury Secretary openly calls for the monetary destruction of his nation’s currency. Does Paulson really understand the social-economic implications of what he advocates? What ever happened to the “strong Dollar” matra repeatedly mindlessly by every US Treasury and Federal Reserve government official since Clinton-crony Robert Rubin?
Paulson Urged `Immediate Action’ to Lift the Yuan, Sobel Says
http://www.bloomberg.com/apps/news?pid=20601068&refer=economy&sid=ah4B496quKe0
Aug. 2 (Bloomberg) — Treasury Secretary Henry Paulson told Chinese leaders this week to take “immediate action” to lift the yuan’s exchange rate, a Treasury official told lawmakers today.
DC — China has been artificially propping up US purchasing power, but in the process, it also undercuts the us tradables sector/ props up its own exports. This distortion has gotten quite large — and i do think that both the us and china need to get serious about reducing it. so far, i don’t see much evidence china is serious (RMB has been stable in real terms, as RMB appreciaiton v $ has been offset by $ depreciation). bush has doen better on fiscal in term 2, but for the next 18 months it also will be hard for the us to do more to reduce its call on the world’s savings (energy policy strikes me as the key).
but for once, i don’t want to get drawn into a debate on china — there will lots of future chances.
Macroman — for a while the turkish banks had convinced turks holding $ deposits to sell embedded options (giving up some of their capital gains should the $ appreciate/ lira depreciate) in return for a hit higher yield. don’t know if it is still the case or not. the high level of dollar deposits in turkjey’s banking system always seemed strange to me — but i haven’t looked at the data since late 05 so i don’t know what has happened recently …
Macroman has it right in last 2 years reverse currency substitution in Turkey was rampant deposit ratio was 1 to 1 but now it is closer to 3 to 1 local to foreign currency denominated deposits
I dont think china will let its currency appreciate
a lot unless there is some unprecedented inflation
caused by wage inflation or resource led inflation.
If there is no resource scarcity i dont see significant
revaluation for atleast 10 years before any significant
wage rises happen
If the US dollar is significantly devaluated as Treasury Secretary demands, the result in America would be that both consumer prices and interest rates would rise. The “real” distortion in Global Trade arises from the reserve currency status of US Dollar hegemony, militarily backed by Gulf Arab oil reserves priced only in dollars, which has essentially locked the world trading system into a fiat currency that is printed at will by the Federal Reserve.
Only the Russians have the political and military power to break the de facto reserve currency monopoly by Washington which is why former Treasury Secretary Robert Rubin and Henry Kissinger recently travelled to Russia to meet with Putin to carry out official US government business as discreetly as possible.
No one really knows what took place at the meetings, but judging by Kissinger’s parting remarks; things did not go smoothly. He said to one reporter, “We appreciate the time that President Putin gave us and the frank manner in which he explained his point of view.” In diplomatic phraseology, “frank” usually means that there were many areas of strong disagreement. Presumably, the main “bone of contention” is Putin’s insistence on a “multi-polar” world in which the sovereign rights of other nations is safeguarded under international law. Putin is
ferociously nationalistic and he will not compromise Russia’s independence to be integrated into Kissinger and Rubin’s wacky new world order targeting the Chinese.
Putin is not America’s enemy. He is a fierce nationalist who has led his country out of depression and anarchy into prosperity and resurgent patriotism. He has stabilized the ruble, consolidated his regional
power, and elevated the standard of living for every class of Russians.
The Russian Federation now has the third largest FOREX reserves, the largest natural gas deposits, and—on many days—provides more oil to foreign markets than Saudi Arabia. The country has regained its international prestige and it has become a force for peace and stability in the region.
The Washington Consensus needs to come to grips with Russia’s ascendant place on the world scene. Russia is not going away. Petroleum and natural gas are becoming scarcer and more costly by the day. Russia’s power will naturally grow in proportion to the diminishing of crucial supplies. This cannot be avoided without
initiating a third and, perhaps, final world war.
America’s preeminence in the world depends to great extend on its ability to control the global economic system. That system requires that the US dollar continue to be linked to oil reserves. But everywhere the petrodollar is under attack. The only solution is to control two-thirds of the world’s remaining petroleum -which is in the Caspian Basin—and
demand payment in only US dollars.
But that plan has failed. The war in Iraq is lost and the longer America stays, the harder the fall will be. Oil will not continue to be traded in petrodollars, the US dollar will lose its place as the world’s “reserve currency”, and America will slide into a long and agonizing economic downturn.
The machinations and secret “shuttle diplomacy” of Kissinger and Rubin will amount to nothing. The situation is irreversible. Geography is fate.
Looking at your graph of investment outflows took me back over 20 years to when I was a wee young central banker looking at the Third World Debt Crisis in the 1980s.
We used to call charts like that “capital flight” and considered them an extremely adverse indicator of political and economic stability. Basically, if the locals in a country don’t consider the local market or economy worthy of investment, then any foreign bankers foolish enough to put money into that country as either investment or lending are likely to end up with a crisis a few years later. The locals know the climate a lot better than any foreigner possibly could and can be expected to identify productive investment locally if it exists, even when capital is tight. When they start moving their cash offshore, something is seriously scary.
Unless the rules have changed, that chart indicates that Americans are losing faith in the productive capacity of the American economy and are seeking to safeguard their savings by investing elsewhere.
It’s particularly dangerous to have flight capital in an economy with highly inequal distribution of wealth (as the US has become in the past two decades). The rich are basically secure against the evils of political and economic dislocation, no matter how extreme, and can therefore support more and more corruption and violence to retain control.
DC- I dont think americans will be decimated by before
some third world countries are sacrificed by american
loss of petrodollar hegemony.
Also i think petrodollar hegemony is not likely to fall
any time soon because oil producing countries are
virtual captives of america except some rebels.
No doubt there’s some truth to the notion that falling US home bias is a consequence of rising expectations of a falling USD & higher offshore returns.
That said, isn’t it also possible that the ubiquity and quality of information about offshore markets has increased dramatically in the past few years, as has the practicability of trading in offshore markets. Mainstream media coverage of world markets is still pretty pathetic, but there’s now a ton of quality info available through the internet. 10 years ago, trading in any non-US markets was a big production, but now it’s not hard to find online brokers (eg. IB) who’ll facilitate trading in almost any market worthy of the name.
In other words, maybe Americans are investing offshore not only because they want to, but also because they can.
To me that chart just looks like investors chasing performance in overseas markets. Look at a chart of MSCI EM or EAFE against US demand for foreign assets.
london banker — your comment reminds me of when i was a young treasury desk officer, and then Secretary Summers asked why portfolio outflows from advanced economies were portfolio diversification while portfolio outflows from emerging economies were capital flight.
I do though find it amusing that emerging market central banks are now financing US capital flight (oops– portfolio outflows), especially given all the debate inside the imf in the 90s over the appropriateness of IMF financing of capital outflows (consensus — ok if it is temporary, not if it is sustained) from emerging economies, given the imf’s mandate.
and i agree with your basic argument that it isn’t a good sign for the us — even if it is a bit of chasing (past) performance.
I’ll try to dig up the msci data — does anyone know the bloomberg call sign (I think i can find it, but equity indices are not my thing)?
*wipes the foam from DC’s mouth off the screen*
yeah, that was jen’s point: it’s not so much capital flight as it is US investors are ‘under-diversified’ and they don’t need a lot of convincing after seeing ($)returns of foreign investments over the last few years.
as for the emergence of local currency sovereign (& corporate) debt PIMCO had a good overview: When Capital Flows Uphill: Emerging Markets as Creditors
Brad Comment>It though does raise the question of how the US can finance its ongoing external deficits if private demand globally is rising not for assets denominated in dollars, but for assets denominated in emerging currencies.
My Comment: If the Asian Currency Unit follows the Euro, then global demand for ACU may become the dominant8 trend. FT states that USA now has dropped its OPPOSITION TO ACU.
http://www.ft.com/cms/s/3d2d5784-fc95-11da-9599-0000779e2340.html
In the same direction>Mr. Bing Zhang, Fan He wrote an article called ” IS ASIAN CURENCY UNIT ATTRACTIVE TO EAST ASIAN ECONOMIES?” One of his conclusions is THAT A RMB PEG TO ACU WILL RESULT IN AN IMPORTANT RMB APPRECIATION
See: http://www.blackwell-synergy.com/action/showPdf?submitPDF=Full+Text+PDF+%28212+KB%29&doi=10.1111%2Fj.1749-124X.2007.00054.x&cookieSet=1
I’m an investor, not a speculator. All I know is the world economy is stronger than ever because of the rise of China and also India. It’s hard to bet against the world economy at this moment. US is not the engine of the economy anymore. People will realize that sooner than you may think. Invest in China, it is still at the early stage to do so. Believe me, you’ll be better off doing so than trying to time the market.
Thanks Dave Chiang for a well written post. Full of good sense too, but the US is too rich to collapse rapidly. It will just fail to “keep up” with the competition and slide back relative to the more productive areas of the world.
even if you start out under-diversified, it isn’t clear to me how you can diversifiy easily if you also need to finance a big external deficit; mathematically, the only answer is huge inflows — and that begs the question of why shoudl foreigners come in when the locals want to get out (the classic EM question …)
I wonder if going to China and issuing an ultimatum (sounds like one at least) is the wise way to go:
“Treasury Secretary Henry Paulson told Chinese leaders this week to take “immediate action” to lift the yuan’s exchange rate, a Treasury official told lawmakers today.”
I await the Chinese reaction with baited breath.
again, as twofish and mcculley would point out, what the US has that (labor and savings rich) EMs don’t: technology and institutional know-how (e.g. legal, credit, management, marketing)
The entire world is flooded by excess Dollar liquidity resulting from the reserve currency status of US Dollar hegemony. Those fiat US dollars are useless for commerce in the domestic Russian and Chinese economies. Not surprisingly, the excess US dollar liquidity in Japan, China, Europe, Dubai, or Russia eventually must be recycled back into the United States economy. By definition, dollar reserves must be invested in US dollar denominated assets, creating a capital-accounts surplus for the US economy. World trade is now a game in which the US produces fiat dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies.
excellent exchange there between ‘London Banker’ and ‘bsetser’. I tend to think that even though capital outflows from US could be called diversification rather than flight, they are most likely a bit of both, and no matter what you call them, Banker’s argument still holds - if people suddenly want to put more and more money overseas, that means they deem local prospect less and less bright.
Maybe that is a sign that the unwinding of balances draws closer. Now, there are a few ways to unwind a debt bubble - first one is through sudden collapse of debts, letting bad blood out and starting from scratch (like in Great Depression), second is through freezing or govt purchase of debts with slow deflating of the debt over 2-3 decades (like in Japan’s recent stagnation), third (most popular in centrally governed countries) is through hyperinflation.
What I am curious about is whether anyone can control the unwinding of USA debts, since a lot of debt is international, which means no single entity has full contol over all the financial players involved. Does this mean that the chances of the third type of unwinding are greatly increased, with hyperinflation threating more than one country?
or the US could go to war (which it has) and scare everyone into keeping their assets in dollars; it is, after all, a ’safe haven’…
Brad, if you type MSCI on Bloomberg, you can look up the various MSCI country indices, hedged and unhedged.
The reduction in US home bias is neither unique nor worrisome, given that American investors have tended to own more domestic equities than portfolio theory suggest that they should, just as, say, Japanese households own way too much cash/deposits.
JGU, portfolio investment into China is easier said than done, because direct purchases of Chinese shares are rationed via the QFII program. While one can of course purchase Chinese ADRs, there is naturally no guarantee that they will perform like their domestic counterparts. And of course, access to China’s domestic currency and bond markets are verboten because of the closed capital account.
I have a dream that one day Brad will make a post on a non-China subject and that China will actually not appear in the discussion section…..
China’s military might: The long march to be a superpower - The People’s Liberation Army is investing heavily to give China the military muscle to match its economic power. But can it begin to rival America?
America, India and the China bogey: A price too high - The rise of China is no reason to trample on the non-proliferation regime
America in the Middle East: Arming its friends and talking peace - In short, a new sort of cold war stalks the region
China’s economy: Be careful what you wish for - Is inflation China’s latest export?
Business in China: Dirty dealing - Despite a clampdown, corruption remains a formidable problem
Non-violent protest: They shall overcome—but perhaps not always - In many places, non-violent protest is the only kind that has any hope of succeeding. But it can still fail
Macro Man has it exactly right in his assessment of ” the reduction in US home bias “.
Thank goodness there’s at least one non-economist out there who can provide the required finance 101 input to this blog.
I wonder how much of the data can be explained by non-US residents using the US as a transit point of investment. You are an Saudi prince, you want to invest in South America. So you call up your good friends at a Wall Street investment bank, wire your money up there, and then they take the money and buy South American companies.
Twofish, I suspect relatively little, given that a) virtually all of the equity mutual funds sold in the US last year, on net, were foreign stock funds, and b) those same Wall street banks operate in Europe. Moreover, sheikh-sized accounts would typically merit a specialized mandate from an investment manager with fiduciary responsibility- but that would not generally require the funds to be brought into the US for re-export,
Tax reform: Overhauling the old jalopy - Tax competition is starting to hurt America. But can Uncle Sam muster the political will to fight back against his tax-cutting foreign rivals?
Innovation and the economy: The good, the bad and the ugly - How Britain rates as a knowledge-based powerhouse
GDP redefined: Intangible measures - Counting investments in knowledge reveals a new picture
Productivity Questions Cloud Outlook - Growth in productivity is key to improving living standards and it may be slowing — along with the pace at which the economy can grow without generating inflation.
Productivity - Americans are hard workers, but not necessarily the most productive workers, according to the Bureau of Labour Statistics. It has compared America’s output per worker and output per hour with a clutch of other rich countries. It reckons that the average American worker produced about $90,000 of output in 2006, measured at purchasing-power parity. Only Norwegian workers, some of whom man oil-rigs, did better. But America’s output per hour worked—just over $50—was less impressive. Employees in France, Belgium and the Netherlands were all able to squeeze more out of an hour of effort. In Norway, workers can churn out about $73-worth of goods and services in that time.
Broad money supply - Broad measures of the money supply include notes and coins in circulation, the reserves that commercial banks hold at the central bank, and the deposits they in turn hold for their customers, including current accounts and less liquid savings instruments. Some central bankers keep a watchful eye on these measures lest too much money chase too few goods, resulting in inflation. The European Central Bank, for example, believes that monetary growth of no more than 4.5% is consistent with stable prices over the medium run. In fact, the quantity of money in the euro area increased by over 10% in the year to June. In Britain, which has higher interest rates, the money supply is nonetheless growing even faster.
Incidentally, the ‘valley’ in the very top chart of the post in the early part of this decade is one reason why I would expect the USD to rally in the event of a market crash or US recession- US investors would likely bring their money back home, just as they did in 2001.
For the same reason, a deep consumer recession in Japan would probably be yen-positive, insofar as it would dissuade Mrs. Watanabe from buying more uridashi or punting around on gaitame.com.
anonymous who has taken finance 101 (and probably 501) –
while a reduction in home bias is certainly not unique (tho some ems are showing an increase in home bias is you look only at their private sector) i would argue a reduction in home bias in a country with a large external deficit is potentially worrisome, in as much as it requires an even bigger fall in home bias elsewhere to provide the net buildup of foreign claims on the us needed to finance an external deficit
MMan –maybe. but a us recession that led the fed to cut rates might sour foreigners on the dollar, and the us would still need roughly $800-900b in net inflows even in the absence of any us outflows …
“why portfolio outflows from advanced economies were portfolio diversification”
- because the ‘investor’ does not change citizenship, although residency may be dual or more, and (much of) the capital is eventually repatriated
“portfolio outflows from emerging economies were capital flight”
-because people flee with the capital and have little or no intention of returning.
Yes - you’re right - external deficits constrain otherwise prudent international portfolio diversification; surpluses facilitate it (unless you live in China). The risk benefits of international portfolio diversification, which was the finance point, would have to be weighed off against the costs or benefits of economic deficits or surpluses.
(Sorry for the crass remark implicating the economics profession. I should have balanced it out by noting that the non-economist I relied on for the sage view is a trader
- but in all seriousness, the trader input to your blog is quite valuable. It’s a good portfolio effect.)
I have a strange suspicion - not backed up by any numbers - that the world has come to come to Americans more than American’s have sought out the world, in the sense of non-US co’s directly/dually listed in the USA (despite Sarbox), ADRs, ETFs, Int’l MF, and all manner of easily accessible securities available through their local bucket shop, purchasable in USDs, with the ADR custodian, ETF or MF manager doing the logistical nuisance work.
And with all due respect to Macroman, and purdy Macrospeak like diminshing “home bias”, I would put to you (again without statistical proof) that the correlation of the alledged change in such home bias exemplified by US demand for foreign assets would be uncannily high to the inverse of USD Index (ex-Canada). To me this means that Americans, perhaps like Mrs. Watanabe, are simply feedback trading. The diminishing home bias argument assumes more premeditation to the rationale behind the flows, when the more simple explanation: “people are buying what has/is going up, and selling what is/has gone down” may have more explanatory power, inelegant as it may be.
Does China impose limits on foreign investment in Chinese companies? I wonder what would prevent China, if a trade war were to come to pass, from demanding that foreign entities reduce their ownership of all Chinese companies to less than 4.9%. That would force some large US banks to sell a lot of their investment, I presume. And the outcry might be enough to stall any further trade sanctions against China. After all the Chinese market is potentially much more lucrative than the US market. Being shut out would really hurt. Anyone with more info about this?
“BP’s eviction from the giant Siberian gasfield is the second forced removal by the Kremlin of a foreign investor from a major gas resource. In December, Royal Dutch Shell was forced to cede control of Sakhalin-2 to Gazprom in a $7 billion transaction.”
Russia has not hesitated to shove out foreign investors when it wanted to do so, and without suffering any consequences to my knowledge. Could not China do the same?
The reduction in US home bias, for whatever reason, seems loosely compatible with the ‘dark matter’ thesis, which essentially equates to the notion that the US can continue to fund the gross carrying cost of its current account deficit by making a spread on funding its gross foreign assets with cheaper foreign liabilities. The DM theory implicitly requires continued expansion of gross foreign assets (i.e. continued reduction in home bias) in order to cover the increasing interest cost of a deteriorating CA deficit. To do this the US has to continue to outperform on its gross assets compared to its liabilities, including the effect of FX valuation. This requires that US investors in foreign assets be ‘better’ portfolio managers (including opportunistic FX forecasting) on mass than foreign investors in the US.
To Dave Chiang:
Perhaps you should give credit to Mike Whitney:
Kissinger’s Secret Meeting With Putin
By Mike Whitney
“The West—and particularly the United States—needs to come to grips with Russia’s ascendant place on the world scene. Russia is not going away. Petroleum and natural gas are becoming scarcer and more costly by the day. Russia’s power will naturally grow in proportion to the diminishing of crucial supplies. This cannot be avoided without initiating a third and, perhaps, final world war.
America’s preeminence in the world depends to great extend on its ability to control the global economic system. That system requires that the dollar continue to be linked to oil reserves. But everywhere the petrodollar is under attack. The only solution is to control two-thirds of the world’s remaining petroleum -which is in the Caspian Basin—and demand payment in dollars.
But that plan has failed. The war in Iraq is lost and the longer America stays, the harder the fall will be. Oil will not continue to be traded in petrodollars, the USD will lose its place as the world’s “reserve currency”, and America will slide into a long and agonizing economic downturn.
The machinations and secret “shuttle diplomacy” of Kissinger and his cohorts will amount to nothing. The situation is irreversible. Geography is fate.
http://www.informationclearinghouse.info/article18036.htm
This post Written by Dave Chiang on 2007-08-02 14:31:54
That starts out with:
“The entire world is flooded by excess Dollar liquidity resulting from the reserve currency status of US Dollar hegemony.”
Borrows heavily from this article, replicating whole sentences:
US dollar hegemony has got to go
By Henry C K Liu
http://www.atimes.com/global-econ/DD11Dj01.html
Guest, thank for the link to Henry Liu’s article.
I am glad that DC quoted from it, prompting you to give the link. This piece certainly provides a different and broad perpective.
http://www.atimes.com/global-econ/DD11Dj01.html
Cassandra, while I certainly wouldn’t dispute that much of the US demand for foreign assets is indeed momentum based, that doesn’t mean it is unhealthy, unwarranted, or unprecedented.
Pages 37-38 of the article below provide estimates of levels and changes in home bias between 1997-2001, a period in which the greatest reduction came in Europe. And while some of that was of course due to the introduction of the euro, it is notable that both Sweden and Norway (neither of whom, of course, are in the euro) saw very large reductions in home bias during the period.
http://www.uh.edu/econpapers/RePEc/hou/wpaper/2005-05.pdf
Surely, in a current account deficit position, diversification (by US investors) can easily be achieved without buying foreign assets if US investors sell some of their existing holding of dollar assets to foreigners. As it is, diversification is being achieved by an expansion of the US balance sheet, in which the US collectively does not run down its holdings of dollar assets so much as make new dollar assets (debt) which it sells to foreigners, and buys foreign assets.
This balance sheet expansion may be reasonable on the grounds that it is profitable, albeit risky, if the US assets retained (eg property) yield more than the new ones sold (debt). However, I suspect that it is more the outcome of growing wealth disparity in the US. Much of the borrowing is being done by those with few assets to sell - eg the government, individuals for house purchase etc, whereas the wealthy, under no pressure to run down their net assets, are doing the diversification.
Ultimately, the future of the US depends on it being a sufficiently nice place to live that the wealthy continue to live there - despite a large proportion of their wealth being overseas - and pay higher taxes and prices (eg for service labour) when the debts need to be repaid.
The article from Liu seemed a bit self-contradictory since it seemed to simulatenously complaining that Americans were overconsuming but at the same time complaining that the world economy was heading toward overcapacity. Also, it seemed to be complaining that the world economy was “capital-starved” when there isn’t a shortage of capital that I can see in the Middle East, India, or China.
The basic problem here I think is that the US is powerful and power breds suspicion. The danger I think for India, China, and Russia is that as those economies become powerful, *they* will become the topic of suspicion. However, unlike the US which is powerful enough so that a lot of objections can be ignored, the suspicions against the emerging markets will come at a time when people *can* stunt their growth.
There is also a curious strong/weak paradox in the way that Liu talks about the US that I’ve seen people make when they talk about China. On the one hand the US is powerful enough to be running the entire world. But on the other hand, it’s about to fall apart. One would think that if the US *was* as hegemonic as DC or Liu asserts that it would be able to keep itself in power and wouldn’t be about to fall apart.
RE - very interesting point, but I’m not sure I fully understand it.
The international investment position is composed entirely of financial assets and liabilities. Even FDI is a financial claim on real assets (i.e. represented as capital investment / retained earnings).
All assets sold by the US to foreigners in international transactions automatically create US foreign liabilities - and equity claims are categorized as liabilities on the foreign balance sheet in the same way as debt.
So the international sale of any US asset to a foreigner creates a US foreign liability and grosses up the US international balance sheet. As per previous discussions, the default asset gross-up is a US claim on a foreign bank, which is a foreign asset. That asset is likely eventually exchanged for a more sophisticated foreign investment - debt or equity.
In other words, any international asset sale forces gross liability and gross asset creation, and expansion of the international balance sheet.
Expansion of the international balance sheet is necessary in order to diversify from domestic to foreign portfolio content (unless the domestic balance sheet starts to shrink - which is only likely in a debt deflation / depression).
The types of financial assets sold to foreigners can be categorized according to their financial intermediation complexity. FDI has the least intermediation; government bonds have a lot of intermediation (who knows where the money eventually goes?).
But I don’t see characterization of intermediation complexity affecting the question of what US investors have to do in order to diversify. They have to buy foreign assets.
Your point on wealth disparity is interesting. Those with the foreign assets (diversifiers) are wealthy; those with the foreign liabilities are less so, and facilitating the spread that is reflected in the wealth of the asset holders.
“Much of the borrowing is being done by those with few assets to sell”- P/E? hedgefunds?
“the future of the US depends on it being a sufficiently nice place to live”
it seems that citizenship may be all that is required, although I’m not in a league that would understand how that works. To use a Russian example - Abramovich is able to live abroad, maintain his exorbitant privileges and be on good terms with the Kremlin. I am sure there are plenty of examples of wealthy U.S. citizens who spend little of their time in the U.S.
- which may get back to the difference between capital flight and portfolio diversification. What are the (likely both written and unwritten) rules that determine when governments decide that assets have, to all intents and purposes, been ’stolen’ and must be repatriated - in contrast with government actions to facilitate the growth of large NR and expat communities along with international diversification of corporate and resident citizen’s wealth? Brad - shouldn’t you know something about this?
If someone can define a ‘U.S. asset’, as I understand that a great deal of that ‘foreign’ investment is done through instruments that are sold in USD and traded on US exchanges.
re: “On the one hand the US is powerful enough to be running the entire world. But on the other hand, it’s about to fall apart”
Correct me if I’m ‘wrong’, but don’t think anyone could be blamed for getting the impression that, for whatever reason, Brad/RGE seems to be in this camp as well - perhaps leaning towards convincing everyone that the ‘U.S.’ is following apart - whether or not ‘it’ takes everyone ‘else’ with it in the process.
“Who says the U.S. has a trade deficit with the rest of the world? Classical economic doctrine holds that nations compete by producing and exporting what they make best, while importing from other countries those goods where they lack comparative advantage. The tally of exports and imports results in either a trade surplus, thought to be good, or a deficit, considered bad. Today that 200-year-old theory is flawed, misleading and overly simplistic. And when policymakers insist on reducing the way countries economically interact to a single figure - the trade balance - it is dangerous, especially when it unleashes the specter of protectionism. “U.S. international trade in goods and services renders an incomplete picture of U.S. global engagement,” says Joseph Quinlan, chief market strategist at Bank of America Capital Management in New York. That’s because the main avenue by which U.S. corporations deliver goods and services to overseas clients is via the American companies’ affiliates abroad, not exports…” http://www.bloomberg.com/apps/news?pid=20601039&sid=aOh2wMD_ecXE&refer=home
sorry - of course “following” in 2007-08-03 08:17:32 should read “falling”
The following also being one example of the ‘U.S.’s central role in supplying the lifeblood of information that runs global markets:
“…everybody seemed to be relying on the same iTraxx feed from Bloomberg, which is delayed by about 10 minutes from what in a non-centralised market comes closest to a live price. “We realised this because twice in the same day we saw the biggest single moves in dollar/yen that anybody had seen in months almost exactly 10 minutes after huge moves in the Crossover,” the strategist says. The story illustrates the central role that levered investors are playing in the volatility across asset classes…” http://www.ft.com/cms/s/d2acecf2-4127-11dc-8f37-0000779fd2ac.html
jkh,
I do not know for sure, but I would be surprised if, for example, IBM’s sale of its PC business to Lenovo remains on the US balance sheet, as both an asset, and, since the sale, a liability too. Even if it did, it would not change the economic effect that the US no longer benefits from that asset.
Contraction of the US balance sheet is exactly what I have in mind. The plain fact is that until the US matches its consumption to its income, its wealth is slowly draining away to the likes of the Middle East and China. Chinese purchases of stakes in US companies like Blackstone are a symptom of this. Hanging on to Blackstone and selling China bonds instead is risky (in fact, doing the opposite has so far looked like a great trade for the US). Unless of course, the US is contemplating defaulting on its bonds!
Maybe one day you Canucks can buy Alaska from the US in settlement of numerous natural resource debts, just like the US bought it at a knockdown price when the Russians had fallen on hard times!
” U.S. international trade in goods and services renders an incomplete picture of U.S. global engagement,” says Joseph Quinlan, chief market strategist at Bank of America Capital Management in New York. That’s because the main avenue by which U.S. corporations deliver goods and services to overseas clients is via the American companies’ affiliates abroad, not exports…”
Wrong.
Exports of domestic producers produce top-line revenue for the current account.
Exports of foreign affiliates produce bottom-line income for the current account - much smaller order of magnitude than top-line revenue. The difference between top and bottom lines is taken into account in foreign GDP.
Guest, anyone with more than half a brain knows that the BBG Xover feed is delayed and gets their prices directly from dealers.
*always trust 2007-08-03 08:48:50* - then why would anyone bother with Bloomberg?
RE:
I believe your point is that the US should sell primary financial assets (e.g. Blackstone equity) rather than leverage (bonds). That’s an issue of domestic financial risk and leverage that I see as distinct from international diversification. Shrinking the gross domestic balance sheet would reduce leverage and the export of leverage to foreign investors. But whether the assets are Blackstone equity or bonds, the foreign balance sheet will expand (whether through expansion of the CA induced net liability position, or as gross asset-liability expansion). But I’m not sure what this has to do with diversification of US foreign portfolio content.
Because the US runs a net foreign liability position, diversification into foreign assets requires gross international balance sheet expansion.
Not familiar with the details of the IBM transaction.
Re the Alaska idea - we should consider it in due course, but we have our hands full right now defending the North Pole and its underlying resources from the Russians. By the way, oil sands extraction costs are going perpendicular at this point.
I cannot believe Sesit fell for the US doesn’t have a trade deficit because US firms sell a ton of stuff abroad that is made abroad line (or that Quinlan is still pushing that line). The profits US firms earn from their foreign operations enter into the BoP — but in the income line (as another guest points out). the fact that us profits abroad are higher than foreign profits in the US (mostly b/c reported foreign profits in the us are low) knocks about $100b off the current account (which offsets the big net interest payments the us makes on its external debt).
however, adding sales of US affliates abroad to the exports data (rather than adding the income earned by US affliates abroad) is fundamentally wrong in a balance of payments sense.
suppose a US firm produces goods in China for both the US and Chinese market using components sourced in China, including chinese managers. Quilan’s measure would have a huge number of “US export” — really sales by US owned companies. but it wouldn’t generate any US jobs/ result in any economic activity in the geographic location of the US. The balance of payments would accurately record a debit from the import of goods for the portion of the firms Chinese production that is exported to the US, and a credit from the profits the firm earns on its sales in both China and the US(which should register in gross national income as well). basically, US owners of capital (the firm) do well, and get an inflow from abroad — but there are no jobs for us workers in that example/ no economic activity in the US other than collecting the profits sent back by the chinese factory.
of course, if those imports were paid for with exports, there would be jobs there — but right now they are paid for by exporting debt. that is a fact too — look at the net export of debt securities by the US of A.
there is a huge tendency to equate the competitiveness of US companies — which can be enhanced by shifting production abroad — with the competitiveness of the US as a center for producing goods and services, which has a much different relationship to outsourcing. and in a BOP sense, it doesn’t matter if an imported good is produced by an American company. You still have to come up with the funds to pay for an outflow of funds associated with the American companies need to pay its foreign suppliers and workers.
this stuff is just wrong, and it annoys me that it gets so much play. the us really does have a trade deficit.
jkh,
I think we are agreeing - I am saying that, contrary to Brad’s comment that “it isn’t clear to me how you can diversifiy easily if you also need to finance a big external deficit”, I think you can. It is not necessary to borrow more to finance the additional purchase of foreign assets, as long as you are willing to sell a domestic asset you own.
re: “I cannot believe Sesit fell for…”
Lots of credible people making that argument. At least they are willing to put their ‘real’ names and brands behind it, as you do on your own views. I’m not qualified to judge, but it seems to me that the Sesit/Quinlan view must have some merit. On that note, if I can join requests that we have a bit less, or no more, ‘MM’ plugs in your posts when he doesn’t seem to be able or willing to back up his own views with something a bit more substantial than a phony moniker and a blog that is for ‘entertainment purposes?’ Surely you can find more substantive references than that.
The Sesit argument is rubbish. It’s a matter of knowing and understanding the definitions in the balance of payments and what the definition of a trade deficit is. Brad’s example is factually indisputable in terms of the definitions, the logic, and the math. Any other interpretation leads to a contradiction. ‘Lots of credible people’ tend to make up their own definitions in economics. Similar to this case, ‘lots of credible people’ fiddle their own customized definition of savings, developing propositions about savings that are completely untenable and completely inconsistent and dysfunctional in relating to the full sphere of other accepted definitions and measures in economics. This case is one of Sesit and others not comprehending the difference between revenue and profit when gauging the components of value added and generation of income in a particular national economy.
Dave Chiang (supposedly) wrote: “Putin is not America’s enemy. He is a fierce nationalist who has led his country out of depression and anarchy into prosperity and resurgent patriotism. He has stabilized the ruble, consolidated his regional
power, and elevated the standard of living for every class of Russians.”
And according to some people in the early 1930s, Hitler did wonderful things for the Germans and their economy.
No, Putin’s not that bad, but he is a threat to the US.
“…Mr. Deripaska was asked in 2006 to refrain voluntarily from entering that country and found out later that his visa had been revoked, although he has never been told why, the circular says. Various media reports this spring said the U.S. government is concerned about potential links between the Russian magnate and organized crime in that country. Mr. Deripaska has dismissed such charges as propaganda. Shareholders have privately criticized the deal with Mr. Deripaska and some have publicly called for Magna to use the $1.54-billion in proceeds to pay a special dividend. That suggestion has been made by Pzena Investment Management LLC of New York, which is Magna’s second-largest shareholder…” http://www.globeinvestor.com/servlet/story/RTGAM.20070803.wrmagna03/GIStory/
guest — i am the ultimate judge of credibility for this blog. i disagree with your assessment of macro man and his work. macro man puts his reputation as macro man on the line every day; a anonymous critic who posts as guest does not. I don’t always agree with him, but I always find him interesting — and i suspect based on what he writes that he has a very good understanding of a lot of flows through london.
i now intend to double my macro man references
and I second “truthiness not” — the folks who tend to embrace the sesit view (paul o’neill was one) tend to have trouble differentiating the us economy from us firms. and their understanding of the balance of payments usually leaves something to be desired.
the BEA does the sums using a profits rather than revenues based measure of us firms activities abroad, and it publishes the results — the profits of us firms abroad are added to exports, and the profits of foreign firms in the us are added to imports. the net result is a smaller trade deficit, but a bigger income deficit — and exactly the same size for the current account deficit. there is no there there so to speak.
to be honest, the dark matter argument is way stronger than the sesit argument — and it works on understandable BoP definitions, tho on a somewhat strange method of discounting flows that doesn’t include any risk spread on riskier assets …
re: “I now intend to double my macro man references”
in others words, you don’t intend to be taken seriously.
I second Brad on MM. He’s very insightful.
Guest - do you have any insights on economics or markets?
Give it your best shot.
i will happily take the risk that linking to macroman ends up reflecting badly on me. i enjoy my conversation with him through the blog and through the comments.
if you don’t, well, your call. ignore the links and comments.
To Alex Sunn who wrote on 2007-08-03 02:51:02
“Guest, thank for the link to Henry Liu’s article.
I am glad that DC quoted from it, prompting you to give the link.”
I have no problem with DC quoting from Henry C K Liu’s articles (among others..) I just wish he would cite his sources so we could see more of the original work of the authors as opposed to a selective, uncredited cut and paste job by David Chiang.
“No, Putin’s not that bad, but he is a threat to the US.”
Well perhaps a threat to a number of US imperialist aims. If the US ceased to provoke Russia there would be no problem.
“the ultimate judge of credibility for this blog” - is your audience
“i will happily take the risk that linking to macroman ends up reflecting badly on me” - then the money must be good, because that tends to make people careless with their reputations and audiences.
Guest on 2007-08-04 05:54:10 - I have a real problem with adulterations, whether the ‘DC sounding’ (fabricated, plagiarized and/or adulterated) posts are produced by the same person operating under similarly borrowed or fabricated IDs - or other cranks who are attracted by it.
Information is like food/drugs. Producers, manufacturers, retailers and regulators have an obligation to provide variety, quality and freedom to choose, but should also be held responsible for ensuring that appropriate standards are articulated and enforced to avoid contamination.
guest — macroman meets every standard for quality on this blog. simple as that. posting anonymous criticism of a valued part of this community doesn’t impress me at all.
In other words, maybe Americans are investing offshore not only because they want to, but also because they can.
Written by Estragon on 2007-08-02 12:06:06
So much for the invisible hand:
By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. — A. Smith
re: “posting anonymous criticism… doesn’t impress me at all”
apparently, it does:
“…the cynical explanation that kleptocrats prefer €500 notes to $100 bills- fewer briefcases for the bodyguards to lug around when conducting under the table transactions…” - Written by Macro Man on 2007-08-02 09:33:41 - who chooses to remain anonymous to your readers.
Guest:
MM has a blog through which he channels his financial/personal views on a consistent daily basis. It’s quite interesting at times. There you can find out a great deal about how one market participant thinks about the whole thing. He just published a diary of his day’s activity. He mentions his wife for goodness sake. He has a sense of humor. You may want to consider more lateral thinking in your view of what anonymous really means.
macroman blogs under a psuedonym, and has a repuation with that pseudonym — he also comments using that pseudonym.
I also linked to a slate article by Dan Gross on the nefarious uses of the euro 500 note - it is a real issue. The US doesn’t produce high denomination dollar notes in large part because it doesn’t want to facilitate criminal activity.
“a sense of humor” peppered with a brand of bigotry and arrogance which spills over into this blog. I’m aware of the wife as I assume she is the author of gushing responses to a few of the advertorials he leaves in the comments section. So I don’t need to bother reading his blog, except to check the ‘credentials’ which are pretty thin, and endorsements from anonymous readers of this blog, along with Brad who claims to lack a track record, knowledge and expertise in, or capacity to make his own living in the market. So I’m not sure why we should place a great deal of faith in what appears to be Brad’s marketing and heavy reliance on one source. I simply suggested that Brad, and perhaps ‘you’, expand your own horizons and lighten up on the advertising.
“The US doesn’t produce high denomination dollar notes” - why should it? going from that remark, we can only assume that anyone who wishes to engage in that activity can use the €500 note. perhaps the bigger question is why the EU might wish to facilitate crime by printing it - or anyone else by accepting it? And couldn’t ‘the US’ be accused of having much more powerful tools to facilitate crime, such as immunity from prosecution?
In the midst of all this crime fighting, and as some of us worry about the extent to which the subprime crisis has the potential to create a cover for other types of massive looting, it would be reassuring if we could see more progress on problems much closer to home. “…Executives and their families now travel in protective bubbles ringed by bodyguards and live behind high walls fitted with motion sensors and cameras…” http://www.washingtonpost.com/wp-dyn/content/article/2007/08/03/AR2007080302197_2.html
I can’t completely dismiss your complaint. Arrogance visible is a common trait among traders - that I can confirm from personal experience and interface. It’s part of the brand. I wish it were otherwise, because it makes them unnecessarily difficult at times. But that doesn’t destroy value where it exists - in this case some good data, data analysis and market analysis on that blog. Of course, that’s a matter of opinion, but that’s mine, having followed both blogs.
I think the anonymity charge is somewhat less valid, given the nature of the medium. He’s not the only blogger flying under that particular radar.
Finally, Brad links to a zillion sources, very few of which are run by traders. He recently linked to ‘Big Picture’, also run by a trader not without his own ego and colorful characterizations. But these people are part of the market, and I think it’s to his credit that he taps these kinds of sources when their observations provide some additional data relevant to the subject. And I think that’s why he does it. The world is not without traders, and they are a factor to be considered in a more complete understanding of the macroeconomics of markets.
guest — i think i have also suggested that some regular guests pick an identifiable moniker, so far without any noticeable impact. i do make my living in the market, incidentally — just in the market for research and opinion not the trading market.
Macro Man has my support too…..I cannot understand the controversy here. He generally backs up his ideas with some evidence, especially on his blog, so you can decide whether agree or not, and he provides an reasoned insider view of the market which I do not see much elsewhere. I marvel at his ability to find the time in what seems to be a busy life to write something nearly every day that is articulate and often witty.
“It’s part of [his] brand” - not the brands I consume, affiliate with, or promote.
“He’s not the only blogger flying under that particular radar.”
- absolutely. Fiction or not, only to suggest that less ‘he who shall not be named’ and more of ‘the others’ might not only mitigate the arrogance, deepen perspective and improve capacities for evaluation, but also help (re)build the broader participation of traders in the comments section. brad’s call.
“i do make my living in the market, incidentally — just in the market for research and opinion not the trading market”
- and hopefully not advertising. So you do make a living wage after all! Sorry, perhaps I should have said ‘from the market’. I could try to find exact quotes from you to justify any possible misunderstanding on my part, but you know what I mean.
I agree with Rebel, and would add that I find Macroman’s thoughts on the central bank flows coming through London helpful in my own work. He sees/ hears things i don’t. I don’t necessarily always agree with him — he thinks voldemort et al have propped up the pound/ euro v the $, while i suspect voldemort may be offering more support for the $ by eating a lot of the $s it buys rather than selling them into the market. but it is useful and constructive dialogue that forces me to sharpen my arguments.
I also think this particular discussion has gone on for too long.
“I’m aware of the wife as I assume she is the author of gushing responses to a few of the advertorials he leaves in the comments section”
Those responses may be mine.
Sorry to upend your applecart, but I’m certainly not MM’s wife.
LOL! any more about ‘Sally’ really would be taking it too far!