Another bad TIC data release
I am back in the United States, and ready to get back to work.
Before turning to the TIC data though, let me first thank Michael Pettis for filling in here so ably once again. I cannot overstate how much I appreciate the ability to outsource (to China even) the responsibility for putting up new content every so often.
Most of the headlines that followed the TIC data release generally indicated that “capital flows to the US bounced back” from their August lows in September.
Foreign investors were net buyers of US long-term assets in September, unlike in August. And foreign purchases ( after adjusting for the repayment of principal on asset-backed securities) of US long-term assets were even slightly larger than net US purchases of long-term foreign assets.
But the main story in the September data is that capital flows to the US remain very weak. At least to my ming, the right headline for the September data is the continued absence of foreign demand for US assets, not the (relative) improvement from August.
- Net purchases of long-term US assets ($26.4b) remain well below the roughly $65b a month needed to finance the US current account deficit.
- Net (private) long-term inflows remained negative (-$2.1b), as private US investors took more money out of the US ($29b) than private foreign investors brought in ($26.8b).
- The positive overall number comes entirely from recorded official – i.e. central bank – inflows. And there is good reason to think that the US data understates real official inflows. Some of the $22.4b in Treasuries sold to the UK in September were bought by (private) banks and hedge funds looking to hoard liquidity, but some were also likely bought by central banks.
- If – as I think likely – the adjustment associated with the payment of principal on asset-backed securities can largely be assigned to the private rather than official side of the ledger, net private inflows were even lower – negative $17.5b. Official investors hold asset backed securities, but they often use private fund managers for this portion of their portfolio. That is one reason why the US data understates official inflows.
Once the adjustment for principal payment is made and short-term flows are added in, net flows were negative in September. Negative $14.7 to be precise. And once short-term flows are added in, net (private) flows were really negative in September. Negative $27.8b. That is better than the negative $129.6b net private flow in August, but it is still a rather substantial outflow of private funds from the US.
Bottom line: private demand for US financial assets has disappeared. In emerging market terms, the US has experienced a sudden stop.
Consider the change in (net) demand for US financial assets between q2 and q3. In q2, net inflows were, according to the TIC data, $237.4b, or about $950b annualized ($194.1b in recorded private inflows and $43.4b in recorded official inflows). In q3, net inflows were negative $82b, or negative $328b annualized (negative $112.2b in private flows and positive $30.2b in official flows).
The overall swing was rather large. Net inflows — really net non-FDI flows — fell by $320b between q2 and q3. Annualized that is a huge number, $1280b.
The main source of that swing is a huge fall in net private flows – and I caution that the private inflow data includes a significant amount of official purchases. Net private flows swung from a net inflow of $194b in q1 to net outflow of $112b in q3. That is a swing of over $300b in a quarter ($1200b annualized).
I don’t have quarterly data for the emerging markets back that far, but the IMF's annual swing in net private flows to the emerging world back in 1997/1998 was far smaller.
UK purchases of long-term debt other than Treasuries fell from $178.95b in q2 (and $136.4b in q1) to $17.7b. UK purchases of US corporate debt fell from $94.4b in q1 and $98.7b in q2 to $16.7b in q3.
Whether that represents a fall in demand from central banks diversifying out of Treasuries (unlikely), European pension funds looking for a bit of yield (more likely) or London based SIVs and conduits operated by US and European banks no longer able to access the US money market for funding (most likely), it is a big fall.
Given this huge swing in capital flows, it really isn’t a surprise that the dollar has collapsed. I was up late on Friday night (really Saturday morning – I had a classic case of jet lag) and I heard a 30 minute debate on the BBC (Jessup of Capital Economics v Redeker of BNP Paribas) over the dollar.
I guess is a signal that the dollar is now weak enough (against the euro) that it might be due for a rebound. If not now, then over time.
Goldman’s Jim O’Neill certainly thinks so – and he is a long-term dollar bear. I tend to agree. At $1.45 to $1.50, the US trade balance with Europe should adjust quickly — if only because Europeans will fly to the US to buy European and Asian goods sold at a lower price in dollars than in euros by European and American MNCs. That at least helps the US services balance …
On the other hand, it does seem likely that the Gulf will eventually end its tight dollar peg – a move that is unlikely to be considered dollar positive.
The details of the TIC data – which show the purchases by country as well as the official/ private split — raises more questions that it answers.
The official/ private split. Total official inflows in Q3 were only $30.15b, with most of the total coming from a $27.4b rise in short-term on the US. Foreign central banks and wealth funds only bought $2.8b of long-term US debt.
Or at least that is all the US data shows. The total is low relative to an (estimated) $200b or so in global reserve growth in q3. China alone added $80-85b to its reserves (after adjusting for valuation effects) and probably another $13b to its sovereign wealth fund. And a host of other countries – led by India and the Saudis – also increased their reserves/ central bank assets.
Global reserve growth slowed in q3 as private inflows to the emerging world fell (they picked up again in October, big time). But the fall in the pace of global reserve growth is far smaller than the fall in recorded inflows to the US.
There also was a very clear shift away from long-term US debt. The $2.8b in central bank purchase of long-term US debt in q3 was well down from $58.4b in recorded purchases in q2 and $39.9b in q1.
BRIC inflows in q3. The total for the BRICs – at least the recorded total — is instructive. The BRICs increased their short-term claims on the US by $61.65b in q3 while adding only $16.2b to their long-term claims. And $15.6b of the $16.2b in long-term purchases came from Brazil.
I suspect that buy and hold type investors decided that they didn’t want to look in low US long-term rates. They would rather hold short-term deposits/ securities than buy longer-term US assets that yield less.
China. Much will be made of the fact that China’s net purchases of long-term US treasuries was negative 17.2b in q3 — and its total holdings fell by $9.6b, to $396.7b, as the increase in China’s holdings of short-term t-bills didn’t offset the fall in its holding of long-term notes.
Indeed, China only bought $2.1b of US long-term debt in q3, as its $13.2 b in (recorded) Agency purchases and $6.2b in recorded corporate debt purchases only just offset the fall in (net) purchases of US Treasuries.
But three notes of caution are in order.
- First, China’s short-term holdings increased by $33.65b. China clearly built up a lot of cash. Looking just at the long-term data misses the story.
- Second, China now buys a lot of US debt through London. Some of the UK’s $72.0b in q3 Treasury purchases likely were then sold on to SAFE. I do not doubt that China is reducing the share of Treasuries in its portfolio (as are the Bank of Japan and the Bank of Korea). But the scale of the shift may be somewhat smaller than flow data suggests.
- Finally, the US data almost certainly isn’t capturing all China’s holdings. The $35.8b in recorded inflows in q3 is small relative to the increase in China’s reserves ($80-85b after adjusting for valuation), the combined increase in China’s reserves and the CIC ($95-100b) let alone the $180b the Financial Times Richard McGregor thinks China added to its total foreign assets in q3. China’s banks and state companies are supposedly sitting on a lot of dollars right now (there is an allusion to the pressure on Chinese banks to hold more dollars in this WSJ article).
Russia took a similar approach to China. Its short-term holdings rose by $19.6b in q3 ($11.2b in September), while its (recorded) long-term holdings fell by $0.7b.
Brazil’s short-term holdings rose by $7.6b and its long-term holdings by $15.6b (with almost all of the increase from Treasuries). The total $23.2b increase matches the overall increase in its reserves.
India’s rapid reserve growth though wasn’t matched by any increase in its recorded US holdings. Short-term claims rose by $0.8b, long-term claims fell by $0.8b.
And there isn’t much sign of the Gulf’s money in the US data either. Long-term purchases from the Gulf were only $0.8b (with a fall in Treasury holdings). Short-term holdings rose by $3.1b, but the $3.9-4.0b total increase is small relative to the region’s current account surplus and soaring assets..
Indeed, total Asian purchases of US assets in q3 are a bit too low to be believed. In aggregate, Asian was a net seller of US long-term assets to the tune of 6.7b in q3, with $67.4b in net Treasury sales.
I don’t buy it. Not really.
Asia may have been selling Treasuries to American and Europeans banks scrambling to increase their liquidity. Asian central banks have clearly been shifting toward Agencies. But the global current account doesn’t balance without a significant net flow from Asia to the US. The world’s biggest surplus region has to finance the world’s biggest deficit region. Asia after all includes most of the world’s current account surplus, whether from the goods producers in East Asia or the oil exporters in West Asia.
Some of the gap is explained by the rise in Asian short-term claims. But not all.
The TIC data is the base for any attempt to understand the pattern of global capital flows.
But in my view, it also to be assessed against other variables – current accounts surplus, reserve growth and the like — to understand what it captures and what it doesn’t capture.
“worthless piece of paper”
OPEC dollar comments hit oil
Oil prices reversed their recent decline today, inching upward after OPEC heads of state said the oil cartel could ditch the sinking dollar. At the end of a rare OPEC leaders’ summit in Saudi Arabia yesterday, Iranian President Mahmoud Ahmadinejad blamed rising oil prices on the weak dollar, which he called a “worthless piece of paper,” and said that member states were interested in converting their dollar reserves to another currency. (AP in Yahoo! Finance) OPEC declined to raise output until at least December, further pressuring prices. (Bloomberg) The average price of gas jumped 13 cents to $3.09 a gallon, close to the record high set in May, according to the Lundberg survey. (CNN)
Very interesting, thank you. And what are the consequences? What is the future of US financial system if we extrapolate that “sudden stop” of external financing on october, november an so on?
“What is the future of [global] financial system…”
If neither official nor private buyers of US assets emerge, the US current account would have to contract quickly, sending a shock to the global system. I suspect the likely short-term outcome — based on the available oct data on reserve growth/ some extrapolation based on China’s $27b trade surplus/ likely $37b basic balance ($27b in trade, $5b in interest income, $5b in fdi inflows)/ estimated oil reserve growth — is that the US became very dependent on central bank/ oil fund inflows to cover its current account deficit. i.e. official dependence has gone way back up (sort of like q2 — though in q2 london based siv related flows and the like could have sort of masked us dependence by overstating european demand for us assets). So the short-term result is we are back to a bretton woods 2 type system (see india’s recent intervention) though on a scale where some doubt whether or not it is sustainable. See Willem Buiter, among others.
unokai,
Macro Man has a very interesting and well-written fiction travel to 2010 and back, in today post, from the US-centric view and the dollar.
Great post, Brad. Thank you.
I have a question that I would appreciate anyone posting here answering or providing pointers to. What is the current net cumulative U.S. foreign or external debt. I googled on the matter a few weeks ago and found precious little, most of it out of date. Currently the NIIP stands a less than $2.6 trillion, less than 20% of GDP, but that can’t be quite right, since the CA deficits from the last 4 years equal that amount. Apparently, if one adds up all the CA deficits since 1990, some $2.9 trillion has “disappeared” from the NIIP accounting, and, whereas I can think of some countervailing mechanisms by which a portion of CA deficits get “etherialized”,- (as well as ways in which such etherialized debt might re-materialize),- I doubt it could sum up to over half the total. Does anyone know of a reasonable estimate of what net cumulative U.S. external indebtedness might actually be? Off the top of my head, I’d guess it would be more like 35% of GDP, which would still allow for a $ trillion or more to have “diasppeared”. TIA.
Brad,
Good interview in WaPo last week; and nice to see your picture in Council on Foreign Relations website.
You look much younger than the idea one makes after reading your posts!
Tkx!
PS: To see how MM and you are becoming bearish, humm! Bad news, indeed!
It is amazing that foreign investors have been as willing as they have to continue to purchase depreciating assets or “sure to depreciate” assets. Now they have stopped which is only good sense. If government flows continue it certainly must be fear of the consequences to the global system of a complete dollar collapse, but how much longer will governments be willing to do stupid things that private investor will not? Might we be approaching the “moment of truth” about the US economy? The Wiley Coyote moment?
speaking of which, if anyone can translate what “invisible” means in this RBI report – ‘The External Economy’ – starting page 8 with “Invisibles and Current Account – Surpluses on account of invisible transactions have financed a significant portion of the merchandise trade deficit that has traditionally characterized India’s balance of payments. Through 2001-04 sizeable invisible surpluses comfortably financed the…”: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/62591.pdf
easy questions first:
Invisibles = the balance on investment income and trade and services. For India, the services surplus (think software, call centers) is significant.
and the limited deterioration in the us net international investment position largely comes from large capital gains on US investment abroad, particularly us investment in europe. Euro has apperciated v the $, and foreign stocks have appreciated more than US stocks (US stocks have underperformed global stocks). Basically, the US external position has benefited from foreigners willingness to finance the us even though us markets underperformed global markets. There are also some accounting/ measurement issues raised by Dr. Daniel Gros of CEPS (in brussels)
note — the definition of invisibles above should be “investment income and the balance on trade in services”
Brad,
You should be a teacher.
Thank you!
Excellent work as always, sir!
So, pretty much only short term investing in our debt by FCB’s and zip for the private sector for September. Not a surprising trend.
I’m most interested in the the reference to Dr. Gros, and would love a link to the accounting/measurement issues he raised. Not an uncommon concern of late.
re: my CFR photo — It was taken 3-4 years ago, tho hopefully I haven’t aged too visibly since then.
3-4 years are nothing, now a days!
Thanks for your soft and kind ways, and wise teaching!
XXX
Further on Brads last post above, I suspect that the recent oil fund inflows speculated as buttressing the current account deficit is indicative of the support the US can call apon within the Gulf countries. More evidence that a GCC break with the dollar peg is not imminenet.
What is clear to my unskilled eye in the TIC data is that capital flows to the US are definately now slammed into reverse as Brad has pointed out.The pantomimes currently being played out on Wall St – how much/who/where will be the next write down against a backdrop of how to manage the Big Lie and avoid a mark to market meltdown- must be very unsettling for those heavily invested into US markets like the SWF’s. Added to this evil brew, they see Bernanke’s regular disavowing of responsibility for the USdollar as he continues to be squeezed by the Fed’s responsibilty to avoid a capital market meltdown while dealing with soaring real prices (even if it is stubbornly un-reported).My humble sense is that the stock market indices are now playing a much more pivotal role in SWF activities and decisions than ever before.Should it become clear that a bear market has been established in the US, then we could easily see sudden and massive flight out of US securities by the SWF’s as they take major defensive steps to reduce risks in that part of their US investment portfolio. Something not escaping the notice of the US Treasury. I don’t think that has started in earnest yet but perhaps that is the message the Gulf countries are trying to send to the US. “Don’t force our hand.” Dumping the dollar of which they own so much may not be an immediate option but they certainly don’t need the added risks of major US stock losses as well.
The US faces some of the same policy issues Asia faced in the 90s — namely whether to direct monetary policy at exchange rate stabilization or domestic stabilization. That is never a fun choice.
The US tho differs from Asia in a couple of ways:
China (and others) so far have been more willing to provide the US with unconditional financing than the IMF was to provide Asia with unconditional financing.
and US debts are (thankfully for the US, unfortunately for the United States creditors) still denominated in dollars …
That means that over time a $ depreciation should be expansionary (see Krugman over at times select …) at least so long as the financial market displacements that might come with a real flight out of the dollar don’t cause even more distress in US financial institutions. they aren’t exposed to the dollar, but they are (at least indirectly through their exposure to credit risk) exposed to higher US int. rates.
I would also like to know what would happen if the current trend continued (the foreign financing is much less than the current account deficit). Brad says: “If neither official nor private buyers of US assets emerge, the US current account would have to contract quickly”. But how would this happen? Most of the CA deficit comes from goods trade deficit. So the US would buy a lot less from abroad? What would force people to buy less foreign goods (less goods at all)? Or the US would export more? But the contraction of the CA deficit/trade deficit would take some time, maybe 1-2 years. In the meantime, seemingly nobody finances this deficit. How is it possible? What would be the consequences? The government should print more money to supplemet the inadequate foreign financing?
“even though US markets underperformed global markets” as they are buying liquidity and maintaining the relative weakness of their own currencies given that a ’strengthening’ of their own currencies will implode their economies – no?
“…Central Bank First Deputy Chairman Alexei Ulyukayev said Tuesday that the reduction in the volume of rubles printed in an attempt to hold the value of the ruble down would likely occur over the space of three to five years. “We will buy less and less foreign currency, and we will issue fewer rubles to purchase that foreign currency,” … He ruled out, however, allowing the ruble to appreciate significantly this year… He said the national currency was likely to strengthen by 5 percent in 2007. In order to prevent huge export revenues generated by high world energy prices from pushing up the ruble’s value precipitously, the Central Bank has been “printing” rubles to keep the currency relatively stable against the dollar and the euro…” http://www.moscowtimes.ru/stories/2007/11/14/041.html
re: RBI – i have never seen it categorized as ‘invisibles’
if we should also be paying more attention to the other BRIC’s external economies and ‘invisibles’:
“…peculiarities of Russia’s external economy in comparison with other countries and… its influence on internal economy, foreign economic ties and foreign policy…” http://www.vopreco.ru/eng/fresh.html
China’s Prime Minister voices alarm over US Dollar Crash
http://www.ft.com/cms/s/0/8b1c17dc-96d1-11dc-b2da-0000779fd2ac.html
China on Monday expressed concern at the decline in the dollar, joining a growing chorus of global policymakers alarmed by the weakness in the world’s main reserve currency.
Wen Jiabao, the premier, told a business audience in Singapore it was becoming difficult to manage China’s $1,430bn foreign exchange reserves, saying their value was under unprecedented pressure. “We have never been experiencing such big pressure,” Mr Wen said, according to Reuters. “We are worried about how to preserve the value of our reserves.”
China keeps the currency composition of its reserves a state secret, but some analysts believe that more than two-thirds are probably still held in dollars.
Russell Jones, head of currency strategy at RBC, said: “Any respite in the dollar’s weakness is likely to be temporary. The dollar isn’t a safe haven at the moment, because most of the problems facing the world economy are coming out of the US.”
Ashraf Laidi, currency strategist at CMC Markets, said “the power in influencing the fate of the dollar lies increasingly with the oil producers as they struggle with a falling dollar.”
Mr Wen’s remarks are likely to fuel market speculation that Beijing might move to reduce the proportion of its reserves held in the US currency.
” The TIC data is the base for any attempt to understand the pattern of global capital flows. ”
Having read your analyses off and on, I wonder if the more reliable anchor is your various estimates of trend growth in current accounts and reserve positions, with the TIC data adding some (less reliable) colour to the likely composition of the estimated flows by source.
“If neither official nor private buyers of US assets emerge, the US current account would have to contract quickly”. But how would this happen?
The way it would happen in via inflation in imported goods in conjunction with a falling dollar. When imports cost more, we buy fewer imports and buy more domestic substitutes. This continues until the ledger balances out.
I personally think this is a short term abberation. China is clearly scared to death of the Yuan appreciating too much against the dollar. Regardless of what a few officials say, actions speak louder than words. I think Japan is scared too. The Saudis like the stability a US presence in the middle east has. I know things are unstable, but compared to what would happen if the US pulled out, the current situation is nothing. It’s no suprise that private flows have slowed, with the mortgage scares and all, but this will more likely be replaced with more official inflows.
I think in a few months, everything will be back to normal and the dollar will approach 80 again.
Charlie — “When imports cost more, we buy fewer imports and buy more domestic substitutes.”
OK, but there are a lot of things the US does not produce anymore. Do you think these industries will go back to the USA? And if they will, it will take some time. What will happen in the meantime, while the US is not financed adequatly from abroad? What will be the signs? We should already see these signs, because as Brad said, in q3 the foreign financing of the CA deficit was lower than needed. Who made up the rest?
AC wrote:
There are two possible ways:
A) Internal recession in the US.
B) Dollar plunge, whereby prices of foreign goods become prohibitive.
AC,
The most obvious sign, so far, is the drop in value of the US Dollar. Strictly from a finanacial standpoint, either interest rates go up or the dollar drops or a combination of the two. We can’t have an environment of higher USD, lower interest rates and an unfunded deficit. At least one has to give.
As far as importing things we don’t produce. This will continue. Oil is an example of something we will never likely produce enough domestically. The surplus items will offset the deficit items, so in net, things will balance out. It seems unlikely given our huge deficits, but, eventually prices will reach a point where we will import less and produce more. There will be no other option.
Again, I think things will eventually return to normal. The world relies too much on US consumption in the sohrt term to allow a continuous drop in the dollar. Long term, I think the US will eventually fall from economic grace.
(In previous post, enclosing text in “less than” and “greater than” signs made it disappear.)
AC wrote:
“If neither official nor private buyers of US assets emerge, the US current account would have to contract quickly”. But how would this happen? Most of the CA deficit comes from goods trade deficit. So the US would buy a lot less from abroad? What would force people to buy less foreign goods (less goods at all)?
There are two possible ways:
A) Internal recession in the US.
B) Dollar plunge, whereby prices of foreign goods become prohibitive.
emerging market experience suggests that a rapid contraction of imports not an expansion of exports drives a quick adjustment, and both output and the currency fall. It isn’t pretty.
I’m wondering if the shift from long term holdings to short term holdings is the main cause in the spike in Chinese inflation…..
Also, I think that any contraction in imports are going to eventually made up for by purchases of capital assets. Lots of real estate for sale that non-US residents are going to be interested in……
“Long term, I think the US will eventually fall from economic grace.”
Meaning what, exactly.
[...] back in 2007, as foreign demand for Agency Debt started on its present downward path. Brad Setser, in a November 2007 post, even used the term Sudden Stop to capture the totality of the falling net inward flows to US [...]