Misreading the Tea Leaves

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Misreading the Tea Leaves

Many are pointing to the decline in foreign US Treasury Bond purchases as a sign that the dollar is about to collapse.  For a prime, and almost-convincing example, see: http://socioecohistory.wordpress.com/2009/08/21/monetization-of-us-treasury-bonds-a-deep-dollar-devaluation-comes/

I have a fundamental question for anyone who believes that net foreign US Treasury Bond purchase declines point to a dollar collapse:  is the decline due to a rejection of the US's ability to pay - that is, a rejection of the interest rate offered or the confidence of payment (or a combination), OR is it due to foreigners running low on, or even out of, dollars?

As a follow-up to that question, I ask:  what do ALL foreign central banks, foreign governments, and private foreign corporations and individuals do with excess US$ cash?  In short, what do ALL foreign holders of excess US FRN's do with them?

Before you answer, remember that any possible FOREIGN recipient of these excess dollars will find themselves in the same position as the purchasers.  

The answer is that in the end, all foreign US dollars held in excess have only two ultimate destinies:  they are used to purchase US Treasury bonds, or they are returned to their birthplace and are used to purchase US assets, goods, or services.  The first is really just a subset of the second.  

For anyone who doubts this, I ask:  What else is there to do with those dollars?  Shall they be held in pure cash accounts?  Very doubtful, except for wealthy-individual holders, and even if they are, isn't that a deflationary stance of ultimate proportions?  Remember, "buy commodities" is not an answer unless those are US commodities.  The seller of the commodities will be inheriting the same problem the buyer sold them.

US Treasury bonds are the destiny of all foreign dollar holders before anything else, at least for now.  Next on the list are US assets, goods and services.  Since we do not produce any goods foreigners desire, that can be ignored.  Since all our services are retail, finance-management, insurance, or real-estate management related and all those industries are in the woodshed, I don't think foreign-dollar holders will be willing or interested in investing in those.  

That seems to leave assets and Treasury bonds.  

Let's start with assets.  Is real estate going back up?  Are foreigners buying up Americana?  There have been a few isolated purchases, but nothing trend-setting so I don't think so.  How about US companies?  I haven't heard of any international buyers scooping up US companies lately.  The last one I can remember was Budweiser - and that was in the go-go days of infinitus crazyness maximus bubbleness.  Those days are gone.

The only thing possibly left for those dollars to migrate to are US Treasury bonds.  Those bond purchases by foreigners are waaaaay down and many who are quick on the trigger claim it is because foreigners are rejecting US debt and by implication, the dollar.  

If that was true, then those dollars would be going elsewhere, wouldn't they?  US Treasury bonds, as cited above, are the #1 choice.  If that choice is being "rejected" shouldn't we see increasing prices in other US assets, goods, or services?  The only alternative is if the whole world has decided to hold cash, and if that's true, we're all screwed as I'll show below.

If Treasury bonds are not being purchased, and concurrently no US asset class, good, or service is being purchased in its behalf, and we assume nobody is holding cash, then the only conclusion possible is that foreign US dollar levels are low and shrinking.  They are not purchasing bonds, assets, goods or services because they have no dollars!  It is not because they have dollars but are merely rejecting our debt.  Again, if that were true, other asset classes, or goods and services would be showing increasing foreign demand, which they are not.

Which brings me to the final possibility.  It is possible that foreign US Treasury bond purchases, assets, goods and services are down not because foreigners are out of dollars, but because they are keeping all their dollars in hard, cold cash.

If that is true, ladies and gentlemen, then we're all screwed.  That would mean that foreigners have been as savvy as the rest of us (by which I mean that if Americans are now saving at historically high records, which at 5-6% is really really sad, their savings rate is in the stratosphere) and they're hoarding cash, waiting to pounce on all our goods (scratch that - we don't produce any anyone offshore would want), services (scratch that, we can't service anything for a fraction of what foreigners can) and assets such as corporations and real estate (bingo!).

I don't know which of these two possibilities is reality, but I am fairly confident they are the only two.  

 

 

 

 

 

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Re: Misreading the Tea Leaves

PS: (I hate thinking of something after I already posted, but here goes):  Since US imports have fallen off a cliff, and foreign dollar recipients (exporters to the US) were on a 30-year habit-forming addiction, I highly doubt that the actual possibility, of the two posited above, is that foreigners are holding cold, hard cash.  To believe that, we'd have to assume that they have all somehow instantaneously restructured their entire internal dollar-based supply-chain (all other currencies are derivatives of the dollar and all foreign trade occurs in dollars) so as to, on the flip of a switch, put whatever remains of their incoming US dollars into a cash account.  Remember, the US consumes (or used to consume) 25% of the world's resources.  That consumption, and therefore dollar inflows to foreigners, has fallen off a cliff.  Somehow, I don't think they saw this coming nor do I think they're holding cash.  Foreign purchases of US TReasuries have collapsed because they're scraping the bottom of the barrel for dollars, not because they are scraping the bottom of US assets for value. 

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Re: Misreading the Tea Leaves

Farmer Brown,

Once again, you slap me in the face with the elusive obvious. Your rainy season has been good for me, as I have learned a great deal from your more frequent postings.

And to think that some call us American Idiots. America didn't establish an empire of this magnitude on the coattails of stupidity. 

So if the global supply of USD is shrinking, Bernanke doesn't have a prayer in trying to print his way out of deflation, at least not in a years time, perhaps not even in a decade's time. 

Thanks for sharing, I will ponder this some more.

Jeff

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Re: Misreading the Tea Leaves

PS (to follow in your footsteps) When was the last time the markets didn't punish people for trading their fears? This current rally has punished many who feared an all-out crash. It sure does seem like there is an excessive amount of currency collapse/inflation fear lately (and the Dollar Sentiment Index confirms it).  I don't think I want to be running with the herd as this one unfolds. By the look of your cow, I don't think she will be running with the herd anytime soon either.

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Re: Misreading the Tea Leaves

"America didn't establish an empire of this magnitude on the coattails of stupidity."

You wanna bet?

The list of stupid things the US has done is so long, I truly don't know where to start....

Mike

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Re: Misreading the Tea Leaves

DTM:

I think we can both agree that is a different subject and not the purpose of this thread.

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Re: Misreading the Tea Leaves

JAG,

I don't know what the full implications of this are, I am only certain that that is what is going on right now, even though I cannot find a single blog or other website that even contemplates this option.  Foreign dollar holders are running low.  Since they do not have a dollar-printing-press like we do, they are net sellers UST bonds to raise cash.  Think of them as clients of the Federal Reserve, not too much different than ordinary US citizens.  "Client" is probably not the right word.  Maybe "indentured servant" is better.

So if they're raising cash by selling assets, and we're just printing them, how will we know when we've printed enough dollars, or that those already printed are finding their way into the global playground?  The American consumer is on strike.  With the unemployment rate still rising, asset prices still falling (other than the yo-yo'd stock market), and credit evaporating, it looks like he will remain on strike for the foreseeable future.  Since that is how the vast majority of dollars make it overseas, I do not see the dollar flow from US to the the global markets changing course anytime soon.

Maybe international players will take further steps to separate themselves from the dollar before that ever happens.  Heck, if they can't get enough dollars, why not start a new currency?  If that happens, then all can say they are shunning the dollar and a new day will be before us.  For the moment though, they cannot get enough of them.

 

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Re: Misreading the Tea Leaves

Who's Buying Up America? Meet The Top Ten Sovereign Wealth Funds

 

Sovereign wealth funds have made headlines over the last few months as a sinking dollar and surging crude prices have enabled foreigners to snatch up symbolic American assets at Walmart prices.

For example, the Kuwaitis saved Citigroup. Abu Dhabi bought the Chrysler building. This weekend, the Post revealed that an unidentified sovereign wealth fund is shopping for thousands of foreclosed homes.

So just who are these sovereign wealth funds? How rich are they? The Council on Foreign Relations offers the following handy list. But here's the bottom line: In aggregate, the top ten funds have $2.6 trillion to invest.

TOP TEN SOVEREIGN WEALTH FUNDS

1. The United Arab Emirates -- $875 billion. Over $1,000,000 per UAE citizen.

2. Singapore* -- $490 billion, $105,000 per citizen.

3. Norway -- $341 billion, $80,000 per citizen.

4. Saudi Arabia -- $300 billion, $10,869 per citizen.

5. Kuwait -- $250 billion, $75,000 per citizen.

6. China -- $200 billion, $150 per citizen.

7. Libya -- $50 billion, $8,000 per citizen.

8. Algeria -- $43 billion, $1,200 per citizen.

9. Qatar -- $40 billion, $30,599 per citizen.

10. U.S. (Alaska) -- $38 billion, $55,000 per citizen.**

http://www.businessinsider.com/2008/8/who-s-buying-up-america-meet-the-top-ten-sovereign-wealth-funds


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Re: Misreading the Tea Leaves

Morpheus,

Thanks for the list.  I was aware of FWFs and that they are huge, but hadn't seen a handy list like this one before.

I think there are two things to keep in mind here:  First, how are these funds valued?  That is, if the Kuwaitis bought Citi, is that portion of the fund marked to market, or marked to their purchase price?  I know they took a huge position back when Citi was not just another four-letter word.  In the end, are these valuations based on cash holdings, or are these simply cash-"equivalents" (quotes needed because if they are equivalents, are they using mark-to-market or mark-to-aquisition price)?  Depending on the answer, they may have far less purchasing power than is suggested by the figures.

The second thing is that except for China and Singapore, all these countries are predominantly oil or natural gas exporters.  They do receive tons of money, but the rate of dollar inflows has gone off the cliff with the collapse in oil prices.  Yes, they have huge savings, but the current flow-rate of incoming dollars is going to force them to start eating (read: liquidating) some of those savings.

I am certain there will be periods of Americana buying sprees by some FWFs and some foreign individuals, but for the most part, at least for now, that is the exception rather than the rule.  If it were the rule, asset prices would not still be falling.

 

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Re: Misreading the Tea Leaves

Farmer Brown:

Excellent analysis. Indeed what you say seems to make some sense. I have been in the inflation camp for some time but I am starting to believe that I may need to re-think my position.

Which seems to imply that the best place for the near term  is all cash - is that right?

 

Ken

 

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Re: Misreading the Tea Leaves

Morpheus,

Here is something else to ask:  How much of each foreign wealth fund is in cash or cash-equivalents?  Since we're talking about the dollar, i.e., cash, it makes little sense to look at anything other than cash.  If a fund has a $100 million building on its wealth fund balance sheet, that does not represent available dollars or purchasing power.  In fact, if occupancy rates are down, it may just be a non-performing asset.

So, I wonder what's left in those funds after all illiquid assets are factored out.  Whatever it is, that is all the purchasing power they have, and my gut tells me it is one heck of a lot less than the fund values would lead us to believe.   Those valuations, to the extent they are constituted by non-cash assets, are just that - valuations.  They do not represent purchasing power, and if their ROI has decreased since acquisition, the real valuations must not only be much lower, but they will have a heck of a time trying to liquidate them if they have to.

Kenc:  I'm not in any camp or other.  This is just what I see happening right now.  While I think cash will be king for some time, I still think it makes a lot of sense to have a significant PM position.

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Observation . . . a mis-read?

Good subject Farmer Brown! Been thinking about this myself to determine how much off-shore currancy to hold. . . and for how long.

I could be way off my tea-leaf reading here - but that list looks like a whos-who of oil (except China). So the majority of these countries holding USD - have USD because that is what oil is traded in. IF they let the USD devalue - they reduce the value of the debt-held-dollars.

China has USD because of goods traded but falls under the same principle - If the USD fell significantly - the debt would not be as valuable. . . so the other countries hold it up for the sake of blind faith that it will be worth something.

I have more questions now than answers -

So, what happens when oil is not traded in USD?

What happens when a super-national currancy is set up? (I would think there would be regional banks per continent.)

Brewing matcha now. . . . . . EGP

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Hugh Hendry and Misreading the Tea Leaves

FB,

While this doesn't support your argument directly, I think it does lend credence to the fact that the majority are misreading the tea leaves:

Hugh Hendry-March, 2009

  • Inflation will become a reason to worry for authorities again at some point, but they should think about combating deflation right now, Hendry said. "It is coming back in the future. All I'm saying it is just an unprofitable proposition at the time," he said. Betting on inflation is as if "we got a new book and we've read the last page. But if you read the entire novel, it's a different journey."
  • The market has grown for about 30 years and for a long period, it will be "going nowhere,Hendry said, likening this period with the one after the crash of 1929 and with the crisis in Japan at the beginning of the 1990s, despite claims that this time it is different because the world has evolved.

 

A couple good videos interviews in that article as well.

 

 

 

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Re: Observation . . . a mis-read?
EndGamePlayer wrote:

So, what happens when oil is not traded in USD?

What happens when a super-national currancy is set up? (I would think there would be regional banks per continent.)

This goes back to my comment about America being the smart money in international finance and trade. In this cold war of finance. the US has set-up a mutual-assured destruction paradigm in the global markets, as you have pointed out. Basically, our trade partners have no choice but to buy our debt, and because of that, they have exchanged their goods for nothing in return from us. The sooner they write-off their losses in this trade, the better off they will be, but they won't.

Unfortunately, human nature seems to indicate that the answer to your question is  World War III.

God I hope not.

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Re: Misreading the Tea Leaves

Framer Brown has a nice down home feel to it. OK, I have a pile of U.S cash but nowhere to spend it. If I buy corporations or realestate the value of my purchase is probably going to fall dramatically (still) because the baseline workers are unemployed, and not purchasing anything themselves except for food, clothing, and energy. Their shelter will be rented at ever more reduced rates. That signals Deflation to me except for the basic necessities as mentioned. However, the FED signals that they will reinflate at all cost making those dollars worth less. Money is not moving because the world has stopped trading. So the Fed can print all the money it wants but who's buying anything. How will we reinflate? The World don't want our money because of fear of inflation. Then again...?  Am I on track here? Feels like survival mode to me and a completely different world. 

If I may I would like to comment on energy and the advent of ever increasing costs to produce seems to indicate that world trade is doomed anyways and that manufacturing must come closer to home. Energy must be a huge part of our problems today, and should be addressed peacefully.  So what to do with the cash sitting on the sidelines then? I would spend it on any real thing I could, at least you have a physical item of worth. If gold is money then that would be a start. Another area you could spend it is investing in people and jobs. Create something of value like an energy infrastructure to lesson the strain on oil production, heck do it before oil gets prohibitively higher. Jobs would be created, and money would flow. Debt would come down, and a new economy would be made. Seems to me some equilibrium would be at hand, and we would export these new technologies to our neighbors. Money should first be lent to those who create, workers should save to purchase big ticket items, and the banks are rewarded by more savings then lending to producers. Money would move within our economy, and the cost of building out a new infrastructor would be paid for by oil dollars not leaving the area. Or we can create jobs by producing weapons of mass destruction and fight out of this mess. How completely unacceptable that choice is.

We really can discuss fundamentals until your cow comes home (stab at humor) but we have to start creating value soon or the citizen ants are going to get restless. Everything in nature tends to its nest yet we humans seem to walk aimlessly, and greedily in ours. Wanting something for nothing. We better get back to work and tend to our basic needs. 

I hope I didn't get so far off track. I really am a babe in the woods regarding world finance so be kind but firm if I am off base.

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Re: Misreading the Tea Leaves
Quote:

As a follow-up to that question, I ask:  what do ALL foreign central banks, foreign governments, and private foreign corporations and individuals do with excess US$ cash?  In short, what do ALL foreign holders of excess US FRN's do with them?

Before you answer, remember that any possible FOREIGN recipient of these excess dollars will find themselves in the same position as the purchasers.  

The answer is that in the end, all foreign US dollars held in excess have only two ultimate destinies:  they are used to purchase US Treasury bonds, or they are returned to their birthplace and are used to purchase US assets, goods, or services.  The first is really just a subset of the second.  

OK, what am I missing here?  One of your basic premises appears to be that foreigners are not buying from other foreigners with USDs.  Why not?  In fact, China is, according to rumor at least, buying commodities with their USDs.  Your assumption that foreigners "will find themselves in the same position as the purchasers", and the underlying assumption that that is a bad thing, ignores the possibility that the USD is still totally negotiable in most places in the world.  It is still the world's reserve currency and I read somewhere recently (sorry, can't remember where) that over half the world's currency is made up of USDs.  In other words, the USD by any definition still carries a lot of weight.  I'm not saying your thesis is necessarily wrong, but perhaps you haven't fully considered the global strength of the USD.

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Re: Misreading the Tea Leaves

Great post Farmer Brown, and others.  Not only interesting, but thought provoking as well.  Isn't it funny how these things run - if this happens then that is likely to happen, etc.  Yet, sometimes, the very thing that ought to happen, given the facts and our traditional thinking, don't happen.  It's hard to know what investors in other countries are thinking isn't it.  I had been under the impression that they were slowly, but surely, buying up all kinds of real estate here, just not so fast that we would get too edgy about it. If our currency goes down, then maybe real estate will be good investment again.  I wonder where so much foreign owned real estate would eventually lead for us?

In addition to the good comments here, I would love to see Dr. Martenson jump in on this one, wouldn't you?

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Re: Misreading the Tea Leaves
Quote:

OK, I have a pile of U.S cash but nowhere to spend it.

Precious Metals (to include defensive metal), and land.
There is a finite supply of both, and they will hold some measure of value regardless to what socio-political devastation occurs.
After that, spend time learning skills.

If you've got money, the only thing holding you back is time.
Get out of currency, as it holds no intrensic value.

Cheers,

Aaron

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Re: Observation . . . a mis-read?


EGP wrote:

Good subject Farmer Brown! Been thinking about this myself to determine how much off-shore currancy to hold. . . and for how long.

I could be way off my tea-leaf reading here - but that list looks like a whos-who of oil (except China). So the majority of these countries holding USD - have USD because that is what oil is traded in. IF they let the USD devalue - they reduce the value of the debt-held-dollars.

Remember these are “Sovereign Wealth Funds”.  As I commented to Morpheus in posts #8 & #10, I really don’t know what the values for each fund really mean.  How much of each fund is free, available cash or cash-equivalents?  How much is in real estate, corporate stocks, mines, oil wells – all things that can be valued in different ways, but none of which constitutes cash and the purchasing power provided by it?


Quote:

China has USD because of goods traded but falls under the same principle - If the USD fell significantly - the debt would not be as valuable. . . so the other countries hold it up for the sake of blind faith that it will be worth something.

I have more questions now than answers -

So, what happens when oil is not traded in USD?

What happens when a super-national currancy is set up? (I would think there would be regional banks per continent.)

Brewing matcha now. . . . . . EGP

I think other countries will eventually be forced to turn to alternative currencies or invent a new one.  It simply makes no sense for them to continue using a currency whose country of origin is no longer exporting them in sufficient quantities (or the quantities they have become accustomed to).  Before they can do that though, they need to figure out the least destructive (for them) way to convert their US cash and cash equivalents to other assets.  This is slowly occurring by default, as net foreign UST bond holdings decrease in order to raise cash. 

Although we’ve seen some developments in the alternative currency area, most noticeably between China and its trading partners, the amount of non-US$ international trade occurring with these countries isn’t even a pinhead-size of water in a drop in the bucket.

 

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Re: Misreading the Tea Leaves


Doug wrote:

OK, what am I missing here?  One of your basic premises appears to be that foreigners are not buying from other foreigners with USDs.  Why not? 

Hi Doug,

First, I didn’t say that and if I inferred it, that was not my intention.  Let me take another stab at it: 

I am asking what is happening to excess foreign-held US dollars – are they going up or down and where are they being invested?  First, let’s define what excess foreign-held US dollars are.  These are dollars held by foreign governments, foreign central banks, foreign private corporations and individuals that are not needed for daily operations.  Essentially, they are dollar profits.  They obtain these dollars by trading with the US.  Sure, they trade with each other in dollars, but every dollar must originate in the US, since we are the only country that “prints” them.  

Historically, all these players have invested their excess dollars predominantly in US Treasury bonds.  The reasons probably don’t matter for this conversation, but they are because UST bonds are considered highly safe and highly liquid.  It is the “parking space” of choice for any and all excess dollars out there. It’s where you put them when you don’t have any brilliant investment ideas in mind.  It’s practically the world’s savings account.

Over the past few months, there has been a marked decrease in foreign UST bond holdings.  Overall, they are selling more than they are buying, and they’ve shifted most of their buying to the short-end of the curve. 

Others look at that development and conclude it is because foreigners have lost their appetite for US bonds, are shunning the low interest rates, and perhaps the currency itself.

What I am saying is that that does not make any sense.  If foreigners were “shunning” UST Bonds, then they would have to be doing something else with that money, unless we are to believe that they are simply leaving it in a cash account.

What are the “something elses” that they could be doing with that money?  Many wrongly believe that foreigners can buy commodities from each other and that will absorb those dollars.  I believe this is where you and I got disconnected.  I am not saying China cannot buy commodities with its extra dollars.  I am saying the recipient of those dollars, say Australia, simply winds up with the same dollars we were wondering what China might do with.  Now they have the excess dollars.  What do they do with them?  They never get “absorbed” until they come home.

My point is that ALL dollars eventually must find a resting place in US-based assets.  If foreign holdings of UST bonds are down, it is not because they are “shunning” the dollar.  It is, by definition, because their dollar holdings are decreasing.  And, they are not decreasing because they are no longer accepting US dollars.  As you point out, they are accepted everywhere.  They are decreasing because we, the originators of the dollar, are sending less overseas.       


Quote:

In fact, China is, according to rumor at least, buying commodities with their USDs.  Your assumption that foreigners "will find themselves in the same position as the purchasers", and the underlying assumption that that is a bad thing, ignores the possibility that the USD is still totally negotiable in most places in the world.  It is still the world's reserve currency and I read somewhere recently (sorry, can't remember where) that over half the world's currency is made up of USDs.  In other words, the USD by any definition still carries a lot of weight.  I'm not saying your thesis is necessarily wrong, but perhaps you haven't fully considered the global strength of the USD.

I am precisely pointing out why the dollar’s days are far from over and why I am bullish on the dollar.  There is a shortage of them all over the international world, which is why we are seeing net dollar holdings of UST bonds decrease.

This will not end well.  Eventually, the rest of the world is going to give the birdie to a currency they cannot control.  But that day is not on any calendar I can find – not even the Mayan calendar.  

 

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Re: Misreading the Tea Leaves

FB,

As far as your response to Doug is concerned, Mish gave a similar response in a speech that he gave at Google earlier this year.

It was a response to a similar question, and I think it was about half-way into the video of his speech.

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Re: Misreading the Tea Leaves

FB

Sorry, I misunderstood.  It appears we are on the same page.

doug

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Re: Misreading the Tea Leaves
Farmer Brown wrote:

Morpheus,

Thanks for the list.  I was aware of FWFs and that they are huge, but hadn't seen a handy list like this one before.

I think there are two things to keep in mind here:  First, how are these funds valued?  That is, if the Kuwaitis bought Citi, is that portion of the fund marked to market, or marked to their purchase price?  I know they took a huge position back when Citi was not just another four-letter word.  In the end, are these valuations based on cash holdings, or are these simply cash-"equivalents" (quotes needed because if they are equivalents, are they using mark-to-market or mark-to-aquisition price)?  Depending on the answer, they may have far less purchasing power than is suggested by the figures.

The second thing is that except for China and Singapore, all these countries are predominantly oil or natural gas exporters.  They do receive tons of money, but the rate of dollar inflows has gone off the cliff with the collapse in oil prices.  Yes, they have huge savings, but the current flow-rate of incoming dollars is going to force them to start eating (read: liquidating) some of those savings.

I am certain there will be periods of Americana buying sprees by some FWFs and some foreign individuals, but for the most part, at least for now, that is the exception rather than the rule.  If it were the rule, asset prices would not still be falling.

 

FB. I'm not so sure that the rate of dollar inflow is going to remain stagnant, particularly with QE in effect. One argument in your favor is that INX auctions have been slim pickin's for foreign buyers so the amount of T-bill related debt is down. This helps short term as I see it because it keeps debt service down, but at the cost of devaluation. IOU's don't work with the US government anymore than they do with anyone. They have to pay their bills. And that means fresh new money.

But the trade imbalance, while ebbing and flowing from worse to less worse is still awful. I mean terrible. Those dollars have to come home and I don't see how less worse, either in petro sales or net import/export cash flow is going to cause the situation to improve. We're not paying for our exports in reminbi. We're paying in dollars.

Once I see a positive trade balance then I'll buy into it. But "less bad" means the rate of capital flow out of the states has slowed down. But it hasn't reversed.

There's a site somewhere that I used to go to, darnit! I would go there once a week and it's name escapes me now, that showed a clock of foreign interests and the purchase of hard U.S. assets, from railroads to highways, land, companies, and other real estate. Last I checked was last year and the clock was over 2.5 tillion dollars.

If anyone can assist and knows of this site then please post it. It has the LIST of purchases, thousands of them, bought by whom, and for how much.

FB. I like your work. Good stuff. Just not sure I buy into this one though. Everything I have examined indicates that the US is being acquired bite by bite. Hell, the Miami Herald ran an article last fall regarding the Saudi government buying the Alligator Alley toll road. That's $3 a car back and forth. Infrastructure sold to foreign soveriegns is treason in my opinion.

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Morpheus
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Re: Misreading the Tea Leaves
Farmer Brown wrote:

Morpheus,

Thanks for the list.  I was aware of FWFs and that they are huge, but hadn't seen a handy list like this one before.

I think there are two things to keep in mind here:  First, how are these funds valued?  That is, if the Kuwaitis bought Citi, is that portion of the fund marked to market, or marked to their purchase price?  I know they took a huge position back when Citi was not just another four-letter word.  In the end, are these valuations based on cash holdings, or are these simply cash-"equivalents" (quotes needed because if they are equivalents, are they using mark-to-market or mark-to-aquisition price)?  Depending on the answer, they may have far less purchasing power than is suggested by the figures.

The second thing is that except for China and Singapore, all these countries are predominantly oil or natural gas exporters.  They do receive tons of money, but the rate of dollar inflows has gone off the cliff with the collapse in oil prices.  Yes, they have huge savings, but the current flow-rate of incoming dollars is going to force them to start eating (read: liquidating) some of those savings.

I am certain there will be periods of Americana buying sprees by some FWFs and some foreign individuals, but for the most part, at least for now, that is the exception rather than the rule.  If it were the rule, asset prices would not still be falling.

 

 

FB. With respect to how these funds are valued, I don't think that is as relevant as it seems on face value. These entities are puchasing hard assets predominantly. Assets can function as money, albeit rather infungible money. That is, they have intrinsic value.

Unlike curreny, which is not a store of value.

How they are valued in a currency whose value decreases year over year is immaterial in my opinion when it comes to the grand scheme of things. Foreign entities have been puchasing this nation bite by bite.  So, if the US dollar were to come screaming home in droves (think of a currency crisis), and that is an "if", then I would think that these foreigners would scoop up our remaining valuable industries, and whatever resources that we had for market in an attempt to dump the dollar.  The first item that comes to mind is food. It's what the US is better at than any other nation. And a lot of nations are in serious straight with food production as you know. Two things now: First, the dollar coming home would shock the system, with a flood of our own currency hitting our markets prices would skyrocket while these foreign held dollars compete against ours, and second, food is our number one desired commodity. So, You'd get the double whammy of soariing prices and out of control rises in basic essentials. That is, in my opinion, a shock that we could not absorb.

Now, I am still having a tough time understanding how trading partners could be short of dollars when the trade imbalance is grotesquely in their favor. Please elaborate. I am really stuck here. It just doesn't make sense.

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LogansRun
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Re: Misreading the Tea Leaves

Good discussion.  So what's the "Endgame" ?  FB, is there a series of events that you see for each scenario?  

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EndGamePlayer
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Re: Misreading the Tea Leaves

After 3 years serious deliberation on what we needed to do -our End Game got pretty simple: Be self-sufficent as much as humanly possible and be ready to support others with edible landscape plants, seeds and such, small livestock and the seeds to support their life too. The Path to Freedom (Devries) and Rob Hopkins (Transition.org) were our models for our life.

We have the space so we're looking into wind energy production as a way to preserve and maybe generate a small amount of income if needed and we're building our bike transportation (power hybrid bikes integrated with gas and electric systems). . .but powering our lifestyle down has been the main priority so far. We've been scavaging parts for 2 solar hot water systems integrated with hydronic wood heat (our wood will be from a set of hybrid poplars we planted this year).

We have some excess money from the sale of a 2nd home (we took a loss on it to sell it) we want to preserve the value of so we plan on spreading it around different metals and currencies, which I think are gambles and so we only do this with limited funds but if I find a product I feel has potential and the company has good management/leadership, then that's where I'd land it.  That's our End Game . . . EGP

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JAG
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Re: Misreading the Tea Leaves

EGP,

It sure does sound like your living up to your online identity! I'm a little jealous that I'm not as far as long as you in my quest to be more self-reliant.

As far as investments are concerned, I have done very well by investing in those vehicles that are feared the most by the most. In this particular situation, its hard for me not to like the USD, using this particular strategy. Perhaps a treasury-only money market fund? Probably the only thing more feared than the USD, is the US long bond and/or the swine flu. Unfortunately, I was forced to sell my position in Baxter, but its probably a good play on the bull market in swine flu fear that awaits us this fall. Additionally, BAX performed very reasonably (only lost a little) in the crash of 2008.

All the best...Jeff

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Re: Misreading the Tea Leaves

Farmer Brown,

 

What do you think about Jim Shepherd's "model".  I haven't found much commentary or blogging about him, but I have been subscribing to his newsletter off and on for about 9 years now.  Do you think his model regarding critical mass and a deflationary spiral signal is legit?

Also, if I understand you correctly, I think you are expecting a severe deflation to occur.  If that happens, wouldn't that result in a general flight to the dollar and buoy the greenback?

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Cloudfire
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Re: Misreading the Tea Leaves

It's all just a used tea bag to me . . . Tongue outSmile

Seriously, Patrick, this is one of your many recent posts that have given me much to consider . . . Your ability to think clearly amidst mountains of data, coupled with your ability to clearly elucidate your theories makes your posts very compelling . . . Thanks for taking the time to share your musings . . .

-- C1oudfire

 

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Farmer Brown
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Posts: 1503
Re: Misreading the Tea Leaves

Hello Cloudfire,

Thanks for the kind words.  I truly enjoy thinking about all this stuff and I am flattered anyone listens to me, be it for actual education or mere entertainment.  Unfortunately, I've been working like a dog recently and have a lot of catching up to do here and at the real source of financial news  - the blogosphere, all thanks to people like Chris Martenson.  

PS: One of the reasons I've been busy lately is because we just installed the first and only 100-foot vertical-stacking system hydroponic greenhouse in the country.  We installed it at a K-12 private school and we're going to use it not only for cafeteria food and to start an organic market, but also for all sorts of learning opportunities with the kids.  It's combined with plenty of traditional growing methods (outside the greenhouse) that we've been working on for the past few months.

Cheerio,

Patrick

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tx_floods
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Re: Misreading the Tea Leaves
Farmer Brown wrote:

PS: One of the reasons I've been busy lately is because we just installed the first and only 100-foot vertical-stacking system hydroponic greenhouse in the country.  We installed it at a K-12 private school and we're going to use it not only for cafeteria food and to start an organic market, but also for all sorts of learning opportunities with the kids.  It's combined with plenty of traditional growing methods (outside the greenhouse) that we've been working on for the past few months.

WOW! That's awesome ~ Way to put all this into action! Smile

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