International investors begin to move away from the US$…
Good day. I made it through a busy Monday yesterday as we deal with being a few people short on the desk this week. The phones were busy as they typically are on a Monday morning, and Mike mentioned that there must have been a full moon as we dealt with some unusual customer requests. It certainly made for a wild and wacky Monday. In contrast, the markets are already on holiday, and the currencies were basically unchanged on the day.
The only news driving the markets yesterday were details leaked from another round negotiations in the fiscal cliff. The President has now agreed to raise the cutoff for tax increases from 250k to 400k while House Speaker John Boehner was rumored to have agreed to an automatic extension of the federal debt limit and an increase of taxes on those making over a $1M. But these concessions still don’t seem to have moved us any closer to a resolution as there will now need to be agreements on the more difficult area of spending cuts / reductions. Congress has agreed to remain in session until the end of the year, with only a short break for Christmas; so there is still a chance a deal is worked out prior to the end of the year. As readers know, I believe there will be a deal struck, with some tax increases combined with a few spending cuts providing the leaders in Washington enough cover to ‘kick the can’ further down the road. The whole point of this fiscal cliff was to force congress and the President into some meaningful actions on the rising debt and deficits, but it looks like they will instead figure out a way to wiggle their way out of the corner they painted themselves into.
Data released yesterday showed a rather dramatic drop in the TIC flows during October. For those new to class, the TIC flow number is a measurement of foreign buying of assets here in the US. The Net Long Term TIC Flows were just $1.3 billion vs a projected $25 bilion of foreign purchases during the month of October. The Total Net TIC Flows number was even more disturbing, showing a reduction of $56.7 billion in October as opposed to net purchases of $4.3 billion the previous month. Foreign investors seem to be reducing their US equity and fixed income investments as the global economic picture seems to be improving. I have discussed in depth how the flows into the US treasury market have been a temporary ‘liquidity’ shelter during the financial crisis in both Europe and the US. The markets have been taking a breather from the earlier constant coverage of the European debt problems, and recent news out of China has bolstered confidence of a continued recovery in the Asian markets. The Fiscal Cliff is the one remaining ‘hot spot’ and it now looks like international investors were starting to diversify back out of the dollar back in October. This is the major concern which both Chuck and I have expressed, that a loss in international confidence in the US$ could quickly lead to major problems for the US. As I wrote in Sunday’s Pfennig and Pfriends, the apparent ‘plan’ to deal with the debt crisis here in the US is to print our way out of it. But this plan depends on the dollar remaining as the international reserve currency, and a loss of confidence by international investors could derail any hope of the US inflating our way out of trouble.