has poom started? evidence in foreign flows

[jk]

from john mauldin's excellent piece this weekend:
http://2000wave.com/article.asp?id=mwo061507


[my own comments follow]

If they are not pegging the dollar that would allow the Chinese to shift their reserves assets into currencies that they KNOW are going to outperform the dollar because of their own actions. It is clear that part of the conundrum of lower long term interest rates is in part answered by massive foreign central bank investment into dollars. If that starts to go away, you will also see the conundrum of lower rates go away as well.

And that policy may in fact be happening as I write. Greg Weldon, on of my favorite purveyors of all things financial, offers us some interesting insight into the Treasury International Capital (TIC) data released Friday morning. He looked into some of the details that have to raise some eyebrows this weekend. It explains why stocks and US equities are soaring and US Treasury bonds are under such severe pressure. Let's look at the TIC data from Greg (www.weldononline.com)

"*Total Net Foreign Purchases of Agencies ... $36.12 billion, more than double March's $15.14 billion, and FAR MORE than $2.43 bln in Feb.

"*Total Net Foreign Purchases of Equities ... $27.42 billion, more than three times the March total of $8.77 billion, and more than twice February's $12.39 billion.

"*Total Net Foreign Purchases of Corporate Bonds ... $33.53 billion, and while less than in March of February, the three-month cumulative total is a mind-blowing $124.24 billion.

"Between Agencies, Corporate Bonds, and Equities, foreigners made net cumulative purchases of $97.07 billion during the month of April. With that figure in mind, nearly $100 billion, we note:

"Total Net Foreign Purchases of US Treasuries ... $ 0.376 billion Yes, less than $400 million, or, less than HALF A BILLION. Out of $97.4 billion in "Net Domestic Securities Purchased", US Treasury paper constituted ONLY four-tenths of one percent of the total.

"There is NO fear. There is only excess USD liquidity that is flowing into everything EXCEPT the "low risk, flight-to-safety' sector ... the US Treasury market. Moreover, "Official Foreign Institutions" (ie: global central banks) were net BUYERS ... meaning ... private foreign institutions and investors were actually DUMPING US BONDS, and reallocating more heavily into equity purchases."

There is no reason to think this has stopped. It is driving the markets, raising both stocks and interest rates. And then Greg brings us to the point that is germane to our discussion on China. I haven't seen anyone else note this, which is one of the reasons Greg is a must read for me. He finds these details.

"MORE problematic ... and something NO ONE seems to be talking about, China REDUCED their holdings of US Treasuries. Again ... the Chinese Central Bank DUMPED US Bonds in April. Note:

"Chinese Holdings of US Treasury Bonds ... $414.0 billion, DOWN (-) $5.9 billion in the month, falling from $419.8 billion.
"Again, we magnify the point ... China sold 1.5% of their UST holdings. Bottom Line: the management of Chinese USD reserves (not to mention Korea, an active 're-allocator"), are helping reflate asset markets, and helping push US bond yields higher."

Hmm. The Chinese sell $6 billion in Treasuries and spend $3 billion to buy 10% of Blackstone. Kind of makes you wonder where the value is? Would I rather have a dollar in Blackstone (at Pre-IPO prices) or a dollar in US treasuries? Beijing is making a statement. Some sane heads in Congress should pay attention.

I do not think China will make a massive "all-at-once" shift away from US treasuries. But they could certainly continue to re-deploy assets away from US treasuries. And they will likely be accompanied by other smaller central banks with large reserves as well. We could see some serious pressure on US government bond interest rates.

And it is interesting to note that the growth in Chinese exports was in large part delivered because of European markets. Europe is the new customer for China, and it makes sense then that they increase their euro holdings. But that is not dollar or interest rate bullish.

part of poom was that the dollars held overseas come home, looking for domestic assets to purchase. let me repeat one line from mauldin:

Between Agencies, Corporate Bonds, and Equities, foreigners made net cumulative purchases of $97.07 billion during the month of April.

at that rate you'd have $1.2 trillion/year of foreign purchases, while our current account deficit is running at about $800Billion/year. i.e. you'd have a net $400billion of overseas reserves coming home.

my first thought was that this was dollar bullish, but i suppose it's really dollar neutral. a more important implication, however, is more u.s. asset inflation. it points, overall, to higher long rates, and that will keep fixed mortgage rates high and be residential real-estate negative. but it also implies continued small credit spreads and higher equity values .

[Guest]

Re: has poom started? evidence in foreign flows

I also get Mauldin's "Outside the Box" bulletin and almost posted a summary of this yesterday evening. I did not know if one requires express permission from Mauldin's Millenium Wave Advisers to reproduce excerpts - is it OK?

Mauldin suggests maybe "POOM" or one of an ongoing series of jerky "Poomlets" has started?

This jibes with a special notice from Jim Dines to subscribers to turn their gaze back to the PM's - just when everyone is getting fearful the PM's are "yesterday's story" and getting ready to sell their bullion to the "next credulous fool to come along".. :eek: :confused:

Dines is consistently and reliably early on changes in market fundamentals and psychology. He is maverick, not pin stripe "institutional" like Mauldin, (he's been to Wall Street and done that back when a cup of coffee used to cost 25 cents) but Dines is every bit as acute,and early on calls.

Mauldin is excellent - something is shifting in the status quo - or call it the "marathon dance to the end, of the two lumbering giants" (US / China) If this continues consistently across the summer months it's confirmed - US Treasuries have hit the "no-bid" from foreign CB's and the poop may well soon encounter the inflation fan.

People should take their positions for the long term event and stand pat. No-one can trade this transition sensibly.

[Jim Nickerson]

Re: has poom started? evidence in foreign flows

I also get Mauldin's "Outside the Box" bulletin and almost posted a summary of this yesterday evening. I did not know if one requires express permission from Mauldin's Millenium Wave Advisers to reproduce excerpts - is it OK?

I don't think most authors mind being quoted in exerpts as long as they are appropriately referenced, but then I ain't no internet lawyer.

[Mega]

Re: has poom started? evidence in foreign flows

i Agee Jim, China will back away bit by bit...........and just have to watch those $ she has left crash in value. BTW has anyone noticed that central banks (Spain/Swiss) are selling Gold...........they say to cover debit, but they are buying "Currenaces"..........Buying $ ?

UNder cover surport operation?

I will be buying Gold very soon, not too much but as a "hedge" for the next couple of years.
Mike

[rachits]

Re: has poom started? evidence in foreign flows

i was thinking has ka started? (merrill vs. bear stearns)

http://www.itulip.com/forums/showthread.php?t=1478

[Guest]

Re: has poom started? evidence in foreign flows

Following is an opinion on the very recent bond market rout and trend change, from the Aden Sisters in Costa Rica (I subscribe) - very matter of fact, very blunt and simple in presentation - as is their regular method ...

Perhaps then the question many of us ask, and for this community's best analysts to volunteer to answer therefore is - "define this trend change as it will affect the main asset classes " - i.e.what assets are affected, and how?

<< (quote begin)

THE FINAL CONFIRMATION

Plus, there's even more and this is truly the final confirmation (see Chart 1, which we believe is the most important chart we're currently following). Here you'll see the really big picture of the 30 year yield, together with its very long-term 80 month moving average, going back to 1930.


Note that the yield has been declining since 1981 and in recent years it's been building a base. The long-term moving average identifies the mega trend and it doesn't change direction often. In fact, it's only changed three times in 77 years, but when it did, it then set in motion a new era and mega trend that lasted for decades.

The last time that happened was 22 years ago. After long-term interest rates peaked near 15% at the end of the inflationary 1970s and gold had soared to $850. the mega trend has been down since then.

Currently, however, another one of these big changes is taking place. This mega moving average is at 5.03% and the 30 year yield has soared above it. It's now at 5.25%. if the yuield stays above 5.03%, the mega trend is up, which is a huge new development. It means long-term interest rates are going much higher and htat big inflation is coming for years to come, which is similar to what happened in the 1970s.

This would also coincide with the mega uptrend in commodities and it would loudly signal that a totally different era is in store, contrary to what's been happening for over 25 years, and it'll be extremely bullish for gold.

So bumps in the road shouldn't sway you. Gold is in a mega trend based on fundamental factors that are not going away any time soon. So again, stay invested and we feel strongly that you'll be glad you did.

(quote end) >>

[bart]

Re: has poom started? evidence in foreign flows

part of poom was that the dollars held overseas come home, looking for domestic assets to purchase. let me repeat one line from mauldin:


at that rate you'd have $1.2 trillion/year of foreign purchases, while our current account deficit is running at about $800Billion/year. i.e. you'd have a net $400billion of overseas reserves coming home.

my first thought was that this was dollar bullish, but i suppose it's really dollar neutral. a more important implication, however, is more u.s. asset inflation. it points, overall, to higher long rates, and that will keep fixed mortgage rates high and be residential real-estate negative. but it also implies continued small credit spreads and higher equity values .

About the only thing of which I'm certain about the flows is that the game is afoot and has been notched up to a higher level.

China did sell about a billion in Treasuries but overall there was about a $12 billion inflow from them. Methinks that the sale of Treasuries was at least partly political and intended to address the discussions in Congress.

As an aside, the chances of a derivatives blow up of some sort sure was enhanced by the quick sharp move in Treasury interest rates.... but as far as "ka" having started yet, it doesn't seem like it. It seems like some type of shock or black swan is needed, at least to me.
And in tinfoil hat mode, the Fed was *very* much involved in the rates going up via the Securities Lending Open Market operation in my opinion.