Minyan Mailbag - Foreign Holdings
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Thought you might find this of interest. Foreigners have stepped back in HUGE numbers to the U.S. Treasury and agency market. If this follows the previous pattern this should lead to an upside breakout form the recent trading range. Just another data point . . .
You may be right, but even so, the reasoning is flawed and dangerous (not yours, but the market in general).
The biggest influence on asset prices, including stocks, is interest rates. I have maintained for some time that if interest rates remain low, equities have a bid below them and nothing to keep them from rising (although stable interest rates is not necessarily a reason to send stocks higher).
But when we analyze the reasoning behind why interest rates are low (in a few words, central bank intervention combined with fiat currency) things get disturbing from a risk perspective. The minister of finance has basically said that Japan will never sell dollar holdings. A statement like that should worry us for that is not how markets work. The claim illustrates just how much artificial manipulations are present. Instead of correcting the massive imbalances, central banks are perpetuating them. This of course can go on for a while, but it just makes things less stable as time goes on.
I think you are aware of this and many smart people are, so they just go along with things. I too must in some respects defer to these artificial forces. But I gave up a long time ago making money from market direction. So I prefer to rely on risk management, which tells me to accept lower returns as the artificial forces work, in order to be prepared for a rapid unwind once market forces overtake them.
So I spend a little more on long gamma than I should in preparation for a tail event.
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