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Minyan Mailbag



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.


Following on the comments that Roach and others have made re: US Assets and Foreign holder data I thought it might be helpful to have a chart handy. What I have done is to include the TIC data from the flows into equity and into treasury bonds over the last 20 or so years. (chart below)

Following on Roach's warning about how foreign holders gave US equities the slip well in advance of the collapse in 1987 (you can see that in what is a very small hump relative to future flows) it's pretty clear looking ahead on the chart where a good part of our equity bubble came from and what were also the key causal agents of its demise. The flood in and out was unprecedented in scope, scale and speed. And this gained tremendous headwind after the various fiscal crises of 1997 and 1998. The flow out was equally vicious and unrelenting and did not reverse until foreign money popped positive (see the break above the red dotted resistance line in the middle indicator).

Great, nice history lesson. Now what? Well, besides being able to squint and see the same mechanism once again in the net outflows from equities from January which just stopped in July, we can have a look at flows into US Treasury Bonds (top indicator).

All I can say is that history appears to be repeating itself as far as a bubble goes, doesn't it? The magnitude of the inrush is rather surreal. No wonder equities have been going nowhere relatively speaking. There's only so much money isn't there?

So, what does this mean? After all foreign money seems very happy indeed to buy bonds as even Roach admits. Should they change their minds, isn't there a chance that all that money will just go right back to equities? Maybe. Although in the past that has not always been the case as a perusal up close of the data will show. You can see that in the midst of the LTCM/Russia 1998 crisis, holders fled both stocks and bonds at the same time.

Now my questions for the Brain Trust. Has there ever been a case where flows out of assets have preceded a rise in currency? Is there a positive story hidden somewhere in here that we are all missing (other than the prospect of asset reallocation)? What happens to the dollar if there is a melt in bonds? To the current account deficit? Lastly, what sort of events might be triggers for an exodus other than a sudden rate rise?

Minyan Bryan McCormick.


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