As readers of this blog no doubt know, the dollar rallied v. the euro last week.
Not that most of America noticed. In much of America’s heartland, the dollar’s value does not make the financial news, let alone the front page — but it does creep into the travel section. The value of the dollar, for most Americans, is defined by the cost of a European vacation! That is the one thing people buy in euros, or pounds.
Far fewer Americans take vacations in Taiwan, Malaysia or Guangzhou.
But a mental map based on the tourist dollar simply may not produce the right mental map for the current world economy. Using 2004 trade data, China and Mexico combined should have a larger weight in the trade-weighted dolar than the euro, the pound, the Swiss franc and all other small European currencies combined. Yet changes in the peso-dollar and renminbi-dollar don’t get anywhere near the inkspace devoted to changes in the euro-dollar.
Maybe New York bankers should schedule a few visits to the branch offices down there. They sure are doing plenty of business in the Caribbean.
US banks have extended more credit to the Caymans ($568.9 billion) than to London ($457.9 billion) — and the amount that they are lending just seems to keep growing. Lending to the Caymans has almost doubled since the end of 2001. US bank credit to the Caymans now accounts for about a 30% of all US bank credit to foreigners …
Compare that say with the share of US bank lending to Asia before the Asian crisis: 20% (it is about 10% now).
Seriously, when the Federal Reserve worries about too much liquidity sloshing around global markets and fueling financial excesses (like really low spreads on US corporate debt, for example) they probably are looking at statistics like these. Bank credit to the Caymans is probably a pretty good proxy for bank credit to hedge funds.
It seems like Asian central bank support for the Treasury market — and other fixed income markets — has become part of the conventional wisdom recently. We know Bill Gross has long worried about the risks associated with holding an asset whose value depends on the kindness of strangers — and about the risk of shorting an asset whose value could rise if the Bank of Japan resumes big time intervention.
But the dollar/ Asian reserves/ central bank support for US fixed income nexus seems to have become the dominant rubric that Wall Street strategists are using to analyze the US fixed income market, judging from today’s Wall Street Journal article by Agnes Crane: “What’s Ahead for Bond Funds.”
Act one: Tsunami. A few well-timed comments on stinginess produced an outpouring of aid.
Act two: The UK plans a “development” G-8 summit. The summit won’t happen for a while, but the real negotiations don’t take place at the actual summit either. The content announced at the summit has to be hashed out this winter.
Act three: The selection of the new World Bank president. By tradition, an American — but also an American that the Europeans (and others) can accept. Someone like Zoellick would have been a good fit.
The FT gets out ahead of the curve with a nice Beattie, Giles and Balls overview of the current debate on development policy.
If you cannot tell from the title, this is going to be a rather wonky post.
Nouriel and I are working on a paper on “Bretton Woods Two,” so I have been delving into some data on the Treasury market. No surprise: the goal is to see what we can learn about foreign central bank buying of Treasuries at different points on the yield curve, and thus try to figure out whether the “central bank bid” is one reason why the 10 year bond ended the year at 4.25% — just about where it started — even though the Fed tightened and inflation picked up.
Since the supporting evidence is long, detailed and bit dull, I’ll lead with my conclusions.
a) Foreign central banks have been a significant source of support at the middle and long-end of the Treasury curve, not just the short-end.
Edmund Andrews of the New York Times provides the Rosetta stone that lets us decipher the Bush Administration’s plan to cut the deficit, which seems to be a plan to pretend to cut the deficit.
Here is the plan, based on Andrews’ excellent reporting.
Grade yourself on a generous curve. The Bush Administration never actually ran a $521 billion (consolidated) budget deficit — the peak deficit was $413 billion. But they did at one time project a $521 billion deficit, and they have decided that their goal is to cut the projected deficit — not the real deficit — in half. That bit of fuzzy math means a FY 09 deficit target of $260 billion, not $206 billion.
The Fed has started to tighten, Greenspan said anyone who has not hedged their interest rate risk desires to lose money. Yet higher short-term rates have not led to higher long-term rates. In the jargon of the market, the yield curve has flattened.
Why is the yield on long-term Treasuries still so low?
My tentative answer: a surge in reserve financing in the fourth quarter from emerging economies largely made up for Japan’s absence from the Treasury market. As central banks intervene in the foreign currency market to defend a fixed exchange rate or to prevent their currency from appreciating, they buy dollars — dollars that are then invested in the US fixed income market, whether in Treasuries, Agencies or something else. That is the Bretton Woods two hypothesis: foreign central banks will finance the US trade deficit in order to keep their exchange rate from appreciating.
The initial framing of Weisman’s article is just way, way off. Social security in no way faces a day of reckoning in 14 years, as Weisman implies. Rather than taking the Administration’s talking points seriously, the press should simply highlight how ridiculous they are.
Consider the following example: Suppose I bought a 15 year treasury bond that matures in 2020. The Treasury does not sell 15 year bonds, so this is a bit of a thought experiment. Do I have a problem in 2020? Do I face a day or reckoning in 2020?
Canada is to the United States?
Large in area, scarcely populated, cold and a major supplier of natural resources to its large southern neighbor …
Well, not yet.
Russia, I think, generally exports its energy to Europe, not to China. The pipelines flow west, not south and east.
But that may be changing.
It seems like the Yukos stake formerly held by western investors is being offered to China. Before, Khodorkovsky controlled Yukos and foreign — mostly western — investors had a minority stake; now, the Russian state seems likely to gain majority control, with China getting a minority stake.
From Reuters: “Make no bones about it, mortgages really went global in 2004,” said Arthur Frank, director of MBS research at Nomura Securities International. “Overseas investors had dollars to put to work and MBS were their vehicle of choice, offering them an attractive pick-up in yield over Treasuries …. “Foreign demand has certainly climbed over the years, but it picked up rapidly this year,” said Frank.