Full Metal Durable Goods / Budget.......

Thank god they are all worried/serious about the deficit...... Colbert from April sums it up......

Gottseidank sorgen sich ja bekanntlich in den USA alle um das Defizit. Schön zu sehen das bei den Militärausgaben weiter Vollgas gegeben wird...... Colbert vom April trifft mal wieder ins Schwarze.....

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
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Floyd Norris NYT

The accompanying charts show the trend in durable goods spending, for military purposes and for other shipments of durable goods, from 2000 through this June.

In June, seasonally adjusted shipments for civilian purposes were 19 percent below the average monthly figure for 2000. Shipments of military items were running 123 percent above the 2000 average.

Military vs. Non-Military Durable Goods / Larger Version / Größere Version

The United States remains primarily a civilian economy. The military now takes about 8 percent of all durable goods, up from 3 percent in 2000.

> Calming.....Here is another chart without any further comment......

> Wie beruhigend......Hier ein weiterer Chart der jeden Kommentar überflüssig macht........

YES WE CAN´T...... ;-)

Who Will Be Left To Buy US Treasuries......

I think this will be one of the most important questions especially after one "natural" buyer after another buyer like China is obviously has to spend lots of their "war chest" at home ( see this excellent piece via naked Capitalism China Announced $586 Billion Stimulus Plan, No Kidding.... Dubai May Need Help To Repay Debt.... & You can’t even depend on the SWFs).....

Ich denke eine der entscheidenden Fragen in naher Zukunft wird sein ob es den USA weiterhin gelingt genügend ausländisches Kapital zu animieren wöchentlich wachsenden Baliouts (AIG, GM, ..... ) und die gefühlten quartalsweisen "Konjunkturpakete" zu finanzieren ( ganz zu schweigen von dem üblichen Defizit.....). Es sieht immer mehr so aus als wenn etliche der bisherigen "natürlichen" Käufer immer mehr Mittel aufwenden müssen um Ihre eigenen Wirtschaft vor einer ( nennen wir es vorsichtig ) Verlangsamung zu retten ( siehe via Naked Capitalism China Announced $586 Billion Stimulus Plan, No Kidding.... Dubai May Need Help To Repay Debt.... & You can’t even depend on the SWFs).....


In the meantime the US is anouncing one baliout a week ( AIG, GM, ..... ) and is discussing another stimulus package almost on a quarterly basis...... On top of this the Fed is close to a zero interest policy and the recent strength in the $ is likely mainly atrributet to the global delevereging..... Probably not the best circumstamces to attract trillions of foreign capital.... Especially when your futue liabilities are close to $ 50 trillion ( see If we are Rome, Wall Street's our Coliseum make sure you don´t miss the Colbert video with the former comptroller Walker )

Es bedarf schon einer gewissen US Arroganz darauf zu wetten das die Ausländer trotz einer Nullzinspolitik, einer Währung die wohl einen nicht geringen Teil Ihrer letzten Stärke allein dem Umstand des weltweiten Deleverering zu verdanken hat, neuen Haushaltslöchern beinahe im Stundentakt sowie der über allem stehenden tickenden Zeitbombe von Social Security & Pensionszusagen etc ( mit nahezu 50 Billion $ , siehe If we are Rome, Wall Street's our Coliseum , besonders empfehlensert ist das Interview mit dem früheren Oberaufseher der US Finanzen.....) weiterhin gewillt und in der Lage sein werden dieses zu finanzieren.....

I don´t want to speculate what could happen if the foreigners have to sell some of their US assets...... Got gold......?

In allen Überlegungen möchte ich leiber nicht damit anfangen zu spekulieren was passieren könnte sollten die Ausländer anfagen aktiv Ihre Positionen zu veräußern...... Got Gold.... ?

Thanks to Contrary Investor

Needless to say that US debt is still rated AAA.......

Überflüssig zu erwähnen das die US Staatsschulden noch immer mit AAA bewertet werden......

If we are Rome, Wall Street's our Coliseum

Somehow Jack Nicholson in "A Few Good Men" with his famous speech "You can´t handle the truth" comes to mind. 50 trillion hole and growing 3 to 4 trillion annually......Please click on the headline to read the entire piece.

Irgendwie erscheint mir bei diesem Thema die inzwischen berühmte Rede von Jack Nicolson aus "Eine Frage der Ehre" über die Wahrheit vor dem gesitigen Auge. Eine Lücke von 50 billion die jedes Jahr 3-4 billion anwächst. Leider kein Tippfehler...Klickt bitte auf die Überschrift um den kompletten Bericht zu lesen.

Maybe you don´t need to handle the truth if you believe in forecasts like this The Triumph Of Hope Over Experience

Aber evtl. verdrängt man die Wahrheit einfach am besten mit Prognosen wie diesen The Triumph Of Hope Over Experience

Should be great news for the Greenback down the road..... Thank god that the Fed is vigilant in fighting inflation ( see chart ) ...... ;-)

Das alles sollten zukünftig "tolle" Neuigkeiten für den US$ sein.... Wie gut das die Fed stets ein entschlossener Inflationsbekämpfer ist ( siehe Chart) ...... ;-)

Thanks to Bud Wood for the excellent Chart!

(Marketwatch) Comptroller General warns (again), we're 'bankrupting America'

What do Cassandra, "Chicken Little," the "Boy Who Cried Wolf" and David Walker, America's Comptroller General and head of the U.S. Government Accountability Office, all have in common?

Nobody pays attention to them!

Except for a short piece in London's Financial Times, Walker's warnings were generally ignored by the American press, by the public and even by the very Congress that hired him and has the power to do something, yet still refuses to heed his warnings. ......

>Here a not so depressing interview with the Comptroller himself with Colbert :-)

>Hier zur Abwechslung ein nicht so ganz deprimierendes Interview mit David M. Walker von Colbert :-)


got gold.....?

Brad Setser on the US Deficit

Brad Setser hits on a point that is not widely covered. the us has to serve their debt and this is becoming more and more a heavy burden on the current account deficit. especially after all the "cheap" debt from the past is rolling into higher rates......to bad that the us abandoned the 30 year .....has and with 59 trillion future liabilities the problem will only get worse..... http://tinyurl.com/2xyqto . make sure you read the entire brilliant piece from Setser and click on the headline!

Brad Setser beleuchtet hier mal wieder einen punkt der ansonsten in der diskussion oft vergessen oder unterschätzt wird. die zinslast die die usa aufbringen müssen um ihre gewaltigen schulden zu finanzieren wird immer mehr zu einem problem und lässt das defizit weiter ansteigen. das gilt besonders weil die billigen krediten jetzt in teurere refinanziert werden müssen.....jetzt rächt sich das die usa die 30 jährige staatsanleihe eingestampft haben ....und mit zukünftigen verpflichtungen von 59 trillion $ dürfte das problem nicht kleiner werden.....lest bitte unbedingt den ganzen bericht von Setser und klickt auf die überschrift!

I think the income balance is poised to deteriorate significantly. That is the real source of my pessimism. The market no longer expects the Fed to ease by much. Short-term rates will stay around 5%. And long-rates have moved close to 5%. That suggests to me that the interest bill on the United States external debt is set to rise: the US will be taking on new debt at 5% plus to cover its deficit, as well as rolling over an awful lot of old debt at higher prices

I consequently expect the income balance to emerge as an important drag on the US current account deficit. If my forecast on the income balance is close to correct, it implies a rise in the current account deficit even if the trade deficit stabilizes in nominal terms and starts to fall as a percent of US GDP.
größer/bigger headline

Foreign U.S. Notes Rise to 80 Percent / "Reverse Marshallplan"

staggering number......Roach calls this some kind of "reverse Marshallplan".

noch fragen....Roach nennt das ganze passenderweise ne art "reverse Marshallplan"

There is a striking twist to the current globalization. Unlike the lobalization of the early 20th century when capital flowed from the rich countries of the developed world to the “settlement economies” such as Argentina, Australia, and Canada, the opposite is true today. In the current globalization, the incremental saving for the advanced economies of the developed world has been provided almost entirely by the transfer of capital from the poor countries of the developing world (including oil producers). The United States, with its massive current account deficit, is the major beneficiary of this “reverse Marshall Plan” – absorbing more than 70% of the world’s surplus saving over the past three year

For the moment, at least, financing the U.S. budget deficit may be getting less arduous as foreign investors now own a record 80 percent of the Treasury notes due in three to 10 years.

Not since the 19th century have foreigners held so much American debt, said Alan Taylor, a professor of economic history at the University of California, Davis. International investors own $672 billion of the $835.4 billion Treasuries due in three to 10 years,


While the Central Bank of China in Taipei and the Bank of Korea say they have had their fill of Treasuries, the 22 percent rise in U.S. dollar reserves led by Brazil and China during the past year makes Treasuries irresistible.

>especially when you look at all the currency losses making it one of the worst investments available.....plus it is getting even better when you read this "Taxpayers on the hook for $59 trillion" http://tinyurl.com/3yxcsm

>das gilt natürlich besonders wenn die ganzne währungsverlusteb mitberücksichtigt werden.....und erst recht bei 59 trillionen zukünftiger verbindlichkeiten (s.link oben)......

Yields on U.S. government bills, notes and bonds are higher than similar- maturity debt sold by Japan and the countries sharing the euro. That's partly why foreign holdings of U.S. securities have doubled since 2002.

``Those dollars need to go somewhere and the natural place to go to is Treasuries,'' said Charles Comiskey, the New York- based head of U.S. government bond trading at HSBC, Europe's largest bank by market value. ``They're not bought for fundamental reasons but for necessity.''....

>but how long can and will this this continue....?

>aber ob das immer weitergehen kann........?

American long-term interest rates would be about 1.5 percentage points higher without foreign capital flowing into the $4.4 trillion of outstanding Treasuries, according to a 2005 Federal Reserve study by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville. The U.S. Department of the Treasury says non-Americans hold at least 52 percent of all notes and bonds.

Lower Treasury yields help keep down borrowing costs for companies and U.S. home buyers. The yield on U.S. corporate bonds was 5.82 percent last week, compared with a 10-year average of 6.05 percent, according to data compiled by Merrill Lynch & Co. Rates on 30-year mortgages rose 16 basis points last week to 6.37 percent, down from 7.94 percent in May 1997 and the average 6.70 percent over the past decade, data from Freddie Mac, the government-chartered mortgage company, show. ....

Percentage of Deficit
The last time foreigners owned so much U.S. debt was in the mid-19th century, when state and corporate bonds for the construction of railroads, canals and highways were purchased by Europeans, said Taylor, the University of California professor. .....

>and now....consumption, houses, war, debt....but no investments!

>und heute...keine investments, nur neue schulden um den kaufrausch weiter auszuleben und masslos über die verhältnisse zu leben und kriege zu finanzieren.

Central banks, whose currency reserves swelled to $5.4 trillion this year, are buying Treasuries with dollars accumulated from exports of goods and oil to America. Foreigners owned less than 35 percent of Treasuries in 2000. Crude prices have tripled during the same period.

Central banks, including the People's Bank of China, have said they plan to increase investments in bonds other than Treasuries, adding to concerns that waning demand would push up U.S. market rates.

`Reaching a Limit'
Japan, the biggest foreign holder of Treasuries, with $612 billion, has reduced investments in U.S. government bonds this year, from $623 billion. The country doesn't plan to ``drastically'' cut U.S. assets, Vice Finance Minister Hideto Fujii said last week.

International investors ``can't keep buying safe, simple Treasuries forever,'' said HSBC's Dyer, who based his estimates on June 2006 Treasury data. Foreigners are ``reaching a limit.''

At the same time, Treasuries are becoming more attractive to foreign investors as yields on emerging market debt and non- investment grade corporate securities approach record lows compared with government bonds, said O'Donnell.

Speculative-grade corporate bonds yielded an average 2.44 percentage points more than Treasuries last week, matching the record low in 1997, according to Merrill Lynch & Co., which started collecting the data in 1986. The average yield premium on emerging market debt narrowed to 1.49 percentage points, the smallest since JPMorgan Chase & Co. began collecting such data in 1997.

Treasuries due in 10 years yield 48 basis points, or 0.48 percentage point, more than German 10-year bunds, down from 116 basis points a year ago. The U.S. notes yield 314 basis points more than Japanese 10-year bonds, little changed from 317 this time last year.

`Reasonably Priced Assets'
``In the grand scheme of global opportunities, Treasury rates near 5 percent may perversely be the most reasonably priced assets around,'' said O'Donnell.

Central bank efforts to diversify reflect the growth of reserves more than the desire to hold less U.S. debt. China's swelled in the first quarter by a record $136 billion to $1.2 trillion, prompting the government to set up a group to pursue other investments. China last week bought a $3 billion stake in Blackstone Group LP, the New York-based private-equity firm led by Stephen Schwarzman.

China more than doubled its holdings of Treasuries in the three years ended March 31 to $420 billion, according to U.S. government data. Members of the Organization of Petroleum Exporting Countries did the same, increasing their investments to $113 billion. Brazil now owns $70.6 billion of U.S. government debt, up fivefold since 2004.

Central banks used their growing reserves to purchase a net $284.5 billion of so-called agency debt sold by government- chartered companies Fannie Mae of Washington and Freddie Mac in McLean, Virginia last year. They bought a net $485.2 billion of corporate bonds.

here is the take from minyanville on this datapoint http://tinyurl.com/2cga9h

Financing capital flight / Brad Setser

interesting stuff from Brad Setser. click on the headline to read the full piece. i also highly recommend his excellent blog

http://www.rgemonitor.com/blog/setser/

bemerkenswertes wie so oft von Brad Setser. klickt bitte auf die überschrift um den rest zu lesen. kann seinen erstklassigen blog uneingeschränkt empfehlen. wirklich klasse.

The other story in the March data? The big rise in US purchases of foreign securities. US residents bought about $40b of foreign securities, including an usually large amount of foreign debt -- $32b.

That is one reason for the dollar’s weakness.

It also explains the weak total TIC flow number in March. The $100b in headline foreign purchases of US debt and equities is deceiving. Net inflows were a bit under $50b – less than the March current account deficit ($75b or so)

If sustained, that level of “diversification” by US residents implies rather large outflows – about $500b a year. To finance that level of outflows and its current account deficit, the US would need to attract about $1400b in inflows.
That is a lot. It might imply the US would need a bigger credit line than even the People’s Bank of China is willing to provide. Financing the United States current account deficit is one thing. The current account deficit is the counterpart to China’s current account surplus (read export jobs). Financing capital flight (i.e. portfolio diversification) by US residents is another …

Deficit Attention Syndrome / Contrary Investor "Hall of Fame"

i highly recommend to read the full piece! please click on the headline this is only a very small extract. excellent!

lege jedem die volle dosis ans herz. bitte auf die überschrift klicken. wirklich brilliant!


...Quite importantly, it's this change in the rate of growth in goods imports that we believe may be a key tell regarding the broader economy. First, is it really any wonder that the rate of change in goods imports has been falling as of late when the annual rate of change in retail sales has slowed to levels last seen in early 2003? Of course not, as so many consumer goods are imported. Having said all of this, the following two charts are probably the most important in this portion of the discussion. First, the long-term picture of the year over year rate of change in US goods imports lies directly below.


As you will clearly see in the chart, there has only been one time in the last three and one half decades where we have fallen below the current rate of change level and the US has not entered or already been in an official recession. That exception was the mid-cycle economic slowdown of the mid-1980's. We suggest that the current possibility of a rate of change break below current levels may be more important than ever given the sheer nominal dollar magnitude of the current goods deficit as part of the overall trade numbers. As we're sure you know, the US runs a services surplus (tourism and travel related). The goods deficit is really larger than the headline US trade deficit. THAT's how important changes in goods imports and exports really are in the current environment.

The next chart is really the important one in terms of defining and characterizing the US trade deficit, as we know it today. What we are looking at is the percentage of the total US trade deficit being driven by both imports of crude oil and imports from China. We've delineated each separately as well as presented their ongoing combined value in the blue columns. The message is clear. In 2006, 66% of the US trade deficit is accounted for by crude imports and the trade deficit with China. It's no wonder China/US trade circumstances are such a perceptual political flash point. Unless something acts to change the trajectory of these trends, it will probably only be a year or two until crude and China account for three-quarters of the total US trade deficit. Outside of crude and China, it almost seems trade with the rest of the planet is an afterthought in terms of the overall US deficit specifically. ....

make sure you get the last paragraph from hank paulsen.....(click headline)

achtet besonders auf den letzten absatz von hank paulsen...(überschrift klicken)

David M. Walker, Comptroller General of the United States at Colbert / :-)

50 trillion hole and growing 3 to 4 trillion annually......

50 billionen lücke und ein anwachsen von 3 bis 4 billionen p.a....



got gold....?

number of the day........

taken from bloomberg "Asia Won't Finance U.S. Trade Deficit Forever: Michael R. Sesit "

Interest payments on U.S. Treasuries held by international investors climbed to a record $113.6 billion in 2005, the last year for which figures are available. If U.S. corporate debt is included, the figure surges to $300 billion, Quinlan said in a March 29 report.

For the first year since 1960, non-U.S. investors earned more dollars on their U.S. holdings in 2006 than U.S. residents earned on their overseas investments.

Petrodollars, the Savings Bust, and the U.S. Current Account Deficit / PIMCO

this time i´m not sure if i agree with the thesis that the global savings glut created the housing bubble. i think it was a combination of the easy fed thanks to greenspan that kept rates to low for to long and increased it only in babysteps (only greenspan saw a deflation in the when he slashed rates to 1%) , lax oversight that allowed all this crap "exotic financing" and only in part thanks to the lower long term rates.

dieses mal kann ich die meinung das die global savings glut den immobubble in den usa ermöglicht hat nicht teilen. in erster linie war das ne kombination von einer fed unter alan greenspan die viel zu lange die schleusen des ultrabilligen geldes hat offen gelassen (ich erinnere nur mal an die begründung der zinssenkung auf 1% das ne deflation vor der tür die nur greenspan hat sehen wollen) und einer praktisch nicht vorhandenen aufsicht die allen kreativen finanzierungsformen tor und tür geöffnet hat und nur zum kleinen teil auf die langfristig niedrigen zinsen zurückzuführen ist.


International finance is a fascinating but challenging subject with many moving and intertwined parts. Exchange rates go up and down, capital flows in and out, and saving doesn’t always equal investment. Economic equilibrium is a global, not national concept. For example, the Fed can sometimes have a bigger impact on Bund yields than does the ECB, and quantitative easing in Tokyo can spill over into the currency markets in London.

Consider the U.S. current account deficit, currently one of the hottest topics in international finance. The debate is not whether the deficit has grown, but instead why it has grown. Some argue that it is simply the result of too much spending and not enough saving in the U.S. But there is also persuasive evidence that a global “saving glut” – an excess of global savings relative to profitable investment opportunities – has contributed significantly to the U.S. current account deficit in recent years.

The current global economic cycle provides compelling evidence that the surge in the U.S. current account deficit since 2004, the final swelling of the U.S. housing bubble, and the decline in the U.S. household saving rate are all manifestations of the same phenomenon: recycled petrodollars. I will review the evidence that the saving glut actually exists, and look at how the price of oil has impacted the saving glut from 2004 to 2006. Finally, I’ll examine how the global saving glut itself generated a U.S. savings bust and the current account deficit, and how this will impact fixed income markets going forward.


The Oil Connection
In the last several years, the story of the U.S. current account deficit has been about the oil import bill. As Chart 1 makes clear, the biggest rise in global current account surpluses in recent years has been in oil exporting countries.

Chart 1, also illustrates that as the current account surpluses of oil producing countries have grown in recent years, the U.S. current account has moved further into deficit. In fact, there has been a high correlation between these oil-related surpluses and the U.S. current deficit. Chart 2 identifies this correlation by comparing the U.S. trade deficit excluding oil and the total trade deficit. During the period from March 2004 to July 2006, the non-oil trade deficit was relatively stable while the total deficit deteriorated substantially. (Chart 2 shows the U.S. trade deficit, not the current account deficit, but the difference between the two over the period was negligible.1)

In fact, the increase in the U.S. oil bill between March 2004 to July 2006 was virtually the same as the increase in the trade deficit. In May of 2004, the U.S. non-oil trade deficit was running at about $39 billion a month ($500 billion annual rate) while the total trade deficit (including imported oil) was running at $48 billion a month ($600 billion annual rate). As imported oil prices began their upward march through $30 to over $70 a barrel, the trade deficit widened almost dollar for dollar. By July of 2006, when oil was at $77 dollars a barrel, the non-oil trade deficit was roughly unchanged at $41 billion a month while the total trade deficit was running at $68 billion a month ($840 billion annual rate).
While the charts above make a strong case for a connection between the current account surpluses of oil producing nations and the U.S. current account deficit, they do not establish the mechanism that connects the two. That mechanism is the global “saving glut,” a term introduced by Federal Reserve Chairman Ben Bernanke in a March 2005 speech.2 By identifying a glut of global savings relative to investment, Bernanke put forth an explanation for the “conundrum” of low global interest rates identified by his predecessor Alan Greenspan.

Finding the Glut
Though economic data cannot directly identify the saving glut, there is evidence the glut exists when we reconcile current account data with the behavior of interest rates, credit spreads and forward real interest rates.

The current account can be described in several ways, but to begin searching for the saving glut, we must define it in terms of national saving and investment. Saving is comprised of personal, corporate and government saving, while investment is made up of business and residential investment. I will refer to this definition of the current account frequently:

Current Account = Savings – Investment

In other words, the current account balance equals whatever savings is left over once all the investment spending is done. If investment exceeds savings, then a nation runs a current account deficit and must make up the shortfall by attracting capital inflows from overseas investors. By definition, then, the U.S. current account deficit is always equal to the rest of the world’s collective current account surplus, which was illustrated in Chart 1.

When Bernanke first raised the idea of a “saving glut,” many skeptics did not believe that such a glut could even be partly responsible for the U.S. current account deficit, and they made two main arguments. First, they denied that there was a saving glut to begin with, citing the observation that savings flows as a percentage of GDP in emerging economies and oil exporters were roughly the same in 2004 as they had been a decade earlier. Second, skeptics argued that even if there were a global saving glut, there is no direct mechanism through which the glut should contribute to the U.S. current account deficit.

In essence, the skeptics were asking “where is this excess of global savings if not in the global saving data?” The answer, of course, was not in the saving data, but in the current account data.

> let us pray that all the oil exporters and the other states like japan and china (especially with the trade news from last week http://tinyurl.com/2cfovx ....will keep on buying $ into eternity... and don´t run for the exits........ china is also shifting away from bonds to equities http://tinyurl.com/3x6q7e

>wir sollten besser alle beten das sowphl die ölexporteure als auch staaten wie china (gerade nach den strafzöllen letzte woche) und japan weiter fleißig bis in alle weigkeit $ kaufen...und nicht irgendwann aufhören bzw sogar den rückwärtsgang einlegen. china will zudem neuerdings nicht mehr nur anleihen kaufen sondern sich vermehrt aktien zuwenden.


If we believe that recent years’ deterioration in the U.S. current account deficit has simply been driven by an autonomous decline in U.S. saving and a boom in investment, we’d have to also expect that U.S. interest rates would have to rise, and credit spreads would have to widen, to attract enough foreign capital to finance the deficit. But in reality, just the opposite has happened: as the current account deficit has grown, interest rates have fallen and credit spreads have narrowed. Chart 3 shows the tight correlation between the U.S. current account and forward real interest rates from the U.S. Treasury Inflation – Protected Securities (TIPS) market.

Any explanation for a simultaneous rise in the U.S. current account deficit and drop in interest rates must explain why foreign investors have been so willing to invest in U.S. assets without demanding higher yields.

The simplest explanation – and one which also explains Greenspan’s conundrum of low long-term rates – is a global saving glut. According to this view, excess global saving is crowding in U.S. investments, driving down U.S. interest rates and risk premiums. Lower rates, in turn, drive up U.S. investment and consumption, which in turn widens the current account deficit. So far, so good. But there is still more that we need to resolve. Namely, how did U.S. consumption withstand the sharp rise in oil prices from March 2004 to July 2006? Previous oil shocks sent the U.S. economy into recession, which typically lowers the current account deficit. But this time, consumption held up and the current account deficit widened even more. What happened?

Oil, Savings, and the Current Account Deficit
The close connection between rising oil and a widening current account deficit makes intuitive sense: since demand for oil is presumed to be inelastic, we should expect the oil price and the current account deficit to move hand in hand. The problem with this argument is that during past oil price spikes (1974-1975, 1979-1980, 1990-1991) the U.S. current account deficit did not widen appreciably. In fact, the U.S. ran a current account surplus in 1975 and 1991, and the deficit in 1979-1980 was modest. Of course, U.S. recessions coincided with each of these oil shocks. So what was different more recently that kept U.S. demand growth sturdy even amid a growing trade deficit and oil bill?

The Fed’s “considerable period” of a one percent funds rate and ”measured pace” of rate hikes certainly supported the economy in 2004 and into 2005. Yet even the Fed, I imagine, was surprised at how well the economy held up to $60 and $70 a barrel oil. It is interesting to note that the “worst case scenario” envisioned in a 2002 Treasury study of how a spike in oil prices impacted the U.S. economy was $50 a barrel oil for one year, which it estimated would subtract one percentage point from growth. Instead, the rise in oil prices to their peak wasn’t even enough to stop the Fed from raising rates. So I believe that another factor contributed to the tight link between oil prices, foreign investment into U.S. assets, and the U.S. current account deficit in recent years – the global saving glut.

According to the saving glut interpretation of the data, the process works as follows: First, strong global demand for oil pushes up the price of oil. Second, the petrodollars are recycled into the global capital market, driving down real interest rates and compressing credit spreads. Third, real interest rates at conundrum levels and skinny credit spreads encourage enough U.S. business investment and residential construction and investment, and discourage enough U.S. saving, to generate a current account deficit sufficient to absorb the petrodollar recycling in the first place. Table 1 shows the data that support this interpretation.

größer/bigger http://tinyurl.com/yrl22v

Between first-quarter 2004 and second-quarter 2006 – the period depicted in Table 1 – the U.S. current account deficit widened by $281 billion. As we have shown, over this period the higher oil import bill accounted for all the deterioration. Over these 10 quarters, overall savings rose, with strong corporate cash flows pushing corporate saving up by $191 billion, and falling state, federal, and local budget deficits pushing government savings up $246 billion (so much for the twin deficits explanation). This $437 billion rise in corporate and government saving was almost exactly sufficient to offset the $455 billion increase in gross U.S. investment over these 10 quarters. Had household personal saving merely remained unchanged over these two and a half years at $390 billion (and thus declined as a share of nominal GDP, which rose 12 percent over this period), there would have been virtually no deterioration in the current account balance. But the current account did indeed deteriorate over the period, indicating a decline in household saving that closely tracked the increasing oil bill. In other words, a saving glut in the oil exporting countries required a saving bust by U.S. households to finance the oil import bill and the widening of the current account deficit. As Table 1 shows, the U.S. net personal saving rate actually dipped negative in second-quarter 2005 and remained there through at least the peak in oil prices second-quarter 2006.

Now, there is a lot that economists don’t know about the U.S. saving rate, but one thing we do know is that it is rarely negative. Indeed, for the first time since the Great Depression, net personal saving in the U.S. was negative in both 2005 and 2006. Was this a coincidence? I don’t think so. In fact, I think that the saving glut, boosted by recycling of petrodollars, contributed to the negative saving rate, and the mechanism was the housing bubble. Chart 4 shows that residential investment as a share of GDP reached a post-war high in 2005 and remained very strong into 2006, before the housing market’s U-turn in the second half of 2006. The housing boom, in turn supported consumption, as households spent some of the wealth gained from higher home values. The housing boom had a direct effect on the current account, through a surge in residential investment from 3% to 6% of GDP (remember CA = S – I), and an indirect effect by boosting consumption via the wealth effect and lowering saving. The conundrum level of long-term interest rates, in turn, supported the housing boom and the decline in credit spreads. And the conundrum level of long-term interest rates and low credit spreads were the result, at least in part, of the saving glut, particularly through recycling of petrodollars. In the global capital market of the 21st century, the “capital account” tail can indeed wag the “current account” dog.

Investment Implications
With the substantial decline in oil prices from their summer 2006 peak, and below trend growth in the U.S. economy in store for 2007, the U.S. current account deficit will likely begin to decline this year. There will also be fewer petrodollars to recycle at $60 oil than at $75 oil. Thus U.S. demand for capital inflows will shrink, but the supply of petrodollar outflows to the global financial system will also shrink. In this state of affairs, what are the implications for interest rates and credit spreads?

As for rates, my sense is that the decline in both petrodollars and U.S. demand for foreign capital will largely offset, but with a bias toward somewhat lower spot and forward U.S. bond yields. Below-trend U.S. growth and some prospect of a rebound in the personal saving rate into positive territory should outweigh the endogenous decline in petrodollar inflows to the U.S. from lower oil prices. But the effect on credit spreads is more uncertain. One could argue that while lower oil prices reduce petrodollar recycling they could also increase the trade surpluses that need to be recycled by non-oil producing countries, the effects canceling out. However, I suspect the decline in new flows from petrodollar recycling may not be benign for the credit markets.

This is because there is evidence to suggest that the petro surpluses have been allocated much more into spread product than have the surpluses of the oil importers.

>is this last quote really correct? to me it looks like that the oil exporters are willing to invest far more risky and therefor less in spreads than china and japan.

>bin mir nicht sicher ob der letzte satz so stimmt. wenn man sich ne andere grafik von pimco ansieht scheint es mir eher so als wenn die ölexporteure riskanter und damit weniger in zinsprodukten investieren.
größer / bigger http://tinyurl.com/yocj7l

Sustaining the unsustainable / economist

this debate really is going into extra innings.

but one day.......maybe in the 150 extra inning.... :-)

diese debatte geht in der tat schon über jahre oder gar jahrzenhnte.

bin mir aber sicher das irgendwann in der x-ten verlängerung dieses thema doch nioch massive probleme heraufgeschwören wird.



Global investors are worried about many things. Why is America's current-account deficit not one of them?

SOUR subprime mortgages, sluggish retail sales, the spectre of a broader retreat in credit and consumer spending. These are the American shadows that spooked investors across the globe this week, once again sending share prices tumbling from Manhattan to Mumbai.

For years, the longest shadow of all was cast by America's imposing current-account deficit. But in these fretful times, no one seems to be fretting much about the country's heavy reliance on foreign funding. New figures on released March 14th showed that Americans spent some $857 billion more than they produced in 2006, the equivalent of 6.5% of GDP, and a new record. China's trade surplus in February was the second-highest on record. It has reached almost $40 billion in the first two months of this year, three times as high as it was a year ago.

China's government, one of America's best creditors, has announced it is seeking a better return on a chunk of its foreign-exchange reserves. It will create a new investment agency, which looks sure to diversify some of the central bank's assets out of the American Treasury bonds that now dominate its portfolio. http://tinyurl.com/3x6q7e ( one can add that after consuming the oil they will soon start to buy resources companies around the globe ex usa / man kan den cartoon erweitern.. zukünftig wird china auch die ölfirmen etc direkt kaufen)

None of this had much effect on the dollar. Measured on a trade-weighted basis, it has fallen by a mere 0.04% since the recent financial turbulence began on February 27th. And as investors yawn at America's deficit, so too do policymakers. A year ago, finance ministers and central bankers from the G7 group of big, rich countries promised to take “vigorous action” to resolve the imbalances between the world's savers (particularly China, Japan and the oil exporters) and borrowers (especially America). The IMF was hoping to reinvent itself as the overseer of this grand macroeconomic bargain. A year later the venture has fizzled. The IMF-sponsored discussions between China, Japan, Saudi Arabia, America and the European Union have yielded little. They may be quietly forgotten.

What explains this nonchalance? By some measures, the world is already rebalancing. The dollar after all has fallen by 16% from its 2002 peak in real terms. Compared with the previous quarter, America's current-account deficit shrank in the last three months of 2006 and was below $200 billion for the first time in more than a year (see chart). That decline owes a lot to lower oil prices. But even excluding oil, America's trade balance seems to be stabilising as exports boom and imports slow.

Even so, it is hard to escape the conclusion that both investors and officials have become less worried about global imbalances. This is mirrored in academia, where opinion on global imbalances also seems to be changing. A few years ago most economists argued that the spectacle of poor countries bankrolling America's deficits was the perverse and unsustainable consequence of American profligacy. Economic theory suggested that capital should flow from rich countries to poor ones, and that America could not increase its foreign borrowing for ever. Empirical studies showed that deficits of more than 5% of GDP caused trouble.

Since then, economists have vied with each other to overturn this orthodoxy. Indeed, rejecting the conventional wisdom is now itself entirely conventional, as Jeffrey Frankel, an economist at Harvard University, has pointed out.

Three years ago, Michael Dooley, David Folkerts-Landau and Peter Garber, all economists at Deutsche Bank, argued that the world economy was enjoying a reprise of the Bretton Woods era. America's large external deficit could be sustained for years as Asian central banks kept their currencies cheap in order to foster export-led growth. In 2005 Ben Bernanke, now chairman of the Federal Reserve, pointed out that global interest rates were oddly low, suggesting a glut of saving abroad, not a shortfall of saving at home, was responsible for the flow of capital to America....

One reason may be the feebleness of their financial markets. That is a thesis explored by Ricardo Caballero and Emmanuel Farhi of the Massachusetts Institute of Technology, as well as Pierre-Olivier Gourinchas of the University of California, Berkeley. They point out that emerging economies have been frantically accumulating real assets, such as assembly lines and office towers, but their generation of financial assets has not kept pace. Thanks to weak property rights, fear of expropriation and poor bankruptcy procedures, many newly rich countries are unable to create enough trustworthy claims on their future incomes. Lacking vehicles for saving at home, the thrifty buy assets abroad instead. In China, Mr Caballero argues, this is done indirectly through the state, which buys foreign securities, such as Treasuries, then issues bonds of its own, which are held by Chinese banks, companies and households.

i wanted to add that the very important point of the petro $ isn´t highlightet in this article. when you look at the next graph you will see that the oil exporters have already overtaken china. and this group isn´t so willing to recycle their wealth to the us. please read this brilliant piece from pimco http://tinyurl.com/3beeqk

ich möchte hier noch einen wichtigen punkt hinzufügen der hier ausgeblendet wird. die ölexportierenden länder haben china inzwischen längst als wichtigsten spieler abgelöst. und diese gruppe verfolgt andere ziele als china und nicht im gleichen maße die $ in die usa zu receyclen. bitte unbedingt diese meisterwerk von pimco dazu lesen http://tinyurl.com/3beeqk

Because emerging economies' supply of financial instruments is so unreliable, people may hoard more of them as a precautionary measure. Firms and households fear they will not be able to borrow to tide themselves over bad times, therefore they choose to save for a rainy day instead. Because they cannot transfer purchasing power from the future to the present, they must store it from the past. ( this will change over time / das wird sichsicher im laufe der zeit ändern)

If global imbalances are the result of such frictions, they are unlikely to unwind quickly. Financial systems, after all, do not mature overnight. If Mr Caballero is right, America is also less vulnerable to a sudden run on its securities. Where, he asks, would the excess demand for global assets go?

"He's fine as long as I take my medication"

So far, the behaviour of financial markets seems to vindicate his point. But, as Mr Caballero acknowledges, his thesis is largely conjectural, supported only by “spotty” academic work. And it would be a mistake to place too much faith in these new studies. If the dollar tumbles, there will be plenty of academics ready to take the old theories off the shelf and eager to say: “We told you so.”

pimco´s gross on liquidity / hall of fame

wow. another "must read" from pimco. they are really connecting the dots. and gross has it right with his quote:

my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse.....

donnerwetter. noch ein geniales teil von pimco. hier werden schön alle punkte zusammengeführt. und das zitat von gross (oben ) sagt alles.

The twin barrels of financial innovation and globalization have significantly complicated the forecasting of asset returns in recent years. Two domestic bubbles in the last decade are testimony to the power of levered money and the recirculation of price insensitive reserves back into U.S. financial markets.

......, what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into U.S. Treasury and mortgage markets at subsidized yields, as well as innovative funny money mortgage creation which allowed anyone to buy a house at escalating and insupportable prices. Bond, stock, and real estate trends then, have recently been increasingly at the mercy of relatively price insensitive and levered financial flows as opposed to historical models of value or the growth of the real economy itself. ..... This foreign repatriation produced artificially low yields, (perhaps 50-100 basis points confirmed in numerous Federal Reserve staff reports and speeches in recent years) which in turn drove housing values to unsustainable levels as recently as six months ago – the estimated peak in national home prices. (add to this china........)
...., my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity. What used to be an Economics 101 “CIG + exports-imports” analysis leading to predictions for interest rates and stock prices has turned into an Economics 2007 analysis of corporate buybacks, international reserve flows and hedge fund/private equity positioning seeking to front run or take advantage of the first two. And it’s not simply a question of analyzing the animal spirits or “exuberance” of investors wherever they may be. Corporations are buying back stock with their historically high profits not really because they’re enthusiastic about their own company’s value, but because they have little else to do with the money.Likewise, foreign central banks and petroreserve recyclers are turned on more by capping their own currencies or geopolitical considerations in the Middle East.

Investors have no more significant example of the influence of financial flows on asset prices than tracking the pace of the U.S. trade deficit in the 21st century.... there is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually. Without it, both bond and stock prices would be much lower, the $800 billion for instance representing 3 - 4x our current federal budget deficit. Almost perversely, then, an increasing current account deficit supports and elevates U.S. asset prices as the liquidity from it is used to buy stocks and bonds.......

Notice that in 2001 a monthly trend reversal of $10 billion ($120 billion annually) neatly coincided with a 20% decline in stock prices and a flat bond market despite a developing recession. ..... The draining of $120 billion from the foreign cash flow pump appeared to have magnifying, “it’s different this time,” effects on both. ......

Although the above historical analysis is subjective and vulnerable to “sampling error” (economist speak for too short a modeling timeframe) there is an inherent logic to it:

more money in the “bank” – asset prices go up; fewer deposits – asset prices go down or perhaps up less.

..... Financial derivatives ....allowing homeowners to lever home prices, institutions to compress risk spreads, and almost all assets to occupy a seemingly permanently higher plateau based on increased liquidity and perceived diversification of risk across the system. I have my doubts about this permanent plateau, but the market seemingly does not......

With that important caveat, let me proceed to analyze another source of increased cash flow that has markedly influenced asset prices in recent years. I refer to corporate profits and their meteoric rise since the 2001 recession, increasing from 5¼% to nearly 9% of GDP as shown in Chart 2.

While normally much of that rise of over $400 billion after tax dollars (almost identical to the pump provided by our increasing trade deficit over the same period) would have been reinvested in physical plant and equipment, this time it was not. more http://immobilienblasen.blogspot.com/2007/01/capital-spending-vs-buybacks.html

Combined, the total rise in corporate share buybacks and the financing for bond and stock markets via the increasing trade deficit have injected an average of perhaps $1 trillion annually of purchasing power into our asset markets since the end of the 2001 recession. Because hedge funds and levered players of all types have been aware of this trade deficit/share buyback “put” and have acted upon it, the incalculable but conservatively estimatable pump from these two sources alone have poured in several trillions of purchasing power per year. Take that money and use it to invest in further high powered and levered financial instruments such as CDOs, CPDOs, and 0% down funny money mortgages of all varieties and you can understand why asset markets have done so well in recent years, and why, as my initial Outlook sentence suggested, it is so hard to analyze “value” in asset markets these days. Prices are increasingly being determined by value insensitive flows and speculative leverage as opposed to fundamentals. (read this full block twice! diesen absatz zur not zweimal lesen)

...... The suggestion of no more bottles of beer on the wall comes from several sources, the first of which appears in Chart 1 as a recent reversal in the trade deficit. While some of this improvement is due to the standard dollar weakness of the past 12 months and its dampening impact on imports, much of it is due to the decline of oil since August/September of 2006. Follow with me if you will a projection by PIMCO analyst Ramin Toloui in Chart 4 that depicts the change in trade flows at a given dollar price of oil. read this excellent piece on the topic http://immobilienblasen.blogspot.com/2007/01/petrodollars-asset-prices-and-global.html

As you can see, the recent $20 reversal in per barrel oil prices results in a reduction of $100 billion or so in the annual trade deficit, and a like amount of liquidity extraction from bond and stock markets, much more if associated leverage is unwound. Granted, some would claim that there will still be $700 billion or so of purchasing power coming into our markets, but higher asset prices in a levered economy are dependent on greater and greater injections of liquidity, not less. Should oil hold in the $55 range, this extraction of high powered 100+ proof alcohol from the markets will be noticeable. (chart shows the 10 year yield in the timeframe when oil has plunged. in large part due to some very poor bond auctions with low indirect/foreign bidders..... zeigt die rendite der 10 jahresanleihe während öl stark gefallen ist. zurückzufüren auf einige schwache bondauktionen mit einem niedrigen auslandsanteil....)

The second source of vulnerability comes from the corporate buyback stash, a trend itself as Chart 3 points out that is beginning to level off and reverse. Peter Bernstein, in a recent January missive, suggests that corporate profits as a % of GDP cannot continue to grow at the same pace. “Everybody else” he writes “is going to want a piece of that juicy action. Employees will demand higher wages, customers will demand lower prices, and the government will levy higher taxes.”

.... share buybacks could be cut back by a good $100+ billion in the near term future.

..... The risk markets (including bond term premiums) if not drunk, are definitely not walking a very straight line.

Stocks, credit spreads, and yes intermediate and long term bonds relative to a likely unwavering Fed Funds rate in 2007’s first half, may stagger shortly.