Zeev's Turnips Patch-No Politics (ZEEV)

[basserdan]

Perhaps tellingly, the U.S. dollar has also been selling off along with U.S. treasuries. So a case can be made that foreign capital is simply pulling out of the U.S. markets. Greenspan's jaw-boning has cost them hundreds of billions of dollars, and they're tired of it.

If this foreign capital flight is indeed occurring, then it is vitally important from a big picture "macro" perspective -- because foreign capital in-flow has been the thing propping up our economy, making up for the lack of savings in the U.S. If foreigners lose their desire to finance our asset- based economy -- and it looks like this bond sell-off could be the first warning of this -- then a destructive chain reaction could be in the works for global financial markets.
===============================================================

Hi TG,

While I tend to favor the author's view, the following excepts from MS' Rebecca McCaughrin are much less dire and have helped me to control my quaking..... <gg>


Sifting through the most recent global capital flow data, the key theme to emerge is that the US remains the dominant destination for foreign investment, despite the dollar’s depreciation

No Signs of an Exodus from US Assets

A sharper acceleration in the dollar’s depreciation at the start of this year again sparked concerns about foreigners exiting US markets. But US Treasury data through May show that dollar weakness has done little to deter foreign investors. On the contrary, foreigners have been funneling capital aggressively into US securities ever since the end of the Iraq war. At the same time, support has broadened beyond Asian investors to include European investors, who have returned with renewed vigor to US markets, in particular taking advantage of higher rates of return on corporate bonds. Total portfolio inflows in May were especially large -- hitting over $100 billion, nearly double the level seen in April. Even if we strip out the unusually large intervention that took place that month by the BoJ, such large inflows are more than sufficient to cover the monthly current-account needs of $50 billion.

Official support for US securities, which was critical in buoying capital inflows last year, has also held up this year. Central banks (mostly Asian) continue to snap up US Treasuries and agencies in an effort to temper their appreciating currencies. Attracted to their top credit ratings and attractive yields, foreign official institutions more than doubled their agency holdings over the last three years, all the while steadily increasing their holdings of Treasuries. In recent weeks, central banks began to pare their agency holdings, but for the most part, they appear to have simply shifted funds into Treasuries.

http://www.morganstanley.com/GEFdata/digests/20030728-mon.html#anchor1