Mauldin's take on dollar strength:
But first, there are those dollar bears who just keep wondering when will the dollar crash? The answer, of course, is when people stop buying it. Fairly straight-forward proposition. And we have long known that central banks have been major buyers of the dollar. But last year, rumors began to circulate that central banks were diversifying away from the dollar, especially as the dollar began to drop. But then it has come back. What happened? It looks like the rumors of foreign central banks buying fewer dollars were just that - rumors. I got both these notes today from independent sources. Comments come after these quotations. First, Dennis Gartman brings us this note:
"Turning to another concern, the IMF has just issued a report proving that the position that the dollar bears have staked out that the world's central banks have been diversifying away from the US dollar was and is false. They may have been doing so back in '04, but they've clearly not been doing so this year. Our friend, Mr. Stephen Jen, of Morgan Stanley, who heads up that firms foreign exchange analytical group, wrote yesterday that 'Bottom line: IMF reports no USD diversification, but EUR diversification Contrary to an overwhelming consensus view in late-2004 that central banks were diversifying wholesale from USD assets, the latest report from the IMF points to exactly the opposite: the share of USD assets in total reserve holdings increased in both nominal and real terms, while there were signs of diversification from EURs in relative terms.
" 'Central bank diversification was the dominant theme in late-2004 This was the single-most powerful theme in the currency markets in late-2004, and propelled EUR/USD into deep overshoot territory by December 2004. We strongly contested this consensus view, and argued strongly, in a note issued in February 2005, the USD share may have actually risen in 2004. The latest report on the currency composition of official reserves from the IMF validates our prediction.'"
And then Bill King sends us this note on the actual numbers. Pay attention, as the buying is more than the supply! Quoting:
"John Williams makes several trenchant observations about the Fed's newly released 'Flow of Funds' report for 6/30/05. 'The United States came out of the second quarter owing the rest of the world a stunning $5.2 trillion more than the rest of the world owed it. This marked an increase of more than $600 billion from a year earlier. During 2004, foreign investors absorbed an extraordinary 98.9% of all Treasury issuance, a net of $358.5 billion acquired, versus a net of $362.5 issued.
"Foreigners also absorbed a very large proportion of the issuance of US agency securities, 89.2%, a net of $104.8 billion acquired, versus net issuance of $117.5 billion. Thus, combined foreign purchases of Treasuries and agencies equaled a whopping 96.5% of total issuance, $463.3 billion, versus $480.0 billion. As for the purchase of corporate bonds, foreign investors took down a net of $254.4 billion, 42.8% of total net issuance of $594.9 billion.
"In addition to the huge proportion of foreign Treasury acquisitions last year, the Federal Reserve added $51.2 billion to its own Treasury portfolio. This means that during 2004, the Fed and foreign investors absorbed $409.7 billion or about 113% of total issuance of $362.5 billion....This results from combined foreign 'official' (largely central bank) and Federal Reserve purchases of Treasuries of $323.9 billion, equal to 89.4% of last year's total Treasury issuance. Central banks are generally not very price-sensitive buyers." gillespieresearch.com
And we wonder why rates have been low. I think we can find the cause of the "conundrum" that Greenspan muses about. As noted above, central banks are not price sensitive. Absent such buying, interest rates would be much higher, home prices would not have escalated and we would not be talking about the Fed targeting asset prices.
As I have repeatedly said, this can go on for a long time. Yes, we added $600 billion in debt to foreigners. But total US assets also rose more than that. The US is not going bankrupt.
This process will go on precisely as long as it is to the advantage of (mostly Asian) central banks and governments to take dollars to spur their economies. When does that self-interest stop? It will stop when those countries can maintain their export economies and manufacturing base from consumer spending with each other and from within their own countries.
We are not yet anywhere close to that with most countries. Understand, I am long-term bearish on the dollar, but this view has the potential to be a long drawn out march. Interestingly, in theory such a scenario has gold rising against all currencies, as it is now. Gold is a neutral currency. When governments do things to hurt their currencies or global balances, it is good for gold against that currency. Interesting times. |
